Following the rally in Russian utility universe, putting the sector ahead of every other Russian equity segment in year-to-date terms for 2020, VTB Capital sees more place for upside for certain names coming from expected profitability gains.

As reported by bne IntelliNews,Russian utility majors are in focus as the sector is set to continue to rally in 2020. 

The most recent upward move in the sector has come across the board, from RusHydro (up 34%) to TGK1 (up 25%). “At this point, share price moves have put the sectoral average dividend yield for 2020 (ex-InterRAO) at an average of 8.6%, well in line with the universal utilities fair pricing formula of the ‘national bond yield + 1%’,” VTBC commented.

As the high dividends of the utility companies seem to be priced in, further re-rating could be linked to positive surprises in the upcoming 2019 financials, a moderation in the perception of the ‘fair’ dividend yield level, and any substantial M&A. 

Accounted for those factor being equal, VTBC sees a “good number of Russian utilcos are fairly valued”, maintaining a Hold recommendation for Mosenergo (12-month target price RUB2.65 for estimated total return of 11%), FSK (TP RUB 0.25; ETR 14%) and Unipro (TP RUB 3.15; ETR 11%).

The pockets of growth are seen in the revision of the future profitability dynamics. VTBC believes such growth still leaves plenty of upside for InterRAO (12-mo TP RUB 11.00, ETR 76%), Enel Russia (TP RUB 1.20, ETR 24%), TGK1 (TP RUB 0.018, ETR 23%), OGK2 (TP RUB 0.87, ETR 26%) and RusHydro (TP RUB 0.95; ETR 33%), which the investment bank rates Buy.