A change in the Kyivenergo’s business model and a double in tariffs for electricity production caused growth in 2006E sales without a noticeable increase in real output.
History of Low Profitability To Be Broken in 2007.
The cross subsidization of Kyivenergo’s heat segment losses by electricity profits is expected to become a thing of the past as a result of a recent increase in heating tariffs for the company (the first increase since 2000) and new legislation for housing services.
The Lease Agreement Is Very Likely To Be Renewed.
Kyiv’s new mayor questioned the advisability of Kyivenergo’s lease of the city’s power plants last August, which resulted in poor stock performance in late 2006. A tender to lease the assets, scheduled for May-June 2007, will clear up the situation.
In this report, we employed DCF valuation and peer valuation to determine the fair value of Kyivenergo shares using three peer groups: EU peers, Russian peers and Ukrainian peers.
TABLE OF CONTENTS
1. Investment Case
2. New City Mayor Spoiled Stock Performance
3. Mixed 2006 Results
70% Sales Growth for 2006
Heat segment Has Eaten Profits… For the Last Time
4. Heat Segment: Radical Improvements Ahead
Kievenergo’s Safety Margin for 2006
Salutary Decision by the Kiev City Council
Why the City Agreed To It
5. The Most Profitable Ukrainian Utility?
6. Asset Lease: Uncertainty Holds
Disposition: Kievenergo, Kievenergoholding, Kievteploenergo
Potential Competitors to Kievenergo
The Time for Truth Is Approaching
7. Valuation
Peer Comparison
DCF Valuation
Valuation Summary
CHARTS
KIEN vs PFTS
Performance
Financial summary, USD mln
Kyivenergo EBITDA for 2007E
Loaded capacity, Jan.-Aug.
Sources of Kyivenergo’s electricity supplied to consumers, GWh
Electricity capacity load and fuel efficiency
Electricity losses in excess of allowed level (7M07), % of electricity inflow
Losses from heating segment, USD mln
Implied KIEN price by SOTP*, USD per share
Implied KIEN share price, USD
TABLES
Kyivenergo ownership structure
1H07 financial summary, USD mln
Net debt, EoY 2007
Russian Energos’ summary, USD mln
Valuation by Energos
EU electricity holdings’ summary, USD mln
Valuation by EU electricity holdings
Valuation by Russian TGKs, USD mln
Valuation by Ukrainian GenCos, USD mln
Operating model assumptions, USD
Free cash flow components, USD mln
DCF model output, USD mln
RAB calculation
Valuation by Oblenergos, summary, USD mln
Implied EV by SOTP valuation, USD mln
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