Time to update on my Electrica case which I have presented in December last year.
Let’s start with some bad news:
I had mentioned two potential “upside options”, which could drive the value of Electrica even higher than in my simple base case:
1. Potential M&A opportunities with regard to ENEL’S Romanian assets
2. Clean up of 22% minority holdings in all major subsidiaries
Both options, for the time being did not materialize. Already in February, ENEL said that they will not sell their Romanian subsidiaries. Additionally, Electrica could not agree with Fondul Proprietatea on the price. The differences in valuation were still significant:
Fondul Proprietatea holds stakes of about 22% in each of these companies, which are valued at EUR 173 million in its portfolio. Electrica, which is 49% controlled by the state, was looking to pay a price closer to EUR 100 million, according to sources familiar with the negotiations.
So none of those two options seem to be realistic for now, but on the other hand I haven’t priced them in anyway.
So now let’s look at the good stuff, starting with the 2014 annual report:
Profit AT, before minorities has been 401 mn RON for 2014, which translates into 288 mn RON after minorities, that is around +15% against what I had projected for 2014. However Electrica stresses that this is due to a one-time effect in the supply segment where they were able to by electricity cheaply during the year. In contrast to many other companies, I can gladly live with positive one time effects…
Operating cash flow was very strong, especially they seem to be able to reduce their outstanding receivables significantly which in my opinion is VERY positive. Payroll costs decreased significantly, it seems to be that privatization is clearly motivator for more efficiency.
They also now show the regulated assets as a separate balance sheet line. They are however lower than I had initially assumed but more on that later.
According to the Q1 report, the year started quite well. Profit increased by around 25%, Profit after minority increased by almost 50%. Again there is a positive one-time effect, in this case it is the de-consolidation of one the 100% owned but loss making service operations which had negative equity. Without this effect, earnings would have increased only slightly, maybe between 5-10%.
I think these 100% service subsidiaries and this effect is also the reason why one reader could not reconcile 2014 results and the 2015 plan from the operating entities which all have 22% minority interests.
All in all I would say a very solid first quarter.
Shareholder meeting & Investment budget
A reader already pointed out the following: In the April shareholder meeting something interesting happened: Shareholders rejected the presented investment plan of Electrica for 2015. Honestly I did not look at the investment plan before but the issue seems to be the following according to this article:
The Energy Ministry rejected electricity distributor Electrica’s investment plan for 2015, in the general shareholders meeting on Tuesday, April 28.
The ministry is Electrica’s biggest shareholder as it owns almost 49% of its shares. The remaining 51% are held by local and international investors who bought shares in the company’s initial public offering (IPO), in June last year, and afterwards, from the Bucharest Stock Exchange and London Stock Exchange. EBRD has an 8.6% stake.
Electrica’s total investment budget for 2015 was about EUR 151 million, EUR 135 million of which was for revamping the group’s electricity distribution network, according to the report the group presented to investors.
The state’s representatives have asked Electrica to correlate the investment plan for 2015 with that it had in the listing prospectus. According to the prospectus, Electrica should invest some EUR 317 million this year.
I have double checked the IPO prospectus and indeed on page 166 we can find the 1,4 bn RON (~400 mn) investment budget and thereof 3/4 for regulated assets. So the Government shareholder clearly has a point here. Honestly, I have no idea why Electrica presented now a much smaller budget. I only can speculate that they maybe want to make a point to the government because of the unexpected reduction on guaranteed returns after the IPO. For my investment case it would be important that they actually do grow their regulated asset base, so this is something to watch.
Another interesting aspect of this episode for me is the fact that shareholders do have pretty much to say in Romania. In any other country, an investment budegt for the next year would not be subject to a vote. The reason for this is most likely that trust is still very low in Romanian society when it comes to large organizations.
So how will this be resolved ? Romanian companies do have quite frequently extraordinary shareholder meetings. So I guess they willhold one pretty soon and present a different investment budget. Maybe not the initial 2015 number but maybe something in between.
Overall, I do think the investment case for Electrica has not changed. Some frictions with the Government and possible delays in the build up of the regulated asset base are countered with unexpected positive effects and a good operational development. It remains to e seen how quickly Electrica and the Government will align themselves, but overall I still think that over 3-5years this wilbe a VERY GOOD investment.