Romania update: Electrica (great !!). Romgaz (so so) & new Prime Minister

Romania new Prime Minister

A few days ago, following the fatal fire in a Bucharest nightclub, prime minister Ponta surprisingly resigned following massive protests on the streets.

Interestingly, instead of quick new elections, a “technocrat” Government was nominated, lead by a former EU commission member.

He has nominated young and independent experts for the key portfolios of the economy, justice, foreign office and health.

Ciolos selected Anca Paliu Dragu, an economic analyst at the European Commission, to take over the Finance Ministry and Cristina Guseth, chief of Freedom House Romania, as Justice Minister.

On the other hand, experienced diplomat Lazar Comanescu was proposed as Foreign Affairs Minister, while Mihnea Motoc, Romania’s ambassador to Britain, was nominated as Defence Minister.

The Economy Minister will be businessman Costin Borc, and sociologist Vasile Dancu will have the role of Minister of Regional Development.

Political commentators saw the proposed government as pro-reform.

Up until now there was a political deadlock between the newly elected president Johannes and Socialist Ponta.

It reminds me a little bit of Mario Monti’s technocrat government in Italy which came into power after Berlusconi was forced out in 2011. Most of the Italian reforms were made in that short period of time. Before and after, not much has happened there. So from an outside view I would consider this whole episode as a step into the right direction.

Now to my 2 Romanian holdings:

Romgaz

Romgaz released 9 month numbers already some days ago. The good news was that the presentation looks more professional than before, the bad news is that sales and profits went down by slightly more than -10% against 9M 2014. Additionally they had exceptional write-offs on receivables and exploration assets.

Interestingly, margins remained pretty stable, helped by the underlying price increases that will bring the local prices up to market prices over several years.

They also made a regulatory filing which already contains a detailed projection for the 2015 profits and dividends. Based on that projection, the 2015 profit will be 1.032 mn Lei or ~ 2,67 Lei per share, significantly lower than the ~3,60 lei for 2014.  However in my opinion, this sounds worse than it actually is. It seems to be that current Nat Gas consumption in Romania has declined, I honestly don’t know why. But as the local Nat Gas prices at the moment are still very low and supposed to rise, that means that the gas which has stayed in the ground and not sold is getting more valuable. So I think the issue of the lower sales volume has only a limited effect on the value of the company as those reserves then can be sold higher in the future. So my initial valuation of Romgaz from a year ago is still valid.

The share price clearly has suffered but less than other energy stocks. Interestingly, Fondul Propritatea dumped 4% of Romgaz a few days prior to the release which, looking back now seems to have been “very fortunate” for them.

Anyway, for me Romgaz is still in the early phase of the investment period and for me there is no reason to change anything

Electrica

Electrica also released Q3 numbers a couple of days ago. In contrast to Romgaz, Electrica’s numbers were excellent. The 9 month profit is already higher than the total 2015 profit I estimated last year in my initial case. The increase came exclusively from the distribution side which is very positive.

Additionally, Fondul Propritatae seems to have reopened negotiations on the minority stakes in the three operating companies. If Electrica could buy them at a valuation close to their own stock, this could create a lot of value for shareholders.

Overall, I think Electrica is one of my “highest conviction” ideas, the stock is extremely cheap and developing much better than I thought. It might take time until this get reflected in the stock price but I don’t have any reason to hurry.

One interesting detail: One of the supervisory board members had to resign because he became the new energy minister. Maybe this helps a little bit for better relationships with the regulator….

 

35 comments

  • I reduced my Romgaz position by 50% inorder to fund the Stada position

  • Not sure if I’m the only one having a problem with the english IR site of Electrica? It does’t seem to be working for me anymore. They have published recently a report about debt writedowns (I think), and today published preliminary results that look like they weren’t that good.

    • Hi,

      the results you are referring to were for the TopCo only, not the consolidated accounts. There was this Bloomberg post which in my opinion is nonsense:

      Electrica Slumps Most in 7 Months as 2016 Operating Loss Doubles
      By Krystof Chamonikolas
      (Bloomberg) — Romanian power distributor drops 3.3% to RON13.62 as of 3:20pm in Bucharest, valuing company at RON4.71b.
      Traded volume more than 5x 3-month daily average
      Shares still up 20% over past 12 months
      NOTE: Societatea Energetica Electrica said late on Friday its preliminary operating loss widened to RON141m in 2016 from RON72m year earlier; FY profit -21% y/y to RON239m

      There could sbe some impact from one offs but I don’t think that it is dramatic.

  • Alpha Finance Romania: Electrica Q3 review

    Distribution segment profit erosion pushed EL bottom line lower

    At a glance, Electrica posted for Q3’16 a 14% Y/Y drop in
    bottom line to RON 130m (-15% Y/Y to RON 99m after
    minorities) as supply segment strong results could not offset
    distribution side profit deterioration. Cumulated, nine-month
    net profit looks more appealing at RON 466m, 9% higher Y/Y
    (+13% Y/Y to RON 368m, after minorities), propped by
    additional gains from S.E. Moldova deconsolidation (RON 74m)
    and increased efficiency.
    Distribution segment performance deteriorated this year
    following significant tariff reductions applied from the
    beginning 2016. Q3’16 net profit fell 23% Y/Y to RON 115m
    mostly driven by a 2.4% Y/Y contraction of revenues to RON
    611m. EDMN reported for the third quarter a bottom line of RON 49m,
    22% lower Y/Y, as revenues fell 9% Y/Y to RON 196m. In the
    meantime, EDTS posted a 32% Y/Y drop in net profit to RON 32m
    despite a 1% Y/Y increase in revenues. EDTN’s result landed 26% lower
    Y/Y to RON 31m as higher operating expenses offset the 2% Y/Y
    advance in topline. Overall, distribution segment fundamentals
    deteriorated following massive tariff cuts as EBITDA fell 10%
    Y/Y to RON 240m.
    On the other hand, supply segment posted a significant
    advance in bottom line to RON 23.3m, 3.7x higher compared to
    the same period of last year. However, compared to the previous
    quarter, supply segment had a more modest performance as net profit
    margin fell to 2.3% vs. 7.5% in Q2’16 pressured by tougher
    competition. Moreover, volumes supplied fell around 2% Y/Y to
    2.3TWh. Hence, Q3’16 supply side EBITDA jumped 2.5x to RON
    30m.
    Considering all above, Electrica group core activity
    deteriorated as Q3’16 EBITDA landed 4% lower compared to
    the same period of last year to RON 261m. In the meantime, 15%
    Y/Y higher D&A expenses pushed operating result 13% lower Y/Y to
    RON 156m. Hence, Q3’16 bottom line landed to RON 130m, 14% lower
    vs. Q3’15.
    At nine-month level, profitability increased 9% Y/Y to RON
    466m as outstanding supply segment performance and one-off
    gains overshadowed distribution side underperformance.
    Supply segment posted a 43% Y/Y jump in bottom line to RON 145m,
    while on the other hand, distribution’ side profitability deteriorated by
    19% Y/Y to RON 285m. Wrapping up, nine-month bottom line
    looks appealing as it paves the way to outpacing RON 500m at
    full year level.

  • Pumba19741113

    Romgaz reported Q1 2016 reports. In the report the following sentence included:
    We mention that on April 21, 2016, SC “Fondul Proprietatea” SA sold its entire share to
    Romgaz, respectively 22,542,960 shares (out of which 20,286,910 as shares and 2,256,050 as
    Global Depositary Receipts (GDRs) based on shares, through an accelerated private
    placement offer carried out through its intermediaries Goldman Sachs International, WOOD
    & Co Financial Services and Banca Comercială Română SA.

    Does it mean that they effectively purchased back their shares? What do you think would this reduce than the # of outstanding shares and increase the EPS?

    • Well, this actually looks like a big share buy back. It is a bit weired because Fondul didn’t really say that but if this is the case, then I would think that this is very very good and will increase EPS significantly.

      Buying back at around 7 times P/E is almost always quite positive.

      • Pumba19741113

        And if you substruct cash from the BS than the P/E is only 4,6 🙂

      • Pumba19741113

        Asked Investor relations. This is the answer. No share buyback. :
        Thank you very much for your email.

        Fondul Proprietatea sold the shares owned IN Romgaz ‎to other shareholders (and not to Romgaz) so that total number of shares did not change.
        ‎We are very sorry about this misunderstanding.

        Kind regards,
        Manuela

      • Gilead is buying back a lot at a P/E of 7 at the moment. Doesn’t have to do anything with Romania or Romgaz, but that was the first thing that came to my mind while reading your comment 🙂

  • Electrica has a good start into 2016:
    Q1 operating profit +19%
    Q1 profit attributable to shareholders: +23%
    http://www.electrica.ro/wp-content/uploads/2016/05/ELSA_EN_Consolidated_condensed_financial_statements_IFRS_EU_Q1_2016.pdf

    • Interestingly GMO is now the 5th largest shareholder of Electrica, holding 2.8% of outstanding shares. The shares are held by GMO Special Opportunities Fund, making Electrica its 8th largest position.

    • looks good indeed. I will increase Electrica from currently around 4,3% to 5% of the4 portfolio

      • I had a look at the Q1 Presentation which was published on the 19th. Details of the results no longer look that great:
        – EBITDA of the distribution entities fell from RON 194m to RON 153m (-21%)
        – Furnizare (Supply) EBITDA increased from RON 44m to RON 57m (+30)
        So the underlying business EBITDA was clearly negative in Q1 2016. So what was driving the positive move in group profitability? It looks like the fact that Electirca no longer consolidates certain Moldovian loss-making entities has led to a extraordinary gain which somehow was included within operating profit. On the other hand there also seem to be some negative one-offs due to disputes with the fiscal authorities.
        So to me the underlying performance is actually rather disappointing.

        http://www.electrica.ro/en/investors/results-and-reports/analyst-presentations/presentation-of-the-financial-results-for-q1-2016/

        • I don’t fully aggree. First. the deconsolidation of the loss making entities was part of the plan and it is clearly positive that it worked.

          The decrease in EBITDA in the distribution segment is explained mostly by the one-offs, they seem to have included them into “normal” EBITDA. Why ? I guess they are still in negotiations with Fondul to buy out the minorities and high profits would increase the price they need to pay.

          The increase of EBITDA at Furnizare by the way is onl +17 mn RON. Underlying distribution revenues increased nicely which will drive profits in the long run-

          The major driver for future results is the Capex for regulated assets. There is some increase but not yet the amount I would expect. This is for me the metric to watch, not quarterly numbers which fluctuate.

  • Pumba19741113

    Hi
    I hope you enjoy your vacation. Romgaz reported Q1 2016 reports. In the report the following sentence included:
    We mention that on April 21, 2016, SC “Fondul Proprietatea” SA sold its entire share to
    Romgaz, respectively 22,542,960 shares (out of which 20,286,910 as shares and 2,256,050 as
    Global Depositary Receipts (GDRs) based on shares, through an accelerated private
    placement offer carried out through its intermediaries Goldman Sachs International, WOOD
    & Co Financial Services and Banca Comercială Română SA.

    Does it mean that they effectively purchased back their shares? What do you think would this reduce than the # of outstanding shares and increase the EPS?

  • Hi. How do you see Romgaz after a further loss of share price? Do you think the level of divident is maintainable?

  • Thanks Guys – received this email from IG today:

    “Thanks for your email.

    I have checked this with the share desk and it’s been decided that there is not enough demand for London International Stocks for stockbroking. However Electrica SA is available for Spreadbet and CFD accounts.”

    I need a better platform – will checkout Interactive Brokers.

    Any ones you guys would recommend?

    Tony

    • ELSA (LSE) is available on IB – commission USD5.

      I use few brokers in US and Europe and IB I like most – cheapest and basically all-inclusive. Great trading platform as well.

      Cheers

      • Thanks a lot.

        Just opened an account and yet to place a first trade 🙂

        Any data stream I need to subscribe to to purchase this specific stock?

        Best,

        Tony

        • If you are not into day-trading and do not to time your trades onto very specific minute, you will be fine without any subscriptions. Hope the IB suits your needs. If you have any problems, I will be glad to help.
          Have a nice day.

  • Do you own the underlying shares or the GDRs in Electrica?

    Tony

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