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HomeValue InvestingLenenergo Prefs – 10-15% yield & EOS Russia – Adventures in Russian...

Lenenergo Prefs – 10-15% yield & EOS Russia – Adventures in Russian Grids – Deep Value Investments Blog


I bought Lenenergo Prefs last week at an average of 168. This is a 3% weight, I am also re-entering EOS Russia – a fund holding Russian grid companies, also at a 3% weight.

This came to me from looking at EOS Russia – a Swedish listed investment in Russian electricity distribution grids (kindly recommended by one of my beloved readers). These are mostly owned by Rosetti – the Main Russian electricity operator but have minority shareholders and (somewhat illiquid) listed stakes. They are very cheap and seem to have turned a corner in terms of profitability / dividends. EOS are trading at a c20% discount to NAV, have reasonably low expenses and have holding in what appear to be very undervalued assets turning the corner.

EOS put it well here:

If the companies continue operationally on the current trajectory and dividend payouts remain at around 40% of IFRS net profits, the dividends that may reasonably be expected on 2021 earnings would imply the following dividend yields at current share prices: MRSK Center-Volga 13-15%, MRSK Urals 17-22%, MRSK North-West 4-10% and Lenenergo pref 12.8% (this based on Lenenergo’s preferred dividend formula). MRSK Volga’s dividends will likely be still zero or very modest as the company reported a loss in the first half, although it still has a fair chance to break even for the full year. MRSK Volga’s results should improve at least somewhat on the back of rising industrial activity in the region.

(P2 https://www.eos-russia.com/wp-content/uploads/MRSKnewsletter_Aug21.pdf)

I actually think Lenenego pref’s dividends will be higher than 12.8%. My best guess based on the half year is probably a preference dividend of 19-25 Rub per share. so a yield of c11-15%. I actually think closer to 15%, but we will see. Rosetti prefs trade at a c3-10% yield (it varies a lot) so if this discount narrows it implies a decent rise in price, though RSTI is far larger, and more liquid. Russian base rates are at 6.75% (having just risen). Distribution should be a long-term stable business, particularly in the future.

Russian preference shares are somewhat unusual they usually offer a percentage of net profit – distributed amongst all preference share holders. Rights can only be altered with the consent of preference holders. Usually if the company is going to get rid of Prefs an offer is made to buy them out following an independent appraisal. Obviously this is Russia, so do you really trust everything will be done in an above board way? Other than day-to- day inefficiency and corruption I am not aware of much minority oppression in the electricity industry. Almost all Lenenergo is owned by Rosetti or the Saint Petersburg city government, the minorities are only 2.5% of the shares in issue- so (hopefully) barely worth stealing from. The prefs are a reasonable proportion of this (22%), sadly, I don’t have a breakdown of who owns the prefs.

There are lots of inefficiencies and oddities in the Russian electricity market – different tariffs to do the same thing for different companies, lower costs in different areas, some of this is policy to support certain reasons, some is just the way the system evolved and doesn’t make much sense. They are cleaning it all up and moving (for distribution) to a regulated asset base / rate of return regulation from cost plus. This should give Lenenergo and the other grids scope to cut costs (which were based on cost+ regulation). I believe this has been started in Leningrad / St Petersburg already, though hard information on this has proved impossible to find, one of the downsides in investing overseas.

There is little need to worry about high energy prices. Russia uses lower internal gas prices so I would not expect there to be government action related to this, unlike in Europe where this is a real possibility.

There is some discussion of a Rosseti buyout of Lenergo. I think the ord’s are where you want to be if you want to play this as they will look at P/B discount and St Petersburg govt has a far higher cost price. I prefer the prefs due to a nice high (hopefully more stable) yield/

Don’t forget as well that the Rouble is undervalued on a PPP level and terms of trade appear to be improving with a higher oil/gas/natural resource price.

https://www.themoscowtimes.com/2021/01/13/russian-ruble-is-worlds-most-undervalued-currency-on-big-mac-index-a72597

So you get a 10-15% yield, scope for share price rises in the future and (potentially) appreciation in exchange for acceptance of a small level of corp governance risk / opacity. Depending on H2 results I would hope for rapid appreciation in Lenenergo over the next year. EOS Russia will take several years to play out but has a multiple of the upside.

As ever thoughts / comments appreciated.

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