TEL, TGN n the positive utility factor

Before we come to the two utility majors let’s look at the Romanian markets. One of the lowest valuation globally; PEs of less then 7 looking forward; Strong fundamentals; Large global M&A deals; Low debt to capita ratios; Relative growth perspective of 4-5% for the next 2 years; Relative stable currency; Low budget deficit of less than 3%; Low Inflation; Falling lending rates
We continue to look at the large cap outperformance over small caps and value over growth. If we connect the large cap hypothesis with the late economic sector, utility sector along with staples are going to benefit the most from the above mentioned aspects. Above that we have a consolidation in the global utility sector too.
We see Transelectrica at a potential 25 RON in the next 6-12 months and TRANSGAZ at 220 during the same period.
Both Transelectrica and Transgaz are currently valued at a PE of 6 and have a BV of 0.4 and 1 respectively. While the prospects of growth are great, over 10% for the next 3-5 years, the Debt to Equity is less than 20%. The companies also generate free cash and a dividend yield of 7-8%, which is considerably less than the Bonds. However, the underlying risk for both companies is low. There are no alternatives for power transmission and gas transportation and their grids are improving. They are also investing hundreds of millions of Euros in infrastructure.
On top of this the annual growth of 7-8% and many international projects, will continue to add to Transelectrica’s bottom line. The company is also financing an under sear cable in the Black Sea with Turkey and building a grid with Serbia. The two new Nuclear Power reactors to be completed by 2012-2015 will increase overall grid capacity by 20-30%. The current credit crisis might slowdown some of the pace, but the projects will eventually go through within a couple of years.
Transgaz is involved in a major project that will cross Romania from Nabbucco, to North and South stream projects. Either one of them will increase the earnings by 20-30% annually. Alternatively Transgaz is working with Hungary and Serbia for additional projects. This will add another 5% annual growth to the existing stable earnings.
All this looks more attractive in context of M&A deals. Only a couple of weeks ago Electricite De France had purchased British Energy for a whooping 22 Bil USD. Exelon Corp. The biggest U.S. utility company by market value offered this week to buy NRG for $6.2 billion in stock in a bet that its superior creditworthiness will allow for refinancing of NRG’s $8 billion in debt at lower costs. Even Warren Buffett’s MidAmerican Energy Holdings Co. $4.7 billion bid for Constellation, was accepted last month.
So while sentiment might look extreme as if there is no pause too all this price drops, the utility majors are actively energizing their businesses. And what timing to look at value when the majority does not see it.
Enjoy the latest XTR INDICES.201008
ORPHEUS ROMANIA RESEARCH
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