Positive outlook for the stock prices of "Transelectrica" and "Transgaz"

Expectations of the stock market analysts concerning the future evolution of the quotations of the two major energy transporters listed on the Bucharest Stock Exchange (BSE) - the National Company for the Transport of Electricity "Transelectrica" (symbol: TEL) and the National Company for the Transport of Natural Gas "Transgaz" (symbol: TGN), are optimistic. The shares of the two companies fell in the first half of the year, after the registration date for dividends, and their profits in the first semester were smaller than in the similar period of last year.

• Nicu Grigoraş, "Intercapital Invest": The shares of TEL can grant investors very good returns in the next months

Shares of TEL and TGN fell after the passing of the registration dates, just like most of the stocks on the BSE, said Nicu Grigoraş, broker at "Intercapital Invest". However, the downward trend was broken at the end of July, once the upward trend of the foreign markets was confirmed, which made the domestic market follow suit, he went on to say.

Nicu Grigoraş said: "The dividend registration date coincided with the end of the secondary offering conducted by «Transelectrica». Once the registration date fell, the shares of TEL fell, just like most of the listed companies. The downward trend was halted by the unexpectedly good evolution of the foreign markets during the summer. If this trend stays on, the shares of TEL will give investors very good returns in the coming months".

The secondary public offer for 15% of the shares of TGN will most likely take place by the end of the year, under the pressure of the International Monetary Fund (FMI), the broker of "Intercapital Invest" said. In the opinion of Nicu Grigoraş, the success of the offer is extremely important for the subsequent development of the stock market, as well as for the ambitious public offers plan which the government wants to implement upon the insistence of the IMF, in the coming years.

Nicu Grigoraş also said: "it remains to be seen what will be the approach of the majority shareholder and of the intermediation union, when it comes to the technical method for conducting the offering and the price at which the stock will be made available to investors. I think that the success of the similar offer of «Transelectrica» could be a very good gauge, of how to adjust the price of the offer, as well as for the technical method for conducting the offer. The public offer of «Transelectrica» practically showed us what investors want from such an offer when it comes to transparency and the pricing of the stock".

• Mihai Chişu, "IFB Finwest": "I expect the offer of TGN will be successful if the state will use all the necessary ingredients"

"Transelectrica" and "Transgaz", two of the "blue chips" listed on the BSE, have evolved differently over the last years, even though they have the same majority shareholder, a similar monopoly position and similar lines of business, from certain points of view, said Mihai Chişu, broker at "IFB Finwest".

"Transgaz" is the company which succeeds in defying the financial crisis, while at the same time seeing rising profits and rewarding its stockholders generously, the broker said.

"Transelectrica", on the other hand, is more easily influenced by the evolution of the economy, as the Euro/leu exchange rate has a major impact on the balance sheet of the company, Mihai Chişu also explained.

"The firs six months brought smaller profits for both companies, compared to the similar period of last year, in the case of «Transgaz»m especially due to the increase in the amortization of fixed assets. When it comes to «Transelectrica», the explanation is lower revenues, due to the lower volumes of energy transported and the increase of the financial losses", he went on to say.

The offer of "Transgaz" has been awaited for a long time by investors due to the company's earnings and its line of business, the "IFB Finwest" broker continues.

He said: "I expect the offer to be successful if the state will use all the necessary ingredients: a price recommended by the consortium, adequate marketing, focus on institutional, as well as on retail investors, and a well drafted business plan, which would include the future plans for the company and its dividend policy. If aside from these criteria, the state will also consider it opportune to offers tax breaks to stock market investors, at least when it comes to listings, in order to make them more attractive, I am convinced that this kind of offers will enjoy great success and will spur the development of the Romanian stock market".

• Igor Popov, "SSIF Broker": "In the medium and long run, I expect the stock of TEL will recover"

The evolution of the price of TEL after the Secondary Public Offering is disappointing, in the opinion of Igor Popov, analyst with "SSIF Broker". He explained: "Most certainly the investors who subscribed the offer at the price of 14.9 lei/share, were convinced they were making a good purchase and they didn't expect the price to go all the way to the low of 12 lei/share. There were probably a lot of people who subscribed just to sell in the market at a price as high as possible, but seeing the price was dropping, they got rid of their positions, and they put an even greater pressure on the price. If we add up the dividend paid by «Transelectrica» to the current market price, we will note that the stock only has to recoup 5% to reach the price in the offering.

I expect that in the medium and long term, the stock of TEL will recover. The company continues to generate a significant EBITDA (ed. note: earnings before interest, taxes, depreciation and amortization) which sooner or later will have a positive effect".

Igor Popov considers that indeed, the operational activity of "Transelectrica" generated smaller profits, which caused concern among investors. Nevertheless, he thinks that the changes in the tariff of the transport of electricity, which are unavoidable, and the potential for an increase in the consumption of electricity will boost the company's performance in the future.

In the case of the stock of TGN, the analyst says that he hasn't noticed anything out of the ordinary. The price of the stock has adjusted with the value of the dividend and has risen slightly, since the beginning of the year, which is fully justified by the higher degree of safety which the stock in question provides, said Igor Popov.

He considers that even as its earnings estimates have been cut since 2011, "Transgaz" achieved a satisfactory performance, and its profit only fell slightly.

"«Transgaz» has once again shown a high degree of stability of its earnings, and it remains a sturdy company, capable of providing investors with a «haven», in the context of the economic fluctuations", the analyst said.

As for the secondary offer of "Transgaz", the analyst said: "Looking back, to the experience of the offering of «Transelectrica», I find it hard to imagine the offering of «Transgaz» without a discount compared to the market price. It is true that this is a different company, with much better earnings and which might be of interest to a different group of investors. I think that we will see the price in the offering be approximately 10% below market price".

• Mihai Iulian Căruntu, BCR: "In 2013, there are chances of the stock of TEL stabilizing above 15 lei/share"

This year is unavoidably a weak one, in terms of financial results, for "Transelectrica", but probably not as bad as 2009 and 2010 were, considers Mihai Iulian Căruntu, coordinator of the Stock Market Research Team at BCR.

He explained that the reasons behind such as earnings are tied to the fact that the results which fundamentally influence the earnings had an unfavorable evolution this year: the contraction of the electricity output by over 5%, the fact that the tariff for the transport of electricity has remained the same as in 2011 and the depreciation of the leu against the Euro, which, aside from the higher interest expenses, also mean a financial loss from the exchange rate differences, which affect the net profit and the potential dividend, the analyst said.

However, according to the analyst of BCR, the good news would be that for the next year, there are perspectives for a completely different evolution of the three aforementioned variables, and as a result, there would be conditions for better earnings next year, which would support the price of the TEL stock in 2013, he stressed.

Mihai Iulian Căruntu said: "«Transelectrica» is trading at a 35-40% discount compared to the similar companies in the West, which are, however, far more leveraged, which would leave room for an improvement in the valuation of the stock of TEL, in the medium run. In spite of the perceived high risk of regulation, we think that the shares of TEL are trading at a an excessive discount compared to other similar companies, and in 2013, in the case of improved financial results and depending on the general conditions on the financial markets, there are chances of the price stabilizing above 15 lei/share".

Shares of "Transgaz" also fell 10%, this year, while they reconfirmed their status as the most stable dividend stock on the BSE, with a dividend yield of 12%, before the ex-dividend date, the analyst of BCR said. "This in itself indicates the fact that the market, and indirectly, foreign investors are asking for very low prices (in other words, very high discounts, compared to similar assets on the mature markets) in order to expose themselves to the Romanian assets", he said.

The H1 earnings of "Transgaz" were lower, due to the drop in the volume of the transport business, says Mihai Iulian Căruntu, and he estimates that the annual earnings will be slightly lower compared to 2011. "They will however be good enough to allow the granting of a dividend in 2012, which would represent dividend yield of more than 10%", the analyst said.

In light of the secondary public offer of "Transgaz" which will be launched by the government, Mihai Iulian Căruntu said: "The most important thing will be for the majority shareholder, the regulatory authority - ANRE -, and the company to clarify to what extent, at the request of the European Commission, the business of transit with «Bulgargaz» and «Gazprom» may be partially or fully regulated (more likely in the case of «Bulgargaz»). In this scenario, it needs to be clearly said to what extent the company's profitability would be affected, since it is well known that the transit activity accounts for 40-50% of the operating profit. The perception concerning the regulation risk of «Transgaz» is deteriorating anyway after, for the third consecutive year, the company did not see an increase in the domestic transport tariff for three years in a row, without any public explanation from the regulatory authority on that.

As for the potential discount which the price of the SPO might offer compared to the market when the time comes, there will probably be a discount which will offer a strict motivation to investors in the short term. But investors will decide whether the price of the secondary public offer is attractive or not simply based on their perception of the regulatory risk and part of the marketing effort will need to focus on that area".

Considering the stability of the transit business, the current price on the BSE would be attractive as a reference, compared to the dividend yield, the stability of the company and the valuation levels of similar companies, considers Mihai Iulian Căruntu.

• Simion Tihon, "Prime Transaction": "I thin that when it comes to the offer of TGN, market context will be very important"

In the case of the secondary public offer for the sale of 15% of "Transgaz", the market context will matter a lot, considers Simion Tihon, broker at "Prime Transaction". He said: "We saw what happened at «OMV Petrom» and, later, with «Transelectrica». The discount will certainly be a criterion which will cause investors to participate in this offering or to stay away, and I think that the state will appropriately use the expertise it gained in the «Transelectrica» SPO. I am referring here to discount as well as transparency".

After the offering, what is important will also be the general context of the market, when and how the state will decide to allocate the shares in the offer to the institutional and retail investors, Simion Tihon also said.

The shares of "Transelectrica" had a negative evolution, after the public offer in the month of March, an evolution which was caused both by the financial results of the company, by the ex-dividend date, as well as by the difficult international context, he said. "In the medium and long term, the expectations are optimistic for the stock of «Translectrica», even as the exchange rate and the negotiation of the transport tariff for energy have an important influence on the company's earnings", the broker said.

The shares of "Transgaz" had a very good start this year, with the correction following the ex-dividend being followed by the same unfavorable international context, Simion Tihon added.

The two companies reported slightly lower earnings, but they are a correct reflection of the state of the economy, the broker of "Prime Transaction" considers.