In this report we update our valuation of electricity distribution companies. We see good reasons for the market’s negative sentiments towards the sector: government intervention undermines RAB regulation, while RAB methodology is flawed and its violation by the regulators has had an increasingly negative effect on shareholder value. We cut our 12M sector MktCap target by 31% primarily on our more bearish stance on tariff growth and risks. Nevertheless at current price levels we still see significant upsides and rate 10 out of 14 electricity distribution stocks a BUY. Our top picks in the sector are MRSK Volga, MRSK Center and Volga, and MRSK Urals. We also prefer individual MRSKs to MRSK Holding now as a privatisation scenario is likely. Clarification on regulation and the privatisation of MRSKs are the key triggers, which are unlikely to be seen until the Mar 2012 elections are over. Click here to view the full report.
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