OREANDA-NEWS. August 04, 2010. RAO East published its 2009 IFRS results. The key takeaways are summarized below, reported the press-centre of OTKRITIE Financial Corporation.

View: After adjusting for a one-off impairment charge on PP&E, the company’s financials showed a positive YoY dynamics thanks to higher tariffs in 2009: revenue rose 20%, EBITDA was up 80% and net income finally moved out of the red. However, the company’s margins continue to be very weak: EBITDA margin of only 3% vs. a 15% average for the thermal gencos.

Electricity regulation in Russia’s Far East remains 100% regulated, mostly using the inefficient cost-plus tariff system. RAO East showed net debt of RUB37bn (up 25%), with its debt/equity ratio of 1.8x representing a 23% increase.  The company continues to take on new debt to finance capex. While RAO East’s net debt/EBITDA ratio declined from 4.9x to 3.4x due to solid EBITDA growth, we still consider it among the most leveraged companies in the Russian utilities space.

Valuation: RAO East trades at an EV/installed capacity of USD203/kW, which is 10% below the Russian thermal generation average. We consider the discount justified because of the less efficient electricity market regulation where it operates.

Action: We do not cover RAO East stock, but expect neutral to negative market reaction on this news. Although the company’s profitability is improving, it still lags behind other names in utilities, and its debt continues to mount.