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This year's tariffs revisions are better suited to protect the company for the drop in gas consumption, thus we see lower risk of unrealized revenuesIn the medium term, we expect transit revenues would contribute with ca. RON 180 mn annually to the company' EBITBased on the 2013 budget we kept the pay-out at 52% in 2013. Going forward, with Nabucco no longer in the equation, we believe an 85% pay-out would be easily attainableWe reinitiate coverage with a Buy recommendation and a 12-month target price of RON 239
Despite the write-down for the investment in Nabucco and the lower pay-out approved by the shareholders for 2013, we remain bullish on Transgaz. On one hand, the regulatory methodology allows now for better protection against potential weakness in consumption coming from domestic gas price liberalization and thus provides room for Transgaz to realize its domestic transport regulated revenues. Secondly, we see only low chances for any changes to the transit business in the medium term, meaning that transit would continue to contribute around RON 180 mn annually to the company's EBIT. Furthermore, a new CEO with extensive experience in the private sector was recently appointed at the helm of the company. Our DDM points to a 12-m target price of RON 239, thus we reinitiate coverage with a "buy" recommendation.
In March 2013 the regulatory authority set Transgaz tariffs over April-June 2013. Furthermore, according to the regulatory methodology, regulated revenues and tariffs were again revised at the end of June 2013. The revenues from reservation of capacity are expected to account for 34% of the regulated revenues, diminishing thus the volatility induced by swings in gas volumes transported. Furthermore, the quantity used to set the volumetric component stands much closer to the present volumes transported which lowers the chances for unrealized revenues. In effect, these changes should allow Transgaz to post an operating profit from domestic transport close or even above the regulated return on the asset base.
Following the infringement procedure started by the European Commission, Romania denounced the two transit conventions with Gazprom, but these continue to produce effects until end-2016 and end-2015 respectively. The related contracts are valid until end-2015 and end-2023 respectively. We do not expect the terms agreed with Gazprom to change before contracts / conventions expiry. Longer term, given (i) the risk that transit could be regulated by revenue-cap, which would translate into a drop of the transit revenues below RON 100 mn (from RON 270 mn for 2016e) and (ii) the risk that the transit activity would slow down after the construction of alternative pipelines feeding the countries targeted by the transit activity (Bulgaria, Turkey, Greece); we chose to reflect these risks by cutting the transit revenues starting 2017e by 50%.
For this year, we kept the pay-out at 52% as approved by the shareholders through the 2013 budget. Going forward, with no more outflows to Nabucco, we believe an 85% pay-out would be easily attainable. The estimated dividend yield drops to 6% in 2013e with the lower pay-out and the Nabucco provision but should climb to 16% in 2016e and drop to a still decent 11% in 2017e.
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