Daily analyst comments

The state favors reorganizing Irkutskenergo under the baseline scheme for regional energos of power monopoly UES, while its equity stakes in genco and grid units, established in the course of restructuring, it would like to assign to Hydro WGC and FGC, Interfax news agency reported Wednesday, February 21, quoting the Economic Development and Trade Ministry’s representative as saying.

The ministry’s spokesman specified that this scenario is still being worked out and has not yet been coordinated with the other major shareholders, i.e. Irkutskenergo, with RusAl and Sual, which are currently in the merger process. For the record, the state owns a 40% interest in Irkutskenergo and in the event of the company’s restructuring it will gain similar stakes in all entities to be spun off from it.

Worth noting is that at present due to its affiliation with metal producers and non-participation in utility industry reform Irkutskenergo is one of the cheapest power plants in Russia, with 1 kW of installed capacity valued at only $370 against the average $580 for gencos. Power tariffs in the region are among the lowest not only in Russia, but also worldwide, and the metal makers controlled by RusAl and Sual are the main consumers of electric power which the company generates.

By the closing bell Wednesday Irkutskenergo stocks climbed 7.6%. The state’s proposal sparked an upturn in the utility concern’s shares. We believe that these shares have not exhausted their upside potential and if Irkutskenergo is carved up, the market caps of Irkutsk-base energy assets could shoot up 60%. The news flow relative to the company’s upcoming breakup will drive up prices and we assign a Speculative Buy recommendation to the stock.