UES will assign its stakes in isolated utilities on Sakhalin, Kamchatka, Chukotka and Magadan to Far East Energy Company (FEEC) established as part of the reform process for other regional energos, Interfax reported citing UES Chairman Anatoly Chubais. It was also noted that UES is busily engaged in forging development scenarios for utilities in the Primorsky region of the Far East.
It’s noteworthy that FEEC was established as the result of a reorganization of Khabarovskenergo, LuTEK, Amurenergo, South Yakutskenergo and Dalenergo in the form of a merger. The company launched operations on February 1, 2007. News about assignment of Far East isolated utilities to FEEC could stoke investor interest in regional utilities stocks, including both isolated companies (with Magadanenergo being the most undervalued among them) and FEEC shares.
FEEC shares appeared on the stock market on Wednesday, May 16. At present, FEEC is valued at $400 per kW of installed capacity which is considerably lower than WGC-TGC gencos with the current market price of $520-540 kW. Taking into account the fact that FEEC has distribution and trunk grids which we value at 20% of FEEC’s total assets, the company is even more undervalued.
In addition, during FEEC’s valuation, possible electricity exports from the Far East to China should be taken into account. According to the power holding’s new general scheme, such exports will reach 25 bln kWh by 2020 which means 70% of current electricity consumption in the region. The Far East will account for 50% of all exports to China from Russia. According to our conservative estimates, FEEC’s market cap is $2.6 bln, which corresponds to $0.153 per share.
We believe that FEEC has excellent growth prospects for its market cap. We assign a Buy recommendation to FEEC with a year-end 2007 fair price of $0.153. We also assign a Buy recommendation to Magadanenergo with a target price of $0.166 per share.
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