Research Notes

On Tuesday, October 16, Interfax news agency wired that on Monday the Federal Property Management Agency announced a tender to select an appraisal firm to set the market price for the state’s 40% stake in Irkutskenergo which is subject to privatization via contribution to Hydro WGC’s charter capital. Citing an EDTM spokesman, the news agency reported that a decision in principle on contributing Irkutskenergo’s state-owned interest to Hydro WGC has already been adopted.

At present, due to its affiliation with metal makers and non-participation in utility sector reform Irkutskenergo (RTS: IRGZ) is one of Russia’s cheapest energy companies, with kW of its installed capacity valued at just $350 in comparison with genco industry average of $490. At the same time, up to 20% of Irkutskenergo’s market value comes from the assets used in electric power distribution, transportation, sales and repair operations, etc. It seems that these segments are not valued by investors at all. Electricity tariffs in the region are one of the lowest not only in Russia, but also worldwide, while the company’s primary electric power consumers are metal producers controlled by RusAl and Sual.

In the event that Hydro WGC gains an interest in Irkutskenergo, the latter’s market cap could surge 30-40%, which would exert a positive impact on Hydro WGC’s capitalization, not to mention operating benefits associated with the company’s growing influence.

At present, we are in the process of revising our recommendation on Irkutskenergo and believe that there is a strong likelihood that the valuation figure of Irkutskenergo’s assets will be above its current market cap, while the news flow relative to the company’s imminent restructuring will drive up speculative demand for the utility company’s shares.

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Simon Birg

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