Research Notes

The third wave RAO UES stakes in power sales companies to be sold started on November 27. RAO UES offered stakes in five power sales companies. The shares of the Vladimir power sales company, Lipetsk power sales company, and Tula sales company were successfully sold in the auction. The Orel sales company and Kostroma sales company stakes were not sold because there were not any bids.

The auction's results have a positive effect on the market of power sales companies. The price of the Lipetsk power sales company was 120% higher than the market price, the share price of the Vladimir power sales company and Tula sales company were 25% and 7% above the market price, respectively. Therefore, the stock market does not fully realize the potential of many power sales companies, though some of the assets do attract strong attention. The main advantage is that power sales assets will provide direct vertical integration for the strategic investors with access to the end users. They would be best utilized as a hedge, and would protect from changes in the market structure.

The price that was paid for the Lipetsk power sales company and the Tula sales company at the auctions held on November 27 was very comparable to the valuation which was released in June. This valuation was performed as part of the anticipated consolidation of RAO UES stakes in 43 power sales companies in RAO Eastern Power Systems, which was one of the three holdings set up during the restructuring. By consolidating its power sales assets in the Far-Eastern power holding, RAO UES wants to protect itself if not all of the stakes are sold.

We do not have any official recommendations for power sales companies. Nevertheless, we believe that the market price of these companies would approach the results of the valuation that was released in June. We recommend using this valuation of RAO UES as a benchmark in estimations of the fair value of power sales companies. Presently, the following stocks have an upside of over 100%:

We are upbeat about the sector of power sales companies. Presently, the best investment strategy is to keep the share of power sales companies at 10-15% among the other power sector companies, and with at least 2-3 undervalued sales companies in the portfolio. Utilizing this method, an investor minimizes non-systematic risk of failed auctions for some of the companies.

The fair value of the companies in the sector which are traded on RTS or RTS-board are given in Appendix 1. The fair capitalization of the power sales companies is given in Appendix 2. Comparative multiples across the sector are given in Appendix 3.

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Simon Birg

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