New Investment – RusHydro ( $HYDR)

Posted a few new investments on twitter that I thought I would update you on.  I have found Russia rich pickings for a lover of high yields and low PEs.

I wrote this a few weeks ago but didn’t get it posted as I have had an unfortunate festive flu – figures maybe a little more out of date than usual. I am long from 0.51 (Late October), (currently 0.5895 so +15% in a couple of months) but think there is still value, I literally bought a touch more on Friday.

RusHydro (HYDR) – has a book value of 1.42 Rub – but is currently trading at 0.5895.  It also has a yield of c7-9% per year and a PE of about 6-9, depending on exactly what figures you want to use.  If we compare this with Verbund in Austria – another hydro generator it is at a PE of 23 a yield of 1-2% and price is 3x book. Now comparing a safe, Austrian Utility with the “Wild East” that is Russia may not be the best comparison.  Vs Fortum in Finland it’s still a fraction of the price.

To me this is a quality asset, it owns hydro plants, grid assets, and conventional plants. A good overview of operations is here and here.

The question is what is the catalyst.  I am not too concerned, as with this sort of yield / PE I am paid to wait.  My bet would be that more money in search of yield moves to riskier perceived markets driving up the price. The risk here isn’t that much greater. Russian interest rates have fallen from 7.75% at the start of the year to 6.25% now – and this has bond-like qualities.

61% of the shares are held by the Russian government.  There is a somewhat vague plan for it to sell down to 50% +1 share.  Usually a big holder selling would be a negative, but this is not universal.  In some instances/countries it can be a positive as it is implied that the government will interfere less.  There is government interference here, non economic investments being made to assist regions, and it is also very inefficient and potentially corrupt..  Still, I think there is money to be made as its just so cheap.

Part of the reason the government is selling is with the intention of improving the way it operates – it is not to raise funds. Having said that in a country as cold as Russia electricity / heat generation will always be highly political.  People can’t be allowed to freeze to death.

The other angle is that they would be much more highly valued if they sold their non-hydro assets.  With the rise of environmental concerns / ethical investing this would be very attractive to this type of investor if they didn’t have lots of non-hydro generation,  potentially preventing them getting through screening for an ethical / green fund.

I am somewhat concerned about the VTB Bank / Rushydro swap agreement – here (slide 28).  Russian companies seem to do a lot of this kind of thing and it is something to watch out for.  To me, right now it appears that Rushydro came off best from this, selling shares at >1 Rub which are now worth <0.6.

My holding is a 3.2% portfolio weight. Not sure if that is a bit light but there are risks here and I think I am better off being careful on individual stock weights.  This can be bought on the LSE as a GDR but it’s cheaper to buy it on the Moscow Exchange.  You can buy it via Interactive Brokers.

As ever comments / thoughts are appreciated.  This is a part of a series on cheap Russian energy stocks – I also bought $FEES / $RSTI, posts to follow.

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