Elliot Associates Romanian play

Wood and Co research on Fondul Proprietatea published 2/22

We continue to regard Fondul Proprietatea (FP) as one of the most attractive investment opportunities in Romania. We see it as a play on: 1) the restructuring of state companies and corporate governance improvement; and 2) the eventual longer-term recovery of energy prices; as well as 3) the ability of the Fund’s manager, Franklin Templeton, to apply the right methods for reducing the discount to NAV. Our NAV estimate, derived by marking to market the listed holdings and valuing some of the unlisted stakes, is RON 1.196/share, which is in line with the official NAV of RON 1.208/share (as of January 2017). However, for some of the listed companies, we see further upside as possible (e.g., Petrom). We believe the current 25% discount to NAV is too high, and we see ways of narrowing this. We increase our price target (PT) to RON 1.11/share, using a 15% fair discount to NAV and a 9.5% cost of equity, implying 23.4% upside. We maintain our BUY rating on the stock.

Potential catalysts for the NAV discount to narrow. We see more asset disposals or listings from the unlisted part of the portfolio, followed by cash distributions to shareholders, as potential catalysts for the discount to narrow. The Fund has already disposed of its stakes in Transgaz, Transelectrica, Romgaz and unlisted E.ON, and has partially reduced its participation in Petrom and Conpet. We believe more disposals are possible from both the listed and the unlisted parts of the portfolio (e.g., a 10% stake in Hidroelectrica, once listed; an eventual sale of the stakes held in Electrica’s subsidiaries to the parent company). The proceeds of any disposals, as well as any dividends that the Fund receives from its listed holdings, are to be distributed to FP’s shareholders, either via buybacks or via reductions of the share par value.

NAV discount too high. The discount to NAV is at 25% currently, from 30% a year ago. The Fund pays a low amount of tax; generates an average yearly earnings yield close to its cost of equity; has been able to sell stakes at a discount of less than 5% to their NAV; and has taken important steps towards either listing other stakes in the portfolio or disposing of them. Therefore, we see no reason for the NAV discount to remain this high.

NAV could see further upside. Not only should the discount to NAV narrow, in our view, but we also see growing support for FP’s NAV to increase, as it is highly exposed to the prices of oil & gas and electricity (46% of NAV). We see oil & gas and electricity prices moving slowly higher, to the benefit of oil & gas producers like Petrom (17.7% of NAV) and electricity producer Hidroelectrica (26.4% of NAV). Moreover, we see more upside for the currently unlisted stakes once the IPOs have been undertaken, as we are currently applying a discount to them in our valuation (Hidroelectrica and Bucharest Airport being the largest).

For more details go to:http://seekingalpha.com/article/3757246-invest-paul-singer

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