Transgaz First Impression 4Q 2009

Our estimates are based on IFRS data, which complicates the comparison with the released data.

Revenues exceed expectations by 4%: The turnover for the quarter reached RON 381 mn, 4% above our estimate, we believe due higher than expected quantities transported.

Extensive cost reductions: The main surprises on the costs side came from grid losses and maintenance costs. Thus grid losses and other materials costs stood at RON 49.3 mn, while we were expecting them at around RON 66.4 mn, 34% higher. This reflects a decrease in grid losses as percentage of gas flows through the grid, to around 2.1% in 2009, compared with 2.3% our estimate, which was in line with last year's figure. Maintenance and other services costs stood 50% lower than expected at RON 25.5 mn, partially explaining the lower grid losses. As a result of higher revenues and the cost cuts, the operating profit stands at RON 137.6 mn, 2.3x higher than our forecast. The net profit came in at RON 108.7 mn, compared with RON 56.6 mn our estimate.

2009e dividend 21% higher than expected: The net profit stands 25% higher yoy and we expect the pay-out to remain the same as last year, thus we expect the dividend at around RON 13 or 21% higher than estimated, offering a yield of 7% against the last closing price.

Outlook and recommendation: We welcome the sizeable cost cuts, though we do not believe they are fully sustainable. We remind that Transgaz is regulated and the methodology is designed to allow it a regulated profit (return on assets) on top of an agreed cost base. Even though during the regulatory period revenues are not adjusted to account for lower than agreed costs, they will be adjusted at the start of the third regulatory period (July 2012). On top, the regulator might be less inclined to adjust the tariffs to account for falling quantities transported at mid 2010. Still, the company will continue to benefit of the cost cuts, at least in the short term. We will review our estimates and target price, and we keep our 'buy' recommendation.