Fondul Proprietatea facelift - company update

The new manager has turned FP into an active investor and it has already scored several important victories in its battles to improve the corporate governance standards of the portfolio companies, the most noteworthy being the successful blocking of the two 'Energy Giants'. Recently, the Government seems to have moved up a gear in terms of listing of state controlled companies. IPO procedures for Romgaz have just been started and the Government has published a draft ordinance for the listing of Hidroelectrica and Nuclearelectrica. If these companies were listed, the weight of listed shares in its portfolio would go up to around 71% (from 39% currently).

The constant supply of new shares transferred from the state to entitled individuals which put significant downward pressure on FP share price over the past months, is about to end as the state's stake dropped below 3%. In addition, as the state's ownership fell below 33%, shareholders were able to vote in the GSM of November 23 the removal of the voting rights limitations.

Moreover, we see FP as the Romanian stock where the interests of shareholders and management are best aligned, since the management fee is based on market capitalization and not NAV. And, with a clear dividend policy, the current dividend yield approaches 7.5%, slightly above the average for Romanian stocks, while FP's shares have displayed less volatility than the market.

Valuation and recommendation: To assess FP's NAV, we use a Sum-Of-The-Parts (SOTP) valuation. We mark to market the listed shares while for the not-listed stakes we apply different valuation methods, ranging from simplified DCF models to peer comparisons. We assign a value of RON 11.6 bn to FP's shares portfolio which corresponds to a NAV of RON 12.5 bn. The number of shares used to compute the unitary NAV is adjusted for the shares due to be cancelled, those bought under the buy-back program and the number of shares subscribed but not paid by the state. Hence, we get a NAV per share of RON 0.95. To reach our fair value and TP we apply a set of discounts. We now differentiate between cash & listed shares and not-listed assets. We use a 15% discount for the first category and 25% for the second, and reach a fair value of RON 10.0 bn, down 12.9% from our previous value, mainly on a decrease of the portfolio of the listed shares but also on a moderate decrease of the valuation of the not-listed companies. The fair value points to a TP of RON 0.76 per share, thus we reiterate our 'buy' rating.