Fixed Income Analysis /

Credit Report - Net4Gas: Initiation of Coverage

    Ulrich Scholz
    Ulrich Scholz

    CFA, FRM - Telecoms, Technology

    14 April 2021
    Published by
    • NET4GAS is a monopoly provider of gas-transmission and transit services: We are initiating coverage of NET4GAS, s.r.o (N4G), which is the sole gas-transmission-system operator (TSO) in Czechia, with an overweight recommendation. N4G’s business model is founded on two pillars: 1. the transit of natural gas through Czechia to European gas markets (gas transit business) and 2. the domestic transmission of natural gas into a distribution grid, gas storage facilities and to large domestic industrial customers (gas transport business). Last year, revenues from gas transit and gas transport accounted for around 77% and 19%, respectively, of the group’s total revenues.
    • High visibility in gas transit is backed by ship-or-pay contracts: The majority of N4G’s gas-transit revenues are derived from four ship-or-pay contracts (estimated 80% of segment revenues). The Gazelle and Capacity4Gas contracts are the most important of these, and both were concluded with the same shipper. Both contracts have long-term durations; they expire in January 2035 and October 2039 respectively.
    • Regulatory framework in Czechia is stable and predictable: The new price regulation from Czechia’s fifth regulatory period (RP5), which runs from 2021 to 2025, includes two major changes: 1. a fixed WACC of 6.43% (7.94% for the previous period) and 2. a pre-agreed trajectory of RAB that will be gradually reconciled up to the net book value from 2020 to 2025. The RAB reconciliation process will support N4G’s earnings and cash flow while mitigating the negative impact of the lower WACC.
    • Record earnings have been driven by Capacity4Gas contract: In 2020, the transported natural-gas volume increased by 11% yoy, mainly as a result of the completion of a part of the Capacity4Gas project. EBITDA increased to CZK 8.7bn (+24% yoy), and operating cash flow exceeded CZK 7.0bn (+21% yoy). Investments of CZK 6.6bn were mainly focused on the Capacity4Gas project, which is backed by a long-term capacity contract. Free cash flow turned positive in 2020 and amounted to CZK 0.5bn (CZK -1.0bn in 2019). Supported by a CZK4.4bn equity injection related to the Capacity4Gas project, adjusted net leverage decreased to 2.9x from 3.6x in 2019.
    • Rating sensitivities signal headroom for potential re-leveraging: While N4G aims to keep its capital structure in line with its current rating, additional EBITDA contributions from the Capacity4Gas project leave headroom for potential re-leveraging. While the magnitude of decline in capex from 2023 onwards will depend on outstanding investment decisions, we assume N4G might also consider higher dividend payments during the 2021-25 period. With the exception of NETGAS 2.5% Jul 2021, NG4 will not face any further major debt maturities before 2025.
    • Senior bonds still look attractive from a relative-value perspective: Even after spread tightening in the year to date, NETGAS 3.5% 07/26 is still trading around 65bp wider than the iBoxx EUR Senior index. Although we note that outstanding NETGAS senior-bond volumes are below benchmark size, we think the spreads include an attractive premium. We are initiating coverage on NETGAS bonds with an overweight recommendation.