Fixed Income Analysis /
Ukraine

DTEK: 'Hold' still holds

    Tellimer Research
    11 February 2020
    Published byTellimer Research

    We reiterate our Hold recommendation on DTEKUA 24s, despite weak FY 19 results. We believe that electricity prices have bottomed out in Q4 and Q1 20 could see a qoq improvement. Hence, we expect that further deterioration of DTEK’s financials in 2020 would be mostly driven by phasing out of the highly profitable H1 19, but not by lower prices or volumes. A debt repayment schedule that is almost clear in the next three years give the company plenty of time to come up with a refinancing solution, assuming it can generate enough cash to pay cUS$170mn interest annually. Besides, there could be a way to reduce debt at the DTEK level, which could facilitate refinancing. DTEKUA 24s are the highest unyielding bonds in the Ukraine corporate universe. While uncertainty around the company’s future profitability remains, we expect DTEKUA to continue to underperform the rest of Ukrainian corporates. However, over 10% yield to maturity, c540bps spread over the sovereign and 435bps spread over the interpolated curve of its “sister” company, Metinvest, are levels at which selling could only be justified by a severe deterioration in credit quality of the kind that would raise “going concern” questions. We are nowhere near that yet.

    Expectedly weak FY 19. DTEK reported US$3bn in revenues, up 11% yoy, on the back of 12% yoy lower electricity generation and a c8% yoy lower average electricity price (see Tables 1 and 2 on page 3). We estimate that DTEK’s adjusted EBITDA declined 36% yoy to US$568mn and EBITDA margin reduced to 20% (from 28% in FY 18). Although a limited format of preliminary reporting does not give us full details, electricity generation has historically been the main source of EBITDA, and in our view was the main explanation for its decline in FY 19. DTEK’s leverage increased from c2.2x in FY 18 to c3.2x in FY 19, according to our calculations, on the back of lower EBITDA. There are no sizable debt repayments in 2020-22 (US$90mn in total), making interest payments the main financial outflow for the company. However, most of the US$2bn debt matures in 2023-24. Some time between now and 2023, DTEK will have to address the debt refinancing question

    Unexpectedly weak Q4 19. Q4 was the second quarter when DTEK operated under the new regulatory framework introduced in July 2019, with electricity prices established daily based on the balance of supply and demand. Despite initial concerns that free market pricing could drive prices up (hence a price cap of UAH1,640/kWh imposed until 1 April 2019), the reality was precisely the opposite. Prices stayed around the cap level in Q3, but gradually reduced in Q4 to cUAH1,200/mln kWh on the DAM market. An unusually warm winter and the reopening of electricity imports from Russia and Belarus put pressure on prices in October-December. In Q4 19, DTEK cut production to 5,671mn kWh (-18% qoq, -40% yoy). Mathematically, calculating Q4 revenues and EBITDA based on the FY 19 preliminary and 9M 19 suggests that in Q4 19 DTEK generated only US$187mn in revenues (-75% qoq) and US$52mn in adjusted EBITDA (57% qoq).