DTEK Energy adjusted EBITDA drops 18% in 9M19

Ukraine’s leading coal and power holding DTEK Energy (DTEKUA)
reported its revenue reached UAH 72.3 bln in 9M19, compared to UAH 119.8 bln a
year before. The numbers are not comparable as the holding spun off its power
distribution business in late 2018. Its operating profit amounted to UAH 5.3
bln in 9M19 (vs. UAH 9.0 bln a year ago) and net profit was UAH 6.3 bln (vs.
UAH 3.4 bln a year ago). The holding’s operating cash flow before working
capital changes decreased 22% yoy to UAH 14.8 bln.

Its total debt slid 14% YTD (or by UAH 8.1 bln) to UAH
47.9 bln as of end-September, which is mostly the result of the appreciation of
the national currency (most of the holding’s debt is denominated in USD). In
9M19, DTEK Energy repaid UAH 1.5 bln of debt (all paid in 1Q19).

The holding’s receivables continued to increase during
the third quarter: after rising 15% YTD in 1H19, they gained another 10% in
3Q19 to reach UAH 18.9 bln at the end of September (with total growth at 27%
YTD).

Alexander Paraschiy: We estimate
the holding’s 9M19 adjusted EBITDA at UAH 14.5 bln, which is an 18% decline
yoy, on like-to-like basis. Traditionally for the holding, its strongest EBITDA
is generated in the first and fourth quarter of a given year. However, the
fourth quarter of 2019 is likely to be very weak for DTEK Energy due to both
weak electricity output (which we expect to decrease about 28% yoy and will be
even weaker qoq) and weak power prices (which will be about 12% weaker qoq).
Therefore, we estimate that DTEK Energy will generate UAH 16.0 bln in adjusted
EBITDA in 2019, which will be 36% weaker yoy, on a like-to-like basis. That
will imply the holding’s net-debt-to-EBITDA ratio will worsen to about 3.0x as
of end-2019, from 2.1x as of end-1H19.

The key risk for DTEK Energy for the future is its
operating risk related to the new electricity market rules in Ukraine, which
started functioning as of July 2019. The results of recent months suggest that
prices on the newly established market will be rather volatile, with unlimited
downward price moves and the upside being limited by price caps. This resulted
in a decrease of wholesale market prices for electricity (day-ahead market and
intraday market) from UAH 1,669/MWh in August (when there was excess demand on
the market) to UAH 1,363/MWh in November (when excess supply was observed). If
the government is able to remove price caps in 2Q20, as is foreseen by law,
DTEK Energy could enjoy better power prices and improve its margins in 2020. If
price caps remain, its profit growth potential will be limited.

Taking into account wakening DTEK Energy
fundamentals and uncertainties related to the new market rules, we downgrade
our view on DTEKUA bonds to neutral from bullish.