OREANDA-NEWS. October 13, 2010. The Federal Grid Company plans to increase its borrowings up to RUB300bn by 2014. The company’s target is for a long-term debt/EBITDA ratio below 2x. Presently, FGC has RUB36bn of total debt. The new borrowings will be used to finance FGC’s massive investment program. Recently, the government approved the company’s long-term investment program, which amounts to RUB950bn through 2015, or RUB190bn/year, reported the press-centre of OTKRITIE Financial Corporation.  

View: Previously, FGC management anticipated company debt to increase to about RUB190bn, looking for the remaining financing to come from internal cash flow. According to our DCF model, we expect FGC to generate a total of RUB512bn of operating cash flow through 2014. Consequently, we expect that in order to finance its capex program FGC will need to increase its total debt to RUB390bn, and thus we have not changed our estimates on this news. Also, we forecast FGC’s debt/EBITDA ratio at 2.7x in 2014, which is still slightly above management’s revised expectations.

Valuation: FGC trades at an EV/RAB multiple of 0.71x, versus an international average of 1.3x.

Action: We view this news as neutral for the stock and reiterate our HOLD rating on the Federal Grid Company.