SEB Enskilda: Court Loss of Tallinna Vesi not to Affect Share Price
OREANDA-NEWS. January 24, 2012. If AS Tallinna Vesi were to lose the court case against the Competition Authority and were ordered to cut its water tariff in Tallinn by 29 percent, as demanded by the Competition Authority, the company’s share price would be worth 4.7 euros, according to an estimation of SEB Enskilda, reported the press-centre of SEB.
It would also reduce the dividend potential of the Tallinna Vesi share by half. However, the investment bank believes that this court dispute could extend well into 2014, unless a compromise is reached beforehand.
If Tallinna Vesi were to win the court case, its market capitalisation could grow to 234 million euros, or to 11.7 euros a share, according to a new analysis of SEB Enskilda.
At present the stock of the water company is traded at a level of 6.4 euros a share which is also close to the share price in the base scenario of SEB Enskilda. SEB Enskilda forecasts that the court case will take a few years and until then, the water price in Tallinn is not going to change. The dividend yield of this stock is a good reason for keeping this security.
“A court victory would give the share of Tallinna Vesi significant growth potential. At present one can sense that possible reduction of the water tariff is already included in the share price and the market considers it likely that the demand of the Competition Authority will prevail”, said Pavel Lupandin, equity analyst of SEB Enskilda. “Tallinna Vesi should attempt to compromise since such a sharp reduction of the water tariff would hit the company’s financial situation extremely hard and would affect the company’s ability to honour its liabilities. A compromise would also benefit the country since it would prevent present and future foreign investors from expanding this case to Estonia’s whole investment climate.”
Tallinna Vesi is explaining the tariffs by the fact that while the company was privatised in 2001, the privatization contract stated a lower return on investment in the first years that was expected to grow later and reach 7 percent net of inflation during the contract that expires in 2020.
Graph: Average water and sewerage tariffs in Estonia urban settlements (EUR per cubic metre, source: Estonian Association of Water Companies / SEB Enskilda).
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