A little over a month ago, 7BET, the index that tracks the main Romanian index, BET, has been listed on the ZSE. Now, with the IPO of Hidroelectrica, we give an overview on what impact will this have on BET, and by extension, 7BET.
In the month since its launch, the 7BET ETF has gained significant traction on the ZSE, with its turnover accounting for app. 20-30% of the total turnover on the exchange on certain days. First of all, what is this ETF and what are its benefits? The 7BET is a total return (TR) ETF, meaning it reinvests dividends and avoids dividend tax payments. It closely tracks the movements of the BET TR index, the total return version of Romania’s main index, BET. Its first notable advantage is its low fees and costs, making it an attractive option for long-term investment.
In addition to the cost-effectiveness, the 7BET ETF has also addressed a key concern for investors on the ZSE, which is the lack of liquidity. The ETF has a dedicated market maker who actively manages the bid/ask spread, keeping it extremely tight at around 0.2%. This improvement in liquidity helps mitigate one of the major challenges faced by investors on ZSE.
Given the fact that this was already known information, what has changed in the meantime? Of course, the news of the Hidroelectrica IPO. This marks a significant milestone as the largest IPO in Romanian history and one of the largest in the SEE/CEE region. The IPO process lasts between 23 June and 4 July. During the IPO, a total of 78,007,110 shares (17.34% of the entire share) will be offered, with an over-allotment option of an additional 2.6% stake amounting to 11,701,067 shares to meet potential high demand from institutional investors. The price range is set between RON 94 to RON 112 per share. Out of these shares, 15% will be available to retail investors in Romania (11.7 million shares), while the remaining 85% (66.3 million shares) will be allocated to institutional investors. Moreover, retail investors who make offers within the first five days will receive a 3% discount on the final price, potentially reducing the price to RON 108.64 per share if the agreed price ends up at RON 112.
Media reports indicate that the IPO has received significant interest from retail investors, resulting in over four times oversubscription. As a result, retail investors may receive only a fraction of the shares they subscribed for. Furthermore, institutional investors have also demonstrated strong interest, oversubscribing their shares within the first three days of the IPO. Considering these factors, it can be expected that the final price will lean toward the higher end of the price range. In this case, we assume that Fondul Proprietatea will grant fulfillment to the IPO’s Global Coordinators over-allotment option. If the final price reaches the maximum price of RON 112, and Fondul Proprietatea sells its entire stake of 19.94% in Hidroelectrica (89.7 million shares), the company’s free-float adjusted market capitalization would amount to RON 10.04 billion (EUR 2.02 billion). This would position Hidroelectrica as one of the largest companies listed on the Bucharest Stock Exchange.
Lastly, taking a quick look at the TTM results of the Company, its net profit amounted to RON 4.9bn (app. EUR 1bn), which at the highest price would imply a P/E of 10.3x.
Hidroelectrica and peers P/E comparison (TTM Q1 2023 results)
Source: Bloomberg, Hidroelectrica, InterCapital Research
So having all of this in mind, what are the main benefits of this listing?
Highly profitable company in line with ESG guidelines
Hidroelectrica in the current energy environment is proving just how profitable it is to be a renewable energy producer. Due to the energy crisis we have witnessed last year, the Romanian government has effectively capped the price of electricity at RON 450/MWh (EUR 92/MWh), and any amount earned above this amount is taxed at 100%. Hidroelectrica has a unique advantage here as it is not dependent on outside commodity prices for production (be it gas, coal, or any other energy source). As such, they’re able to keep the costs of production at app. RON 100/MWh (EUR 20), meaning that they have a lot of room for profitability. This leads to significantly higher EBITDA and net profit margins, at 64% and 47% in 2022, respectively. Lastly, as Hidroelectrica uses renewable energy for production, the support from the current ESG push in the EU should be relatively strong.
Strong dividend payments
Hidroelectrica’s dividend payout ratio is set at 90% for regular, and 5% for special dividends of the previous year’s net profit. This strategy is supported by the Romanian government as its budget is structured to take into account cash inflows from dividends in which the state has a stake. As such, this strategy is expected to continue. To put things into perspective, if listed at the highest price, the DY of the Company would amount to app. 9%, which would mean that Hidroelectrica’s contribution to the index DY would be 1.8%. Overall, this would also mean that the DY of the index could amount to 6-8% yearly.
Romania becoming an Emerging Market
With the IPO of Hidroelectrica, Romania will finally be able to be considered an Emerging Market, according to MSCI classification. This means that Romania will receive higher exposure to investment funds in the Emerging Market space, it will be able to attract more foreign investors, liquidity will improve, and overall, the growth opportunities will be plentiful.
Inclusion into the 7BET index
As Hidroelectrica’s listing will make it one of the largest companies on the exchange, it will also be included in the BET index, where it should have app. 20% of the weight. As such, positive developments in Hidroelectrica will also have a strong positive influence on the movements in the index. As 7BET tracks the BET index, and given its inherent advantages (low costs, dividends reinvested), the IPO of Hidroelectrica will have a significant positive impact on the further development of the index, and Romania as a whole.
Because of all of these reasons, investing in the 7BET ETF is about to get a whole lot better, and opportunities for further growth abound.
BET composition by sector (% of the total)
Source: BVB, InterCapital Research
