Oil producers’ resistance to the increase of external tariffs will result in a decline of KTO’s sales in 2016. However, we anticipate it to recover in 2017 and to grow significantly after the launch of Kashagan and expansion of Tengiz. We also lower our expectations for cost inflation after the Company demonstrated its ability to contain and even to reduce its expenses. We increase our target price to T1118 and expect KTO to pay dividends of T116 per share this year.
2015 results. KazTransOil’s revenues grew 3.2% yoy in 2015. Costs demonstrated very positive dynamics: the Company restrained expenses despite the rise in inflation last year. Non-consolidated net income for the Company peaked last year due to positive FX deposits revaluation – T79.6bn (consolidated net income totaled T44.7bn).
Tariffs. Last year, the Committee on Regulation of Natural Monopolies and Protection of Competition (CRNM) approved tariffs for KTO at T3,225 per ton*km with a 10% rise each year during 2015-2019. External tariff was set at T5,796 and, according to the Company, is unlikely to be raised in the near future – oil producers will resist cost increase due to falling revenues.
Sales expectations. We believe rising transportation volumes to be the main growth driver, since the external tariff stays flat and domestic tariff rises by 10% pa. Oil production at Kashagan in 2017-2018 and expansion of Tengiz in 2020 will allow KTO to increase its sales despite stable prices.
Dividends. KTO distributed 100% of its net income in dividends in the last two years. We expect the Company to reduce the payout ratio to 56.1% this year (equal to 100% of the consolidated net profit), as FX revaluations significantly distorted KTO’s income statement. Correspondingly, we anticipate dividend of T116 per share this year.
Buy reiterated, TP increased to T1118. Altogether, expectations of higher sales and lower cost inflation, supported by the NBK’s inflation target of 3-4%, allows us to revise the target price to T1118 per share (up by 22.2% from the previous TP), reiterating our Buy rating.
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Disclosure: the analyst own shares of the Company.