Lukoil: Revision of the target price

The increase of 12M TP to 4177 rubles/share, "BUY" recommendation.

Altynay IbraimovaJanuary 24, 2018

Evaluating the favorable background on commodity markets, which contributed to the adoption of a positive decisions by the Board of Directors of Lukoil and the Lukoil's share price achievement of our target price in less than six months, we focus on new drivers that can provide additional profitability in the form of high dividends. Increased oil prices for 4Q2017 (17% higher than for 9M2017) cause us to increase our forecasts for net profit in 2017 and, together with the planned buy back during the next five years, confirms our more optimistic expectations for dividends. We raise our 12M target price to 4,172 rubles / share, providing a total return of 15%, and we maintain our BUY recommendation on Lukoil shares. 

Financial results for 9M2017 show improvement in line with expectations. EBIT for 9M2017 was 359bn rubles, an increase of 13%, which was achieved due to the increase in export sales of oil (+ 24% yoy) and petroleum products (+ 11% yoy) due to rising oil prices (+ 23% yoy). In the reporting period, Lukoil increased oil exports by 11.6%, the share of oil exported by the Company was 45.7% of oil produced in Russia (9M2016 - 40.5%). In the structure of expenses, there is an increase in the costs of acquiring oil, gas and refined products (+ 19%), taxes other than income tax (+ 34%), while operating expenses (-0.1%), transportation costs (-13%), excises and export duties (-5%) and commercial and administrative expenses (-19%), on the contrary, decreased. Due to the decrease in financial expenses (-34% yoy) and a lower loss on the exchange rate difference, the Company's net profit amounted to 298bn rubles, which is higher by 86% yoy.

Dividend yield (6%) provides good potential for the share price. According to the results of 9M2017, Lukoil decided to pay interim dividends in the amount of 85 rubles per share (24.2% of net profit), which is 13% higher than the 9M2016 dividend (75 rubles / share). Based on the results of 9M2017 and considering higher oil prices for 4Q2017, we expect a net profit of 390bn rubles, which contributes to more optimistic dividend forecasts. Following the results of 2017, we expect that the company will pay 40% of net profit as dividends, which corresponds to 220 rubles / share and exceeds the dividend for 2016 on 13%. The growth potential of dividend payments is also the reinforced by the Board of Directors decision to carry out a new buyback of shares over the next five years, spending $2- $3bn on it.

The increase of 12M TP to 4177 rubles/share, "BUY" recommendation. Based on the results of 9M2017, we remain optimistic about the results for the entire 2017, expecting the growth of net profit at the end of 2017 (+ 88% yoy), which also provides an improvement in the forecast for dividend yield (6%). Evaluating the management's redemption plan as a way to increase the Company's shareholder value, we generally note a positive background for the share price for the entire forecast period and increase our 12M target price by 24% to RUB4177 / share, with a BUY recommendation.

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