The risk of reducing domestic tariffs is offset by the possibility of higher export prices. KazTransOil submitted an application for approval by the antimonopoly committee of new tariff levels for the domestic transportation. Taking into account the concerns of the company regarding the reduction of tariffs to the level of zero profit, we take into account in our assessment a reduction within 10%, counting revenue in the domestic market based on the level of 4,250 tenge/ton*km up to 2023 (0% growth) with the resumption of growth in 2023-2026 by 10%. At the same time, the company faces the need to increase the export tariff, which, according to our estimates, will amount to 8% yoy to 2022 with a gradual narrowing of growth to 4% by 2026, since the potential for an increase in fees for export shipments is limited to company’s belonging to the KMG group.
Stable freight turnover regardless of Tengiz and Kashagan. In Kazakhstan a significant increase in oil production is expected due to Tengiz and Kashagan, oil from these fields goes mainly through the CPC pipeline. Investments in the amount of $600mln that CPC will use to improve pipeline capacity will focus on Tengiz oil after the expansion program. Thereby, our previous assumptions regarding partial surcharges on oil volumes to current KTO volumes after the expansion of Tengiz may not be realized, and we expect a reduction in the share of oil transported by KTO from all Kazakhstan oil from the current 50% to 35% by 2026, from 45 million tons up to 36 million.
The monopolistic position of the KTO guarantees high demand. Being the operator of a strategically important asset of the country for KTO the pipeline’s occupancy with oil is paramount. We believe that problems with unloaded capacity of KTO are unlikely even under the condition of expansion of the CPC system. The fact that the KTO pipeline system has access to the Chinese market is a unique advantage making export and transit transportation attractive, which in addition, are charged in US dollars and in conditions of weak tenge make it possible to service foreign currency loans.
Recommendation to Buy from 12M TP 1300KZT/share. We recommend to Buy KazTransOil shares. We assess the status of the company's assets as a rather important aspect in the country's export potential. With all the risks, our 12M target price amounted to 1300/share and provides a 29% increase.
