Ukraine: Unsupported Optimism Could Be Punished

VTB Capital

April 16, 2009

Optimism towards Ukraine, proxied by credit spreads, has been rising over the past month and a half; however, we are still highly cautious over the prospects for the country as the economic reality remains particularly grim and we have seen little progress by the Ukrainian authorities (which continue to be torn by factional infighting) on the IMF loan programme - a crucial foundation for sovereign credibility.

In our Ukraine: Sovereign Ratings Under Pressure of 25 February, we argued that Ukraine's overall creditworthiness was at stake and that successfully negotiating with the IMF to obtain the second USD 1.88bn tranche of the USD 16.4bn loan programme (and, indeed, subsequent tranches) was essential to avoid a sovereign default.

At that time, the perception of Ukrainian risk was very high, as reflected by the 5-year CDS trading at a high 4,287bp (see Figure 1). Since then, however, expectations of a sovereign default have eased and optimism returned to the markets, and those same CDS have now eased to their current sub-3,500bp level.

However, in our view the current perception of Ukrainian risk is overly optimistic and we see no fundamental reasons to suggest that it might be sustainable, because:

- no major progress has been made with the IMF on loans;

- the political situation shows no signs of the much-needed unity;

- economic indicators remain highly negative.

For as long as the current round of global investor optimism sweeps along, Ukraine is likely to go with the flow, but the moment we see the increasingly expected turnaround it will be among the first to be hit. Based on the country's current economic and financial performance, and if progress with the IMF continues to stall, we would expect to see a new round of rating downgrades before the end of spring, which could lead to a noticeable revaluation of Ukraine as an asset.
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A couple of interesting developments over the past 24H in Ukraine worthy of comment

Tim Ash / Royal Bank of Scotland

April 16, 2009


First, the cabinet of ministers signed off on a series of 19 bills which it hopes will jump start the stalled US$16.4bn IMF SBA. The government is seeking to ensure the disbursement of the stalled US$1.84bn in the second credit tranche, alongside the US$3.7bn due to be released in the third tranche in May.

The government had initially attempted to secure parliamentary backing for the legislation, but deputies from the Regions and Communists blocks, together with elements within President Yushchenko's Regions of Ukraine party had blocked approval of the legislation. The bills include measures to hike domestic electricity and gas prices, hike taxes and cut entitlement to the state pension system. Overall the bills aim to cut the budget deficit to 3% of GDP, to be compliant with IMF targets. Cabinet approval of the reform package was welcomed by the visiting IMF mission, albeit there is still surely a question mark as to whether cabinet approval of the legislation will be legally watertight across the whole array of bills approved; the cabinet of ministers does have the right to hike utility prices, albeit it is less clear cut in terms of its ability to legislative over pension-related reforms. Encouragingly though, President Yushchenko appeared to come out in favour of the government's decision.

Second, and less encouraging, President Yushchenko is reported to have called for commercial banks to restructure their external liabilities falling due to year end. Presumably this excludes foreign-owned banks (around 50% of bank assets at present), but it is unclear whether this proposal extends to both state owned (Ukreximbank and Oschadnyi bank) and private domestically owned banks. Ukreximbank in particular has a syndicated loan for US$345m falling due for repayment on April 16, and a further issue due in September.

We still think that the bank's developmental orientation would suggest it will continue to honour its obligations, likel! y suppor ted in this by the IMF; the Fund's objective surely still is to ensure the speedy restart of private sector lending back into Ukraine, and Ukreximbank would still appear to be a first conduit for this. That said, we have long argued that Ukraine's external financing gap will ultimately be closed via a combination of forces, including the restructuring of private sector external liabilities (on a case by case basis), devaluation, official financing and some draw down of official reserves, and the deflation in domestic demand more generally narrowing the current account deficit. Arguably all the above factors are on-going, but a more formal process, perhaps supported by the actions of the NBU, would obviously be a major credit negative. Yushchenko, et al, would perhaps highlight that efforts by policy makers in Kazakhstan to facilitate the restructuring of some private sector bank liabilities has set something of a precedent; albeit in Kazakhstan this process is still running on a case by case basis.


Timothy Ash

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Yushchenko gives his estimations on total debt due in 2009

Rencap

April 16, 2009


Ukraine President Viktor Yushchenko met yesterday (15 Apr) with senior officials of the National Bank of Ukraine (NBU) and an International Monetary Fund mission in Ukraine to resolve differences and restore the flow of the IMF's stand-by loan to Ukraine. At this meeting the president said that, according to his estimation, Ukraine should redeem $24bn of its total foreign debt by the end of 2009, and that it had already redeemed $4.4bn in 1Q. These numbers are in line with our estimations of $29bn of sovereign and corporate debt due this year (click here to view our 19 Feb 2009 report Ukraine in 2009: Financial hurricane gathers strength).

According to the president, Ukrainian banks have to repay $12.5bn of foreign borrowings by the end of 2009, while corporate sector debt redemptions are about $9.5bn and $2bn is needed to service sovereign debt to the end of the year. Yushchenko highlighted that in giving these numbers, the IMF's loan is needed to support the NBU's foreign reserves otherwise they could drop to $14-14.9bn YE09, while at the end of March they were at $25.4bn.

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Industrial production up 8.3% MoM in March; YoY drops to 31.9% for 1Q09

Rencap

April 16, 2009

According to the State Statistics Committee, in March Ukraine's industrial production increased MoM for the second month in a row. Growth was 8.3% MoM vs 5.4% MoM in February. As a result, the YoY figure slightly improved; the 1Q09 slumped to 31.9% YoY vs 32.8%YoY for Jan and Feb 2009. In March there was slowdown in the output growth of metals (4.6% MoM vs 12.3% MoM in Feb) and engineering (5.9% MoM vs 21.8% MoM in February). However, the substantial MoM growth in February was mainly due to a low base of comparison (in January there was a notable drop in industrial production).

Overall, growth in the extraction and manufacturing sectors was 9.1% MoM and 9.4% MoM respectively, while the YoY drop continued to be substantial at 32.9% YoY and 37.2% YoY respectively. A poor industrial production performance in 1Q09 may trigger a comparable drop in GDP. According to Ukraine President Viktor Yuschenko, real GDP in Jan and Feb 2009 declined about 25-30% YoY. Official indicators for real GDP in 1Q09 are expected to be released 13-15 May 2008.

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Bank Aval finally repays its USD 500 mln loan

Sokrat

April 16, 2009

Raiffeisen Bank Aval announced that it has repaid the final USD 100 mln tranche of an overall USD 500 mln syndicated loan, which was attracted in April 2007 for a period of two years at LIBOR +1.2%.

Our view: We had no doubts about the successful repayment of this debt, since the bank had earlier repaid 4/5 of the loan and since the bank receives support from Raiffeisen Zentralbank. As well, we anticipate that BAVL won't have problems with the repayment of another USD 83.5 mln loan in July 2009
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Ukrnafta fails to hold EGM for the seventh time in a row

Rencap

April 16, 2009

Event: Yesterday (15 Apr), Ukrnafta again failed to hold an EGM with its 2006-2008 dividends on the agenda, due to the unavailability of the register.

Action: The announcement is negative for Ukrnafta, in our view. Nevertheless, we retain our HOLD rating on the stock.

Rationale: This is the seventh time Ukrnafta's shareholders have failed to decide on the distribution of earnings in 2008-2009. As we understand, the six previous failures (in Jan, Apr, June, Sep and Dec 2008, as well as Feb 2009) were caused by a conflict between the company's key shareholders (Naftogas of Ukraine and Privat Group), and we believe this was also the case yesterday. While Naftogas of Ukraine insists on a 100% dividend payout (similar to Ukrnafta's practice in 2004 and 2005) to improve its poor financial standing, Privat Group requires a fair price for Ukrnafta's gas supplies to Naftogas (the regulated gas price for Ukrnafta is about 11x below Ukraine's import gas price). We are disappointed about the continuation of the shareholders' conflict. We think Ukrnafta may now be legally forced to pay dividends at normative payout ratios of 40% for 2006-2007 and 15% for 2008 by 1 June 2009, in accordance with the 2009 Budget Law. We will closely monitor any decisions with regard to this issue, as the potential dividend yield is very high (about 28% at current market quotes), on our estimates.

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Market Comment: Market finally cools down

Alfa

April 16, 2009

In March, Ukrainian industrial output added 8.3% m-o-m, continuing the recovery that began the previous month. This contrasts sharply with US data, which showed industrial output in that country falling further than expected. Unfortunately, the US data held sway on global bourses, with most, including Ukraine, registering declines. Dniproenergo, Ukrnafta and Ukrtelecom declined in yesterday's trading session. Two stocks, however, managed to resist the downward pressure: Centrenergo, which was more or less flat, and Enakievo Steel Plant, which was the day's most popular stock.

The market's time-out makes perfect sense, as it is still too early to start talking about a global recovery, and investors need to see more local catalysts, such as successful privatizations, to continue buying Ukrainian stocks.

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Ukrgazbank, Finance & Credit to be recapitalized first

Galt & Taggart

April 16, 2009

Business daily Ekonomicheskie Izvestia this morning reported Ukrgazbank (UGZB UZ) and unlisted Finance & Credit Bank, owned by Ferrexpo (FXPO LN) majority owner Konstantin Zhevago, will be the first to receive government recapitalization funds. The decision is not official, but an undisclosed source in the Cabinet of Ministers said the two lenders need an estimated UAH 7bn (US$ 909mn). As a next step, the NBU is expected to conduct an express audit of the banks' balance sheets to ascertain their capital needs.


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Regal Petroleum suspends talks with Macquarie Bank

Rencap

April 16, 2009

Event: Regal Petroleum announced yesterday (15 Apr) that it has suspended discussions with Macquarie Bank in relation to the prospective provision of a loan facility for up to $100mn. On a separate note, Reuters reported that LUKOIL and TNK-BP are mulling a possible acquisition of a stake in Regal Petroleum's core Ukrainian assets. Leonid Fedun, LUKOIL's vice-president, later that evening denied any such acquisition talks.

Action: We retain our BUY rating for Regal Petroleum.

Rationale: As of 27 Feb 2009, Regal had $88mn in cash, which is not sufficient to fully finance its 2009 capex programme, which we estimate at $130mn. According to our estimates, Regal will require $121mn of external funding over 2009-2010 before it becomes able to finance its ambitious development programme (which should result in the recovery of 139mn boe of hydrocarbons over 16 years) from its operating cash flows. In our initiation report Regal Petroleum: a drilling story of 17 Mar 2009 (click here to view the full report) we mentioned the possibility of an equity offering should the company fail to complete the announced debt raising. This option seems to us much more likely at the moment. Although an equity offering may be dilutive for Regal's minority shareholders (which is a valid risk, in our view), it may unlock much higher value through the successful development of Regal's 169mn boe of 2P reserves. The alternative for the company is to delay the development programme and focus on cash preservation until financial markets stabilise. Given our conservative valuation assumptions, we still believe that Regal is a good risk-return trade-off.

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Why Ukraine Must Act Now To Implement An Anti-Crisis Plan

Martin Raiser, World Bank Director Ukraine, Belarus and Moldova

April 16, 2009


The current global economic crisis is unprecedented and the recovery is likely to be slower than many had hoped. For Ukraine, the crisis has hit at a difficult time, politically, as the country looks towards presidential elections. Yet, the country cannot wait to tackle the crisis until a clear political mandate emerges from the polls.

It needs to find enough compromise to take a comprehensive set of measures to withstand the crisis and enable recovery. The next session of parliament starting April 13 offers the opportunity to take one step in that direction. It should not be squandered.

In October 2008, Ukraine was among the first countries to correctly seek and rapidly receive large scale financial assistance, from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development as well as scaled up technical assistance from a range of bilateral donors.

Since then, some positive steps have been taken, but a lot remains to be done to implement a coherent package to deal with the crisis. At the outset, it is important to get expectations right: Ukraine is likely to suffer a deep recession. Given external imbalances and the lack of access to capital markets muddling through is not a viable strategy.

An anti-crisis action plan for Ukraine needs to contain four key elements:

(i) adequate and continued implementation of macroeconomic policies under the program supported by the IMF,
(ii) the re-orientation of budget spending towards growth enhancing investments in public infrastructure to support the real sector and employment,
coupled with efforts to mobilize resources for the protection of the poor and vulnerable,
(iii) a clear strategy to protect depositors and rehabilitate the banking sector, and
(iv) reforms to enable business entry and attract private investment. All these elements are closely inter-linked and a! re mutua lly reinforcing.

Effective implementation of these elements will require the Government, the Presidency, and the National Bank of Ukraine to work closely together, and it will require support in parliament. Taking decisive first steps in these areas will help stabilize market expectations, ensure continued assistance from the International Financial Institutions and mobilize additional support from bilateral creditors.

With the IMF mission returning to Kyiv there are now good prospects for progress on the first dimension. Below, we outline the key challenges in the other three areas that would complement and support prudent macroeconomic policies and are at the core of the World Bank's dialogue with the authorities.

On the fiscal side, Ukraine shares with many other emerging markets the predicament of the absence of financing to close a large fiscal gap. Based on World Bank assumptions for growth, inflation and resulting tax revenues, we believe the underlying fiscal deficit in the 2009 budget is significantly larger than the 3% of GDP assumed in the budget law, without counting the costs of bank recapitalization.

Measures adopted by parliament on March 31 contribute to closing this gap by some 0.6% of GDP. Additional measures to be considered by parliament, in particular to address the growing imbalance in the pension fund, could add another 0.3%.

These steps would signal Ukraine's willingness to tackle its fiscal problems and could unlock external financing. More fiscal measures may be needed and in our view there is significant scope in Ukraine's budget to reduce non-targeted spending and wasteful subsidies and tax exemptions to inefficient producers and wealthy consumers. But at this stage doing something is what counts. Parliament should support the proposed additional measures.

In the banking sector, the diagnostics for the largest banks have revealed significant capital shortfalls. Encouragingly, many private shareholders, including western bank! s have a lready started to recapitalize their banks. For systemically important banks whose shareholders are unwilling or unable to recapitalize, the state has a role to play.

The process by which the government would acquire control in these banks, ensure deposits are safe and tax payers' money is spent prudently is now being elaborated. Its implementation will require consistent collaboration between NBU and the Government and its success will depend on careful design and communication to the public.

At the same time, insolvent banks that are not eligible for recapitalization need to be intervened fast to prevent the loss of confidence and the risk of contagion for the rest of the system. To do this job, NBU requires a larger arsenal of resolution tools that would allow depositors and good assets to be transferred to viable banks whilst carving out bad assets for subsequent liquidation, and existing shareholders to be written down in accordance with current capital valuations. To be able to do this, the legislation needs to be amended - this should be urgently considered by parliament.

Finally, the re-launching of structural reforms is critical for Ukraine to come out of this crisis in a robust and competitive position. Ukraine can no longer rely on cheap money to finance the modernization of its old industrial sector. Many projects that were viable before the crisis may no longer be so after it.

Thus Ukraine will need to go through a period of accelerated structural change. For this it needs to lower barriers for businesses to enter and exit, so that existing resources can be reallocated. Ukraine will need to set appropriate incentives for business to innovate and modernize through a predictable tax and regulatory system, through appropriate pricing policies for energy and other public services and resist the temptation to slow structural change through subsidies and tax breaks. And - as importantly - Ukraine will need to modernize its public services to become more efficient a! nd to de liver better quality.

The structural reform agenda is long. However, in the short-run, a few critical pieces of legislation could go a long way to set the stage for an early recovery. Legislation now before parliament would reduce the number of permits and lower minimum capital requirements for private businesses.

The government has also prepared a new law on public procurement that signals Ukraine's commitment to international standards of competition, whilst saving the state large amounts of money. This legislation should be adopted.

The international crisis has exposed the risks inherent in the growth model Ukraine followed during the boom years, as in many other countries in the region. Ukraine deserves international assistance to cope with the huge shocks that have unhinged this growth model. But to benefit from such assistance and emerge from the crisis with its economy poised for a return to sustained growth, Ukraine needs to accept and to tackle its own problems and shortcomings.

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FUIB breaks ties with ratings firms

Galt & Taggart

April 16, 2009

First Ukrainian International Bank, issuer of a US$ 275mn Eurobond maturing in 2010, temporarily halted cooperation with ratings agencies Moody's and Fitch, Interfax reported. The bank said it failed to see the value of the agencies' services given global capital markets are currently closed to Ukrainian borrowers, and preferred to direct resources to bank-specific activities.

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Russian government to subsidize Transmashholding: will LTPL benefit?

Foyil

April 16, 2009

Transmashholding, a large Russian railway equipment producer and disputed owner of 76% of the Ukrainian locomotive builder Luganskteplovoz (LTPL) should receive government subsidies this year, according to the State Budget that is now entering its second reading in the Russian Parliament, PM Putin announced on Wednesday. The interest rate at which State assistance is to be made available should be 10%-14% p.a.

Our view: We see this development as negative for Luganskteplovoz, since in the absence of a clear situation regarding the ownership of LTPL, we doubt that Transmashholding will be eligible to allocate any funds to Luganskteplovoz until the situation is resolved. Also, we believe that it would be more logical for the Russian company to direct any proposed government aid towards its other subsidiaries that compete directly with Luganskteplovoz and have no ownership issues outstanding. This should hold back the technical modernization of Luganskteplovoz at least until 2010, negatively impacting its ability to compete both domestically and internationally. Nevertheless, this news should not hamper the cooperation of Transmashholding and Luganskteplovoz in the production of locomotives for Russian Railways.

We believe that LTPL should receive new orders from Russia in May, while we see the earlier announced plans to produce 120 locomotives in 2009 for the Russian railway monopoly as less realistic, and we expect that the order will be reduced to just 70-80 units this year. We recommend HOLDing shares of Luganskteplovoz.

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VAB Bank to grow share capital 64%

Galt & Taggart

April 16, 2009

VAB Bank plans to increase share capital 64% to UAH 643mn (US$ 84mn) through an open placement of additional shares, according to Interfax. Shareholders will vote on the issue on April 28, with two planned subscription periods between August 3 and October 30.

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Ukreximbank to boost share capital 9%

Galt & Taggart

April 16, 2009

Ukraine's Cabinet of Ministers approved a 9%, or UAH 591mn (US$ 77mn), share capital increase for 100% state-owned lender Ukreximbank, according to Interfax. The government will use 2008 profit and undistributed profit from years past to increase the nominal value of the bank's shares.

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1Q retail sales fall 12% y/y

Galt & Taggart

April 16, 2009

Ukraine's 1Q09 retail sales declined 11.5% y/y to UAH 95.8bn (US$ 12.4bn), the State Statistics Committee reported. Last month retail sales fell 9.4% y/y.

Galt & Taggart: Domestic consumption, which traditionally drives Ukraine's economy, is predictably weak on the back of the hryvnia depreciation, real wage declines, and burgeoning unemployment numbers. We expect retail sales to shrink between 5% and 7% in FY09.

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Cement, Slate Output Drops 54.6% in March

Sokrat

April 16, 2009

In March 2009, cement production in Ukraine decreased 54.6% in comparison to production levels reported in March 2008. Last month's output equaled 620,000 metric tons. In the same period, slate production in Ukraine dropped by 56.4% to 26 mln tiles. For the purposes of this calculation, slate includes corrugated plates, slate and other asbestos cement products.

According to the State Statistics Committee of Ukraine, the month-over-month production dynamics of cement demonstrated an increase. Cement output in March experienced a 41% boost, compared to February 2009. For slate, output increased by an impressive 95.5% in March, compared to February. In 1Q2009, cement output decreased by 59.1% YoY to 1.325 mln metric tons. These first three months of 2009 saw slate production drop 62.5% to 47.5 mln tiles compared to 1Q2008.

As previously reported by Sokrat, cement production in March 2009 saw a decrease of 58.1% (to 440,000 metric tons) compared to the previous month, while slate output dropped 72.2% to 13.3 mln tiles in February 2009. In 2008, overall cement production fell by 0.7% YoY to reach 14.918 mln metric tons. For slate, output was reduced 5.3% to 599 mln tiles. In Ukraine, there are over 15 plants engaged in cement production, with a combined total annual capacity exceeding 20 million metric tons.

Our view: In our point of view, this news is NEGATIVE for Ukrainian cement producers in general and particularly for Ukraine's three largest producers: Ivano-Frankivskcement [IVFC UZ, U/R], Volyn-Cement [VOLC UZ, BUY], and Doncement, which is part of the Heidelbergcement group. In terms of slate, the three largest producers are IVFC, VOLC, and the Balcem Plant, which is controlled by the Eurocement Group but not listed on the PFTS. The key consumers of cement are real estate development agencies that now are lacking financial resources to complete their projects. We think that Ukraine's anticrisis measures in the construction sector ! are unli kely to improve the situation, since the government will first support those companies under state control. While most cement producers have decreased their output by 80-85% YoY, others have halted cement production.

We expect the construction market to slightly recover, but not early than 1H2010. Sokrat currently has Volyn Cement's recommendation and target price under review. For a better understanding of the construction materials market in Ukraine, see our November 4 flash note "Volyn-Cement: Fortified Enough to Withstand Crisis" and our 22-page company overview "Volyn-Cement: from Wet to Dry" of July 14, 2008.
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Retail & wholesale medicine markups capped

Sokrat

April 16, 2009

Ukraine's Cabinet of Ministers has established a cap on trade markups, setting the maximum that may be charged on wholesale prices at 12% and 25% of retail prices for both medicine and other medical goods. The decision was taken by the Cabinet of Ministers as laid out in its resolution No. 333, dated March 25. In this document, the Cabinet did not set maximum markups on the prices of several products, including narcotic substances, psychotropic substances and their precursors, nor medicinal gases. The Cabinet of Ministers also set the maximum trade markup of 10% on the wholesale and retail prices of medicines and medical goods that are purchased, either partially or completely, using funds from Ukraine's state budget. There is also another exception to the new rule: Ukrainian-produced medicine whose retail price does not exceed UAH 12 per item are not subject to this particular price regulation.

Earlier, the Ministry of Economy had proposed to introduce procedures for establishing the prices of medicine subject to state price regulation by making the relevant amendments to the Cabinet of Ministers resolution No. 955 of October 17, 2008. This document set limits on the markups that could be made on both wholesale and retail prices for basic medicines. This original resolution No. 955 had established a 10-15% markup on the wholesale prices of medicines, with that level increasing to 15-35% for retail prices.

Our view: This news is POSITIVE for Ukrainian pharmaceutical producers. We wrote earlier (see the Sokrat daily of April 10) that the new law will positively influence domestic pharmaceutical producers such as Farmak [FARM UZ, HOLD], Kyivmedprepared [KMED, U/R], and Darnitsa [4SI1 GR, SELL]. We expect that local producers can increase the prices for medical drugs by 25-50% that are priced below UAH 12. The top level of the price increase has limited consumer demand for medical drugs.

In our view, the Ukrainian pharmaceutical market! will dr op by a maximum of 15-20% and, regarding imports, we foresee they will drop by 35% to the level witnessed during the 1998/99 crisis. An increase in Ukrainian-made drug consumption will be further bolstered by the crisis' after-effects. Customers are optimizing their cost structures and tend to buy cheaper drugs. We think that other than pharma producers, pharmaceutical retail stores (aptekas) will also benefit from the acceptance of this new law. In the chain producer-distributor-retail chains, it is likely only distributors that will not benefit as much as the other players in the business chain.

We believe that on a market where demand is the key driver, local distributors will decrease the number of medical drugs that are similar to each other in terms of medical characteristics and effect; however, local producers may get additional orders from retail chains for their products, because they can increase margins and, as a result, receive more profit. An additional driver of sales growth for local manufacturers may be increasing orders from retail chains for private label medical drugs production. Overall, we confirm our positive general outlook on the Ukrainian pharma sector in the medium- and long-term.
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Ferrexpo 1Q09 trading update: High volumes, low prices and costs

Rencap

April 16, 2009

Event: Yesterday (15 Apr), Ukraine pellet producer Ferrexpo (FXPO) published its 1Q09 trading update, which mirrored a slightly bettered management prior guidance. FXPO produced 2,268 kt of pellet (-17% YoY), Iron ore produced was 7,131.5kt (-13.2% YoY) whilst concentrate production fell to 2,695kt (-15.1% YoY). Pellet production was split into 953.3kt of 65% pellet (+2.5% YoY) and 1,314.9kt of 62% pellet (-31.1% YoY). In March, FXPO was operating at full capacity, even though its YoY performance was flat it demonstrates the company's ability to ship despite current market conditions. FXPO reported a 1Q09 average price of $76.5/t DAF/FOB, representing a sales mix of 75% spot sales and 25% contract. Spot sales have been executed as low as $60/t, which is a $25/t discount to where we believe contract prices should settle for pellet in 2Q09. The average 1Q09 C1 cash cost of production was $37.4/t, but an even more competitive $35/t in March. We expect further weakness in the hryvnia, which will cause this figure to drop further. Adding an estimated $14/t DAF/FOB cost and $6/t G&A cost indicates that at the EBIT level Ferrexpo continues to generate margins of 25%.

Action: Ferrexpo remains a BUY, with upside limited to 40% from current levels after a strong run. We view it as a relatively low risk play on a recovery in steel volumes into 2H09 and 2010.

Rationale: Whether markets allow Ferrexpo to revert to a higher price level without sacrificing volumes remains to be seen, but on balance the company continues to deliver robust cash flows combined with very low capex and debt.
Rob Edwards

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MHP FY08 results and 1Q09 trading update

Rencap

April 16, 2009

Event: MHP (which accounts for 38% of Ukrainian industrial poultry production), announced strong FY08 results (15 Apr), which beat our expectations by 16% on revenue and 20% on EBITDA. MHP reported $1.5mn net income vs the $14mn loss we had forecast. MHP's dollar-based revenue grew 69% YoY, fuelled by the poultry segment, where revenue increased 71% YoY to $660mn, driven by 26% YoY poultry volume growth (215,000 tonnes) and a 44% poultry price increase to UAH12.03/kg. Poultry contributed 82% of revenue. Government grants (including direct subsidies and retained VAT) totalled $108mn (44% of FY08 EBIT).Margins improved thanks to vertical integration (MHP is self-sufficient in corn for fodder) and operating cost control (SG&A 10% of revenue vs 10.9% in 2007). Hryvnia depreciation (-37%) negatively affected the financials (although 15% of revenue is export in hard currency). Helped by a 91% increase in subsidies, EBITDA grew 88%. An FX loss on debt (71% in euros, 29% in dollars) depressed PBT 68%, while net income fell 96%. MHP stated its positive outlook for poultry in 2009, guiding for a 21% YoY volume growth and a 10% UAH/kg price increase. No direct subsidies will be available in 2009 (vs $48.7mn in 2008), except VAT exemptions. 1Q09 poultry volumes were down 8% YoY, and the average price increased 9% YoY to UAH11.43/kg.

Action: Positive for MHP, in our view.

Rationale: The FY08 results exceeded Bloomberg consensus by 11% and 24% on revenue and EBITDA, respectively. The stock is down 35% over three months and currently trades on 2009 3.9x P/E and 2.9x EV/EBITDA, on our estimates, implying 62% and 57% respective discounts to its EM peers. At YE08, MHP had $79mn of cash (dollar and euro deposits), enough to service its $456mn interest-bearing debt, of which $55mn is due to be repayed or refinanced in 2009.

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Stirol 1Q sales decline 58%

Galt & Taggart

April 16, 2009

Chemicals manufacturer Stirol's (STIR UZ) 1Q09 sales contracted 57.5% y/y to UAH 488mn (US$ 63mn), according to Interfax. The company cited increased natural gas expenditures, a more than three-fold fall in market prices, and a 16-day production stop caused by the January gas dispute. Owing to the natural gas price hike, Stirol said it halted ammonia exports, which had brought in UAH 300mn (US$ 59.4mn) in 1Q08. In 1Q09 nearly all of the company's key outputs saw sales fall, including granulated ammonium nitrate (down 9.4% y/y) and carbamide (-25.3%), while sodium nitrate sales grew 50% y/y. Stirol's production volumes also declined significantly - ammonia, polystyrols (both down 71% y/y), and carbamide (-46%).


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