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MARKETS OVERVIEW:
Half of UX index components gain more than 10%, hryvnia surges 1.9%
The Ukrainian market shot up by a whopping 6.7% on Tuesday, driven by strong domestic demand and appreciation of other emerging markets. Emerging markets advanced following bullish comments on by СEO of Franklin Templeton Mark Mobius, who noted that emerging markets are still undervalued. The UX index rose 6.7% to close at 1390 points on a record volume of UAH 51m. The PFTS index rose by 4.1% to reach 548 points on an equity trading volume of UAH 10m. Half of the issues included in the UX index gained over 10%. In particular, the Yenakieve Steel Mill advanced 17.5%, Ukrsotsbank moved up by 15%, Azovstal added 11%, and Bank Aval gained 10%.
Konstantine Lytvyn
On Tuesday, the hryvnia appreciated sharply. The Interbank FX Market closed at UAH/USD 8.2580-8.2915, with the hryvnia gaining 1.9% against the US dollar. This is the highest level against the greenback for the hryvnia since August 12, 2009. Along with other supportive factors that we mentioned in the previous FX market round-up (see Astrum Daily of September 29), the national currency was also supported by the end-of-the-quarter factor, with commercial banks adjusting their balances to meet NBU requirements in terms of currency position and improving accounts for the 3Q09 banking sector official statistics.
Oleksiy Blinov
ECONOMICS & POLITICS
OVGZ placement results meet expectations
On Tuesday, September 29, the Ministry of Finance placed OVGZ for a total amount of UAH 229m, offering government bonds with a maturity period of 9 months, 12 months and 3 years.
Astrum’s perspective: The main demand was on the short end of the curve and 9-months OVGZ were sold for a total amount of UAH 164m (at face value), or 72% of the total placement. This result is in line with our expectations. The government kept the threshold level of bond yields unchanged at 22%-23%, which limited the interest of potential buyers.
Sergey Fursa
COMPANIES & INDUSTRIES
SPF holds auction for Odessa Port Plant
Yesterday, the State Property Fund held an auction to privatize the 99.6% stake in the Odessa Port Plant (OPP). Only three companies took part in the auction – Nortima (affiliated with Igor Kolomoyskyi), Azot Servis (affiliated with Sibur), and Frunze Flora. The initial offer price was set at UAH 3.9bln (USD 488m) and the step was set at UAH 50m (USD 6.25m). There was a competition between Nortima and Azot Servis until finally Nortima offered UAH 5 bln (USD 625 m).
Nevertheless, the Auction Committee refused to approve the results of the auction since, they believe, the final price was below the fair value for OPP. As a result, the stake remains state-owned. Afterwards, Prime Minister Yulia Tymoshenko said that the prohibition of the tender by President Viktor Yushchenko essentially reduced the number of the potential bidders. She also said that there was collusion among the bidders. The Chairman of the SPF announced that the price for the stake should be in the range of UAH 8-10 bln.
Astrum’s perspective: We believe that the proposed price of USD 625m was below the amount that OPP sale potentially could have generated in the case that the number of bidders had involved the 13-15 companies that initially expressed interest. In such a case, we believe the price could have surpassed USD 1 bln. Nevertheless, we do not rule out the possibility that Nortima puts forward a claim to the court regarding the purchase of this stake in OPP based on the results of this auction. Taking into account the past experience of Pryvat Group with court proceedings, we do not rule out the possibility that the court proceedings will last for more than one year which will make a new auction in 2010 impossible.
Alexander Kava
NBU takes two small banks under control
On September 29, the NBU implemented temporary administrations in two banks: Ipobank and Skhidno-Evropeyskiy Bank.
Astrum’s perspective: Ipobank is controlled by Vasyl Gorbal, the former owner of Ukrgasbank, which was recapitalized by the government. We believe that implementation of the NBU’s temporary administration at Ipobank was due to the UAH 1bln loan, received by the Bank from Ukrgasbank. The reasons for the financial problems experienced by Skhidno-Evropeyskiy Bank are currently unknown. These two banks are in the fourth group in the NBU rating by assets. The occurrence of financial problems in such small banks should not have a destabilizing effect on the banking system on the whole. We expect further financial problems in small banks in 2009-1Q10.
Iaroslav Stetsik
AM Kryvyi Rih to start construction of PCI unit in 2011
According to the Metal Courier, ArcelorMittal Kryvyi Rih (KSTL: HOLD) intends to start construction of the Pulverized Coal Injection (PCI) unit in its blast furnace shop in 2011. The Company aims to launch the new technology in the blast furnace # 9 in 2013 and in other three blast furnaces afterwards.
Astrum’s perspective: Ukrainian steelmakers are announcing resumption of their investment programmes on the back of the global steel demand recovery. Thus, we believe that the news comes as no surprise and is NEUTRAL for KSTL’s stocks. In August 2008, KSTL announced its intention to start construction of the PCI unit in 2009 and launch it on the blast furnace #9 in 2012. However, in 4Q08 the economic crisis forced the Company to reduce planned capital expenditures for 2009. Along with the optimization of production process this helped KSTL save cash 1H09 and become profitable in July’09. By our estimates, the introduction of the PCI unit should allow the Company to cut coke use per tonne of pig iron by 26%-30% and fully exclude natural gas use in pig iron production in 2014-15.
Yuriy Ryzhkov
Electricity subsidies to household consumers increase
According to the government's forecast, the amount of cross-subsidies to household consumers for electricity consumption should grow from UAH 12.3bln in 2008 to UAH 18.3bln in 2009.
Astrum’s perspective: The increase is related to the growth in household electricity consumption in 2009 - it went up by 11% y/y in 1H09 and should grow by 12% in FY09. As the National Electricity Regulatory Commission decided not to increase neither retail nor wholesale electricity prices until the end of 2009, the rising amount of cross-subsidies should lead to further decrease in electricity prices for generation companies. We view this news as NEGATIVE for thermal generation companies Centrenergo (CEEN: BUY), Dniproenergo (DNEN: HOLD), Donbasenergo (DOEN: BUY) and Zakhidenergo (ZAEN: HOLD) that should continue posting losses in 2H09.
Yan Lipchinsky
KDD Group reports strong results in 1H09: POSITIVE
The leading Ukrainian real estate developer, the KDD Group (KDDG LN: U/R), reported a 1H09 net income of EUR 3m, compared with the EUR 201m loss in 2008. Improvements in the Company’s bottom line are due to the revaluation gain of EUR 3.8m against the revaluation loss of EUR 213m loss reported in 2008. KDD reported a 16% increase in the fair value of its assets in 1H09 to EUR 197m, on the back of EUR 23.7m capital expenditure in projects under development and a EUR 3.8m gain in the revaluation of the fair value of projects held for development.
Astrum’s perspective: Based on the NAV reported yesterday, the Company traded at a P/NAV of 0.41 or below the P/NAV of 0.50 in early 2008. It should be noted that, in our research, we assigned KDD a lower NAV compared with appraisals by Colliers International, as we focused mainly on the valuation of property under construction and attached a much lower value to projects held for development.
Investors were positively impressed by the KDD's cost-cutting program, which resulted in the decline of G&A costs from EUR 3.6m in 1H08 to EUR 1.8m in 1H09. The KDD’s cash flow in 1H09 consisted of a positive operating cash flow of EUR 6.7m, a positive EUR 9.2m financing cash flow, and a negative EUR 23.4m cash flow from investment activities. As a result, the KDD Group’s cash declined by EUR 7.2m to EUR 33.5m in 1H09. The Company is currently pursuing a number of funding options, including bank financing and the sale of a stake in one of its projects under construction. We believe that the successful fundraising will be a catalyst for the KDD Group’s performance and for the revaluation of projects currently held for development. Yesterday’s strong 43% stock performance on top of the 52% growth over the last month brought the stock price to USD 0.56 per share, above our price target of USD 0.52/share; therefore, we put the stock Under Review.
Ivan Kharchuk
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
www.astrum.ua
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