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MARKETS OVERVIEW:
Equities finish down following the negative macro data in the US. Hryvnia continues up and down movement.
UX index was down 1.25% to 1567 points on Tuesday, while the PFTS index finished 0.2% lower at 647 points. Equities fell off the open and then sold off further in the last hours of trading following a negative macro data released in the US. Trading volume was average on the UX reaching UAH 35m. All blue chip issues, but Ukrnafta that benefited from the growth of the initial oil price at the next auction, finished in the negative territory. Zahidenergo and Ukrsotsbank were the biggest decliners, losing 2.8% and 2.5% respectively.
Konstantine Lytvyn
In line with our expectations, volatility on the Ukrainian FX market continued on Tuesday. The Interbank FX Market closed at UAH/USD 8.2290-8.2535, with the hryvnia losing 0.4% against the dollar. The exchange rate has returned to the level where it was at the end of September. The Ukrainian Parliament on Tuesday passed the law that will significantly increase the minimum wage and pensions in 2009-2010, which may support further devaluation of the hryvnia.
Oleksiy Blinov
ECONOMICS & POLITICS
NBU “quasi-GDP” down just 10.1% y/y in September
The National Bank of Ukraine has published its index of core economic sectors output for September’09. The index shrank 10.1% y/y in September, which is a twice better result than the 20.5% y/y decline witnessed in August’09. The accumulated decline indicator improved from 25.4% y/y in 8M09 to 24.1% y/y in 9M09.
Astrum’s perspective: The NBU index is a “quasi-GDP” that tries to capture general output trends by aggregating available supply-side data. However, it should be noted that the NBU index is not intended to be taken as a “second GDP figure”, as its methodology and structure is somewhat different. The key reason behind the sharp improvement in the September’09 indicator, compared to the 20.5% y/y decrease in August’09, is associated with the agricultural sector. In 2009, crop harvesting is proceeding much faster than in 2008. Thus, Ukraine had a sharp increase in late crops’ (corn and sunflower seed) harvest in September in y/y terms. According to estimates by NBU economists, agricultural output shot up 28% y/y in September’09. At the same time, we expect that this factor will offset turn around in October, as it is obvious that low harvesting volumes this month will be compared to the higher harvest of October’08. Thus, this year’s agricultural season inputs will be distributed between 3Q09 and 4Q09 GDP figures, with a slightly positive contribution to the 3Q09 indicator and a slightly negative contribution to the 4Q09 figure. Improvements in other sectors are due mostly to the lower baseline effect (for more insight on industrial output trends in September, see Astrum Daily of October 19). We estimate real GDP contraction in 3Q09 at 12.5%-13.5% y/y (see Astrum Daily of October 20) and maintain our real GDP decline forecast for 2009 at 13% y/y.
Oleksiy Blinov
Consumer confidence improves slightly in September
According to a joint survey by GfK Ukraine and the International Centre for Policy Studies (ICPS), the Consumer Confidence Index (CCI) in Ukraine grew by 1.5 points m/m to reach 64.7 in September’09.
Astrum’s perspective: We associate this improvement mostly with the appreciation of the hryvnia that took place in the second half of September when the poll was conducted. The Index of Current Standing (ICS), which gauges Ukrainians’ self-evaluation of their current well-being, increased by 1.8 points m/m to reach 55.9. Moreover, the Index of Economic Expectations (IEE) grew by 1.3 points m/m, reaching 70.7 in September. However, these levels are still very low and point to strong pessimism on the Ukrainian market as indexes range from 0 to 200, where 0 means ideal pessimism and 200 is related to ideal optimism. Despite some improvement compared to August, expectations about prices and employment remain negative: 18 out of 20 Ukrainians expect that price growth will accelerate in the next 12 months and 14 out of 20 expect that unemployment will rise in a year’s time. We treat this recovery in consumer confidence as fragile, and the trend may be easily reversed by pre-electoral political instability and FX rate volatility.
Oleksiy Blinov
Parliament approves two ultra-populist bills
The Ukrainian Parliament yesterday approved bill № 4762 drafted by Oleh Zarubinskyi, an MP from the Lytvyn Bloc. This Bill envisages increasing the minimum wage and subsistence level as of November 1, 2009. MPs also approved another populist Bill, № 3426, which sets a price cap on imported pharmaceuticals at the price levels that were in effect on July 1, 2008.
Astrum’s perspective: The first bill is the latest in a long series of appeals for an increase in social outlays, launched by the Party of Regions (see Astrum Daily of June 26, 2009 for a detailed analysis). This latest version of bill № 4762 is actually a “mirror” of government proposals, and foresees adding an extra UAH 188 every month to both the minimum wage and the subsistence level, which forms the basis for establishing state pensions. According to our estimates, this bill will require at least UAH 3.5bln in extra expenditures from the 2009 budget and will increase 2010 state expenditures by at least UAH 55bln, in comparison to the draft 2010 state budget prepared by the government. However, this bill gives a chance for the government for appeals: the minimum wage and the subsistence level should be changed only through the budget law, and not enacted as a separate law. At the same time, this decision will become another “point of uneasiness” for the IMF during upcoming negotiations regarding the fourth tranche of SDR 2.5bln (USD 4bln), further complicating the talks (for additional insight on the state-of-play with Ukraine-IMF negotiations, see our flash note “IMF fourth tranche: stand-by or go-ahead” of October 14, 2009). While this bill has low chances of actually being implemented, in the course of the presidential campaign, minimum social standards for 2010 could still be increased from the levels outlined in the government’s original proposal in a conventional way, through the budget law.
The “pharma price moratorium” bill was proposed by the Communist Party of Ukraine as far back as December’08. It imposes a moratorium on price hikes on pharmaceutical products, hitting imported drugs the most, as the bill prescribes that prices for imported pharmaceuticals should not exceed levels that were in effect on July 1, 2008. This is a “mission impossible” for pharmaceutical importers, as the exchange rate has devalued by 44%, from UAH/USD 4.6 to UAH/USD 8.2, since that date creating upward price pressure on imported drugs.
Oleksiy Blinov
MinFin places OVGZs: yields increase, volumes decline
On Tuesday, October 20, the Ministry of Finance placed three OVGZ series for a total amount of UAH 452m. More than 50% of the placed bonds were 9-month OVGZs that were sold for UAH241m in total. The weighted average of 6-month bond yields was 24.5%, the threshold level of these bond yields was 27%. There was no demand for the special OVGZs provided with the target purpose of financing the Euro-2012 preparation program.
Astrum’s perspective: This auction fixed yields at a new higher level. In line with our expectations, the demand by banks declined on the back of a liquidity squeeze in the banking system. As a result, only 19 bids were submitted, of which the government satisfied 16. The total volume of the bids was just UAH 660m, which is 50% lower that the volume placed at the previous auction. MinFin satisfied the maximum number of applications, demonstrating its high need for funding at the moment. Only one application for each OVGZ series was left unsatisfied, the yield for which exceeded the threshold level by 1 p.p. As a result, we can assume that the last two auctions have essentially fixed the new yield level and now MinFin will have to use these levels as guidelines in the face of pressure to refinance its debts.
Sergey Fursa
COMPANIES & INDUSTRIES
TMM issues 2008 IFRS results: NEUTRAL
TMM (TR61 GR: HOLD) reported a 56% y/y increase in 2008 net sales to USD 89.8m and a 11% drop in the net income to USD 11.6m.
Astrum’s perspective: The Company’s 2008 sales and net income exceed our estimates insignificantly, by just 12% and 14%, respectively. Thus, we see this news as NEUTRAL and we maintain our HOLD rating on the stock. TMM’s announced results are better than those of the Company’s CIS peers, which reported massive revaluation losses in 2008. This is not surprising, as TMM is in better shape than its peers, given that most of its value is created by completed projects or projects that are close to completion. In effect, this makes TMM portfolio less vulnerable to fluctuations in market sentiment.
Ivan Kharchuk
Bank Forum reports UAH 141m net loss in 3Q09
Bank Forum (FORM: BUY) reported on its 3Q09 net loss of UAH 141m, compared to the net income of UAH 27m in 3Q08.
Astrum’s perspective: In line with our expectations, FORM’s net loss continued to grow in 3Q09. In 9M09, it amounted to UAH 424m. The Bank made a UAH 219m provision to reserves in 3Q09, which raised its reserves/assets ratio from 4.5% at the beginning of the year to 8% by the end of September’09. We believe that FORM’s assets will cease deteriorating in 4Q09. We reiterate our BUY recommendation for the Bank’s stocks on the back of its forecast net income growth in 2010-13.
Iaroslav Stetsik
UZ drops railway 8M09 rolling stock purchases by 97%
According to the Association of Producers and Consumers of Railway Machinery, in January-August’09, Ukrzaliznytsya (UZ) purchased railway rolling stock worth USD 15m, 97% down y/y. At the same time, UZ’s financial plan for 2009 involves purchases of rolling stock and track equipment for over USD 500m.
Astrum’s perspective: Freight railcar transportation in Ukraine decreased by 29.4% y/y in 9M09. On the back of declining transportation, the implementation of UZ’s financial plan, including investments in the purchase of rolling stock, is obviously problematic. Instead of the planned purchase of 1,870 freight railcars, UZ should purchase only 1,000 freight railcars in 2009 through the credit program provided by the EBRD. On the background of the downturn in sales, UZ's debts bear a heavy burden on the UZ’s cash flow and investments. In January-September’09, UZ’s external debt payments came to UAH 2bln, or up to 50% of the total debt repayment expected in 2009.
Igor Bilyk
Schwarz considers entering Ukrainian retail market
Schwarz, a European leader in the retail sector with a revenue of EUR 35 bln in 2008, has been seriously considering entering the Ukrainian retail market. The Company wants to be present in two specific retail segments: hypermarkets, under its brand Kaufland; and discounters, under its brand Lidl. Schwarz is not only looking for land plots for its outlets, but is also considering the acquisition of an existing operator on the Ukrainian retail market.
Astrum’s perspective: In line with our expectations, Ukrainian retail market continues to draw the attention of large international chains, while small and middle local players continue to suffer from large debt loads and high interest rates. The prices of Ukrainian retail trade assets have significantly fallen compared to the pre-crisis period, thereby opening up new opportunities for large international players to make acquisitions in Ukraine. Particularly, this should draw players like Schwarz, which are less demanding in terms of requirements to land plots and retail outlets than has been the case with Metro and Auchan.
Alexander Kava
Electricity exports down by 54% y/y in 9M09
Ukrainian electricity exports decreased by 54% y/y in 9M09 amounting to 2,761 mln kWh.
Astrum’s perspective: The largest contribution to such sharp export decline is the stoppage of electricity export to Moldova which in 2008 accounted for over 30% of total electricity exports. In contrast to our initial export forecast, Ukraine did not manage to sustain its export volumes after Moldova’s refusal to buy Ukrainian electricity in 2009. The second significant factor adding to total export decline was a decrease in electricity exports to the EU which last year accounted for over 60% of the total electricity export. We expect that the electricity export decline will level out by the end of 2009 due to renewed exports to Belarus in September. In FY09 total exports should amount to 4,600mln kWh, 42% down.
Yan Lipchinsky
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
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