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MARKETS OVERVIEW:
Ukrainian equities sharply up in a volatile trading session. Hryvnia flat for past two weeks
On Thursday, anticipation of a solid 3Q GDP data in the US drove global markets upward and fuelled further growth when the reported data turned out to be better than expected. Ukrainian market opened down 4% on the bearish mood stemming from the selloff the American market saw on Wednesday. Later in the day, the market pared back its losses and closed up 4% soon after the release of the GDP in the US. The UX index closed up 4.2% at 1431 points, while the PFTS index added 0.3% to finish at 587 points. Equity trading volume was above average totalling UAH 36m on the UX. Banking sector was the best performer: Bank Aval shot up 8%, Ukrsotsbank advanced 5.6%.
Konstantine Lytvyn
The Interbank FX Market has been flat for two weeks already, with no significant exchange rate movements since October 16. On Thursday, the Interbank FX Market closed at UAH/USD 8.1400-8.1550, with the hryvnia gaining a modest 0.2% against the dollar. The market continues to be influenced by the factor of Prominvestbank, which still has to sell the bigger part of USD 500m it received as a capital increase and is acting as a de facto “second NBU” in terms of containing potential exchange rate spikes.
Oleksiy Blinov
ECONOMICS & POLITICS
Public debt flat in September
According to the Ministry of Finance, direct public debt decreased 0.7% m/m in September, to UAH 204bln. Debt guaranteed by the state increased by 0.6% m/m to UAH 75.6bln.
Astrum’s perspective: There were no significant debt movements in September’09 apart from the CHF 781m (USD 755m) redemption of Eurobonds that were issued in 2006, through the scheduled put option. At the same time, the foreign currency denominated debt slightly increased in September due to an increase in the official exchange rate from UAH/USD 7.989 to UAH/USD 8.01 and the dollar’s weakening against major global currencies, which primarily impacted the USD-denominated size of Ukraine’s debt to the IMF. According to our estimates, direct state debt is currently at 21.9% of GDP. We expect that it will grow further to 23.7% of GDP at the end of 2009.
Oleksiy Blinov
COMPANIES & INDUSTRIES
Naftogaz delays new Eurobonds’ issue: NEUTRAL
According to Naftogaz's announcement, the date of the new Eurobonds issue has been postponed to November, 5, 2009. The Company did not reveal the reasons for the delay.
Astrum’s perspective: We think that the issue is delayed due to technical difficulties in preparations and we expect that the Company will not encounter any problems that could cause the restructuring to fail. We do not change our view on the new Naftogaz Eurobonds. The issuer’s creditworthiness is defined by the state guarantee, which permits determining the price of the new bonds on the basis of quotations for sovereign bonds, with a spread that demonstrates the level of investors’ trust in this state guarantee. We recommend that investors buy Naftogaz Eurobonds at 85%-87% par value. We expect that the completion of the restructuring will decrease pressure on the sovereign curve. When the state guarantee for Naftogaz's bonds becomes a certainty, their spread to the sovereign curve should drop to 50-100 b.p. As a result, we expect that the price of Naftogaz Eurobonds will grow to 90% par value.
Sergey Fursa
Electrotyazhmash to modernize Kyiv HAPP
According to press service of the state-owned Electrotyazhmash, the Company intends to modernize two hydro generators at Kyiv Hydro Accumulating Power Plant (HAPP). The Company has already begun deliveries of equipment for reconstruction and modernization of the first hydro generator with 40 MW capacity. The cost of its modernization exceeds UAH 11m. Modernization of the second power unit should be completed in 2010.
Astrum’s perspective: Electrotyazhmash is one of the world's largest producers of turbine generators and traction electric motors. The Company is enjoying the flow of the modernization projects in the electricity generation sector in Ukraine and the CIS on the whole. Electrotyazhmash has high chances to get orders for modernization of remaining four power units at Kyiv HAPP in 2010.
Igor Bilyk
Electricity reform takes another step
The Cabinet approved a draft law on introduction of bilateral contracts between electricity producers and electricity consumers. National Electricity Regulatory Commission (NERC) expects the Parliament to adopt the law in 2010.
Astrum’s perspective: According to the Cabinet of Ministers Decree №1056 of November 28, 2007, the electricity sector reform should be completed by 2014. However, due to the economic crisis in 2009 and upcoming 2010 presidential elections, most of the reform provisions set for 2009 have not been implemented. The introduction of bilateral contracts scheduled for 2Q09 did not materialize. The approval of the draft law on bilateral electricity contracts by the Cabinet of Ministers supports our forecast that the first bilateral contracts should be introduced in 2Q10-3Q10. The expected complete sector liberalization by 2014 should set free generation tariffs, putting thermal gencos Centrenergo (CEEN: BUY), Dniproenergo (DNEN: HOLD), Donbasenergo (DOEN: BUY), and Zakhidenergo (ZAEN: HOLD) in a favourable position to increase their EBITDA margin from 8%-12% in 2002-2008 on average to 20%-22% in 2014.
Yan Lipchinsky
Iron ore export was flat in September
Ukrainian iron ore exports stood flat in September at 3.1 mln tonnes. In 9M09, iron ore exports were up by 9% y/y to 19.2 mln tonnes.
Astrum’s perspective: China was a driving force behind the recent surge in Ukrainian iron ore exports. We expect that, in 2009, Ukrainian iron ore exports to China should increase by 160% to 12.6 mln tonnes. China becomes the largest destination country for Ukrainian iron ore due to the failure of an annual settlement between Australian iron ore producers and Chinese steel mills, with Chinese enterprises switching to spot market purchases. Next year, this should not be the case as the spot market price is close to the current annual long-term contract price and is poised to increase in 2010. We expect that Ukrainian iron ore exports to China should decline next year following the recovery on the East European iron ore market and growth in freight charges. The Eastern European market is more attractive for Ukrainian iron ore producers due to lower transportation costs and prices that are comparable to those in China.
Ivan Kharchuk
Three mobile operators will bid for 3G license
The National Communications Regulatory Commission (NCRC) informed that three mobile operators submitted applications to participate in the first tender for 3G license in Ukraine. Out of four major GSM operators, only URS that operates the Beeline brand has not applied for the tender.
Astrum’s perspective: We believe that the fight for the second 3G license in Ukraine (the first was granted without tender to Ukrtelecom, the national telecom incumbent operator) will be tough. We think that Astelit will be the most interested party as it can use the license as a chance to increase its market share. We believe that URS stayed out of the tender as its future remains unclear after the establishment of VimpelCom Ltd. (merger of Kyivstar GSM and VimpelCom). We do not rule out spin-off and sale of URS’s mobile business.
Alexander Kava
Steel output in Ukraine up 7.6% m/m in September
Based on statistics for the 28 days of October, we expect that, in October, steel output in Ukraine should amount to 2.61 mln tonnes of steel (up 7.6% m/m), which is 0.01 mln tonnes above our expectations and 0.27 tonnes below those of the Metallurgprom Association. Metallurgprom expects November steel output to stand at 2.76 mln tonnes. ArcelorMittal Kryvyi Rih (KSTL: HOLD), Zaporizhstal (ZPST: N/R), Azovstal (AZST: U/R) and Petrovskiy Steel Mill (DMZP: SELL) were the only major steel makers with m/m growth, increasing their steel output by 89%, 14%, 7%, and 4% m/m respectively. Yenakieve Steel Mill (ENMZ: U/R), Mariupol Steel Mill (MMKI: U/R) and Alchevsk Steel Mill (ALMK: SELL) posted the largest steel output drop: by 20%, 14% and 13% m/m respectively. Dzerzhynskyi Steel Mill (DMKD: SELL) decreased steel output by 5% m/m.
Astrum’s perspective: The majority of the largest Ukrainian steel makers met their production targets for October. The only exceptions were the IUD-owned ALMK and DMKD. These companies have been below their plans for the last several months due to their inability to source raw materials (coke and iron ore) in sufficient volumes, probably due to squeezed working capital. We expect that, in November, steel output in Ukraine should go down by 4%-6% m/m to 2.5 mln tonnes, driven by weak steel demand and growing competition from the Chinese steel makers on export markets. Most of domestic steel makers should decrease output, except for ENMZ that should boost it by 10%-15% m/m after the repair in the converter shop is done. This repair started in October and was scheduled to be completed by November.
Yuriy Ryzhkov
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
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