|
Ukrnafta disappoints in 2Q08: NEGATIVE
Ukrnafta [UNAF UZ, Strong BUY] has released its official preliminary 1H08 financials on July 25.
The highlights of the P&L (USD/UAH 5.05): gross sales, USD 1,776.5 mln (+57.4% YoY); extraction rent payments, USD 548.2 mln (+69.4%); commission payments, USD 131.2 mln (+195.3%); net sales, USD 811.4 mln (+42.6%); gross profit, USD 275.4 mln (+44.1%); operating profit, USD 201.1 mln (+69.9%); OIBDA, USD 261.8 mln (+48.9%); EBITDA, USD 260.6 mln (+47.4%); EBIT, USD 199.9 mln (+68.0%); EBT, USD 190.7 mln (+75.3%); net income, USD 189.1 mln (135.5%). Margins: net-to-gross-sales, 45.7% (down 4.7 pp); gross, 33.9% (up 0.4 pp); operating, 24.8% (up 4.0 pp); OIBDA, 32.3% (up 1.4 pp); EBITDA, 32.1% (up 1.1 pp); EBT, 23.5% (up 4.4 pp); net, 23.3% (up 9.2 pp).
Selected details of the June 30, 2008 balance sheet: PP&E, net, USD 1,256.1 mln (+0.3% vs. December 31, 2007); construction in progress, USD 236.8 mln (+4.9%); current assets, USD 981.0 mln (+83.3%); accounts receivable, USD 138.8 mln (+870%); cash & equivalents, USD 25.7 mln (-69.1%); long-term debt, USD 0.0 mln (vs. USD 159.3 mln); total debt, USD 115.4 mln (-27.5%); net debt, USD 89.7 mln (+17.9%); current liabilities, USD 590.5 mln (+270%); accounts payable, USD 22.9 mln (+42.2%); book value, USD 1,955.1 mln (+10.9%); total assets, USD 2,548.3 mln (+22.2%).
Ukrnafta, a major Ukrainian oil and gas producer, as well as fuel retailer, is controlled by two strategic shareholders: the Ukrainian state, through Naftohaz of Ukraine (50%+1 stake), and the Privat Group (42%, controls management).
Our view: We are disappointed with the 2Q08 profitability. The 2Q08 actual results are (together with our expectations and the difference between these expectations and the actual data as a share of the latter): gross sales, USD 1,048 mln (USD 927 mln, -11.5%); extraction rent payments, USD 294 mln (USD 316 mln, +7.5%); commission payments, USD 1.2 mln (USD 161 mln, about 130 times more); net sales, USD 590.2 mln (USD 296 mln, -50%); gross profit, USD 135.8 mln (USD 215 mln, +58%); EBITDA, USD 132.6 mln (USD 202 mln, +52%); EBT, USD 97.5 mln (USD 168 mln, +72.3%); net income, USD 95.9 mln (USD 126 mln, +31%).
Thus, EBITDA and EBT are drastically (by about USD 70 mln) lower than we expected. This is even more surprising to us because the net sales are USD 121 mln higher than our estimates and rent payments are USD 22 mln lower. The reason for this underperformance is the sum of the commission payment and COGS at USD 456 mln, which is USD 214 mln higher than we expected. Notably, instead of continuing to sell gasoline via commission, the company switched to accounting for wholesale costs in COGS.
We are not sure what happened to USD 70 mln of the pre-tax profits. Neither labor nor material costs related to extraction can explain this discrepancy. We can only conclude that the fuel retail segment lost substantial money in 2Q08, which would be very strange. Nevertheless, this is the only possibility we see now, and we are not sure why this has happened in 2Q08 as opposed to earlier. The switch from commission sales to “buy wholesale, sell retail” accounting is not, in our opinion, related to any changes in the supply structure. If the Privat Group, which was and continues to be the wholesale fuel provider, wanted to milk Ukrnafta by supplying it with expensive gasoline and diesel, it could have done so in the past.
The unexplainably poor performance is NEGATIVE. Should we conclude that we systematically overestimated the future performance, we will revise our valuation accordingly.
Ends Q2 with losses of UAH 101.888 million: NEUTRAL
Ukraine's national incumbent fixed line operator Ukrtelecom [UTEL UZ, U/R] ended April-June with losses of UAH 101.888 mln. In the second quarter, Ukrtelecom reduced its net revenue by UAH 0.093 bln or by 2.8% to UAH 3.267 bln. Ukrtelecom also ended the first quarter of 2008 with losses of UAH 97.546 mln. In this case in 2Q2008, its gross profit decreased from UAH 837.69 mln to UAH 512.79 mln, and income from realizing its works and services - from UAH 3.958 bln. to UAH 3.88 bln. Furthermore, the prime cost of realizing production for Ukrtelecom increased from UAH 2.522 bln to UAH 2.754 bln, and in such cases material expenditures changed from UAH 1.106 bln to UAH 779.32 bln, administrative costs from UAH 177.74 mln to UAH 189.04 mln, expenditures for sales from UAH 241.67 mln to UAH 367.91 mln, and other operational expenditures were reduced from UAH 140.67 mln to UAH 125.72 mln. The company’s management connects the unprofitability with an increase in inflation rates and an increase in the level of expenditures with constant adjustable tariffs for connection services.
Ukrtelecom controls 78.5% of the local telephone market, servicing about 10 mln fixed line subscribers and 25,700 mobile users.
Our view: We think this news is Neutral for Ukrtelecom because we expected such negative results for the second quarter due to increases in the operator’s operational costs. We were also ready to see such a negative result based on the earlier-announced preliminary financial operator’s results for 2008, with losses at UAH 400 mln. According to Igor Sirotenko (deputy CEO of marketing and sales) in his interview with Interfax on July 23, Ukrtelecom began optimizing its personal numbers. Today, its staff includes 95 thsd specialists; two years ago there were 120 thsd. Based on the company’s plans, the staff will decrease to 93 thsd at the end of 2008. An initiative for further staff reduction’s was also announced. The reconstruction of its network, which Utel is undertaking, allows for having less and less manual labour. In our view, losses were generated, on the one hand, due to increased labor costs, inflation, and Ukrtelecom’s significant 2008H1 marketing expenses to promote new mobile and internet services. On the other hand, Ukrtelecom also decreased the amount of term profitable LD (long distance) traffic, which was handled by independent mobile operators.
We see several factors which can decrease losses by the end of 2008: to make staff reductions, increase tariffs on fixed line services by at least 30% (+UAH 600 mln), cut unprofitable services (Ukrtelecom cross subsidizes local fixed line services, a radio-translation network, and telegraph (+UAH 700-1,000 mln), and increase ARPU from new services (+UAH 50-100 mln). However we expected losses in Ukrtelecom’s results for 2008.
We confirmed our view that the company's future prospects significantly depend on its privatization and the name of its future strategic partner. Ukrtelecom faces pressure from growing competition and the company’s growth can be supported via required financials from private investors. The transition from state to private hands via privatization will impact on Ukrtelecom positively. We will update our recommendation for Ukrtelecom shortly based on this latest news.
CEEN’s 1H08 net sales up 41% YoY: POSITIVE
The electricity generation company Centrenergo [CEEN UZ] reported on its 1H08 financials. Net sales increased 41% YoY, amounting to USD 407 mln. COGS for the period outpaced the sales growth, leading to a 15% YoY decline in gross profit and implying a gross margin of 8%. Net income grew by 25% YoY, amounting to USD 21 mln and implying a net margin of 5%.
Our view: We remain positive for all thermal generation companies and recommend BUYing: Centrenergo [CEEN UZ], with a target price of USD 5.77 and current upside of 129%; Donbasenergo [DOEN UZ], with a target price of USD 49 and current upside of 324%; Zakhidenergo [ZAEN UZ], with a target price of USD 184 and current upside of 140%.
In the case of Dniproenergo [DNEN UZ], we assume two valuation scenarios: if the additional share issue is not cancelled, we recommend BUYing Dniproenergo with a target price of USD 445 and current upside of 25%. However, if the additional share issue were to be cancelled, our target price will go up to USD 657 per share, implying an upside of 85%.
Industrial electricity tariffs up 3.9-4.6%: POSITIVE
According to the National Electricity Regulatory Commission, industrial electricity tariffs will see a 4.6% increase for small industrial consumers and a 3.9% increase for large industrial consumers in August 2008. Respectively, electricity tariffs for small industrial consumers will amount to USD 79.9 per MWh and for large industrial consumers, it will be USD 105 per MWh.
Our view: This increase is in line with the wholesale electricity price increase for August 2008 at 3% compared to July, reaching USD 73 per MWh. The wholesale electricity price in Ukraine is expected to increase 41% YoY by the end of 2008, reaching USD 80.5 per MWh.
At the same time, the cross subsidizing of household tariffs remains significant. Current household electricity tariffs are at USD 49 per MWh, which is almost 50% lower than the wholesale price and 114% lower than the industrial tariffs.
As the experience of developed markets shows, along with the announced electricity sector reform scheduled for 2009-2014, household tariffs will see at least a twofold increase. This, coupled with the introduction of a RAB-based tariff formation method for electricity distribution companies (oblenergos), will reveal their true value. We put a BUY recommendation on most of the names in the distribution sector.
Kernel bought an agricultural farm with 1.7 thsd ha: POSITIVE
The Kernel Group [KER PW, N/R] acquired an agricultural farm with 1.7 thsd ha of leased land in Central Ukraine. The agreement was signed on July 26, 2008. The deal was closed for USD 2.3 mln. The lease agreement is effective for ten years.
In 2008, the Kernel Group forecasts sales to grow 74% YoY to USD 610 mln. Kernel also expects its net income to increase 3.2 times YoY to USD 63 mln and EBITDA by 120% YoY to USD 102 mln. The company projects a 14% YoY increase in sunflower oil output in the 2007/2008 marketing year.
Our view: The Kernel Group is incarnating its strategy to expand its leased land bank to 250 thsd ha by 2010. The acquisition of this agricultural farm is in line with Kernel’s strategy (the company currently leases 62.5 thsd ha).
The growing world population and lack of agricultural land is stimulating a demand for agricultural products, resulting in surging prices for soft commodities. In particular, grain price increases ranged from 95-129% in 2007, and prices for sunflower seeds further ascended 217% in 2007. We believe, prices for soft commodities will be at their high in 2008, above their average price in 2007, which positively affects Kernel’s stock price as the main business of the Kernel Group is grain trading.
|
