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Ukraine President proposes budget amendments
The President of Ukraine, Mr. Viktor Yuschenko, proposed amendments to the state budget to address the current natural disaster in Western Ukraine. The President’s amendments followed the previously announced budget amendments proposed by the government.
The government suggested total additional expenses of UAH 2.24 bln (USD 461 mln). An increase of UAH 1.48 bln (USD 305 mln) to the budget reserves will be allocated to the liquidation of the flood consequences. An additional UAH 755 mln will be spent on repairing roads in Western Ukraine that were destroyed by the latest flood, the expenses of which are planned to be financed by increasing the special fund of Ukravtodor state-owned road construction company. The government also announced that the UAH 23.4 bln (USD 4.82 bln) three-year credit for the Ukravtodor enterprise will be pushed ahead to 2008.
The President highlighted three main concerns with respect to the government’s amendments. Firstly, the President suggested that the overall additional expenses should be increased to UAH 4.39 bln (USD 906 mln). Secondly, the President suggests that obtaining credit for Ukravtodor using state guarantees is a risky funding step as Ukraine does not practice mid-term budget planning. Finally, the President criticized the financing scheme proposed by the government. He specifically emphasized that increasing excise duties for alcohol and tobacco may lead to increases in illegal trade in the sector.
The vote for these amendments is expected to take place on Thursday, June 31 during the emergency meeting of the Parliament.
Our view: While we doubt that enough parliamentarians will attend the emergency meeting, we expect that the natural disaster-related amendments to the budget will be accepted by those in attendance. We further anticipate that whether it will be the government’s or the President’s variant that is accepted will depend strongly on the exact faction-based composition of the parliamentarians in attendance. Still, we expect that the President’s version has substantially higher chances to be passed through.
While we view the current anti-inflationary measure as rather efficient, we anticipate that the increased budget expenses will stimulate inflationary processes. However, the conservative monetary policy of the regulator, coupled with the rather small size of the proposed additional budget expenses, leads us to expect that the inflationary effect will be negligible.
Therefore, we confirm our earlier end of year inflation forecast of 22%.
Ukrainian National Bank holds trial flight in GBP trade
On Tuesday, July 29 the National Bank of Ukraine (NBU) made an Interbank intervention and bought Great Britain pounds (GBP) at the 9.4376 UAH/GBP rate, almost UAH 0.2 lower than the official NBU 9.6234 UAH/GBP rate. This was the first ever officially announced GBP intervention of NBU. Thus, the implied UAH/USD cross-rate is 4.75 UAH/USD, almost 0.1 UAH lower than the official NBU rate. The estimated volume of the intervention is USD 50 mln.
Earlier this month, the NBU bought EUR on Interbank twice, for the first time at 7.3739 UAH/EUR and the second at 7.3195 UAH/EUR, 0.3 UAH lower than the official rate. The cross-rates imply a 4.63 UAH/USD.
Our view: We view the recent NBU actions as a movement towards diversifying the national currency reserves. We anticipate that the NBU is withholding from buying USD as the regulator does not wish to give a signal to the market that it is ready to buy USD 2-5% cheaper than the official rate. Further, the NBU is attempting to demonstrate to the Interbank that the market is expected to move to a multi-currency regime and work with pairs other than UAHUSD.
We view two possible scenarios here. The first possibility is a gradual movement to a currency basket-based policy. The basket will be either formed of USD and EUR at the 80/20 proportion with small shares of other currencies, which approximately corresponds to the trade patterns of Ukraine, or it may be based on a mix of USD, EUR, GBP, and possibly CHF. We do not expect JPY to be a significant share in the basket though. The second possibility involves moving to a flexible exchange rate policy. In such a case, the NBU’s steps should be viewed as diversifying the currency reserves without an eventual formation of the currency basket.
We confirm our earlier forecast that the Interbank UAH/USD rate will fluctuate close to 4.6 until the end of 3Q08 and the UAH will start to appreciate in 4Q08, possibly reaching 4.95 by the end of 2008.
We expect that the UAH deficit and traditional seasonal deflation, along with the high NBU interest rate, will be the main driving forces behind the expensive Hryvnia until the end of 3Q08. We anticipate that the relatively high level of inflation will depreciate the UAH in 4Q08.
ZPST declares 100% dividends, may sell out: POSITIVE
At the July 20 EGM, shareholders of Zaporizhstal [ZPST UZ, Strong BUY] declared 100% dividends for 2007 (DPS USD 0.043, dividend yield 8.4%, USD 114 mln total dividends). The dividends will be payable during September 02, 2008 – September 02, 2009. The ex-dividends date is September 02, 2008.
Zaporizhstal is the fifth-largest Ukrainian steelmaker (4.46 mln metric tons of steel in 2007, 4.37 mln metric tons expected for 2008). The company is not vertically integrated. Zaporizhstal shares have been traded on PFTS since May 20, after almost two years of being delisted due to a rough 3.13x minority dilution. The Midland Group owns a significant stake in Zaporizhstal, 47.70% according to our recent tally. The company has recently entered a contract with Siemens VAI for construction of USD 1.7-2.0 bln, 4.7 mln tpa converter-concaster shop.
Our view: POSITIVE, because we think that the dividends payout may be the present owners’ last squeeze on the company prior to a sellout. Of course, the present owners are ruling their set of assets according to their own priorities, and if they desperately needed money for investments, they could squeeze Zaporizhstal for dividends at any time. Furthermore, the recent reshaping of Zaporizhstal’s management structure at the June 06, 2008 AGM may be related to requirements of prospective creditors who would like to finance the substantial CapEx program (we estimate that as much as USD 800 mln in debt would be required at some point).
Nevertheless, obtaining a substantial credit will be very difficult under the current credit crunch conditions. Furthermore, a prudent prospective creditor would be unlikely to insist on a management structure reshaping allowing at the same time for paying out substantial dividends out of the blue. Therefore, as we reported previously, we think that the company would be sold.
Potential buyers include (a) ArcelorMittal, which has recently paid out substantial USD 1.2 bln dividends at its currently lone Ukrainian asset, ArcelorMittal Kryvyy Rih, and (b) the Metinvest Group, one of whose owners, the SCM group, reported record USD 3.8 bln of net income for 2007. Both of these groups should be fully able to afford both buying the company and modernizing it using internal cash flows.
It will be interesting to see how the situation unfolds. We emphasize most strongly that a sellout will eliminate substantial risks associated with the present controlling owners, improve profit disclosure, and therefore shall be hugely POSITIVE for minority shareholders.
We see an upside of 198% to our target price of USD 1.51, and recommend BUYing the stock.
PREN – USD 5 mln losses from heavy rainfall: NEUTRAL
Electricity distribution company, Prykarpattiaoblenergo [PREN], announced that amount needed to compensate the damage of electricity lines caused by heavy rainfall and flooding in the western part of Ukraine is estimated at USD 5 mln. The company reports damaged electricity lines of 6-10 kV of a total 43 km and 367 transformation substations.
Today the company initiates extraordinary meeting of the Council of the wholesale electricity market (Energorynok) to discuss possible compensation to the electricity companies in the western part of Ukraine which suffered from the natural disaster. According to the announcement made by Prime Minister Yulia Timoshenko, compensations to the damaged electricity ad gas companies will be made through Fuel and Energy Ministry of Ukraine.
Our view: We view the news as neutral which will not impact our target price for the end of the year. At the same time we once again reiterate our BUY recommendation for most of the electricity distribution companies of Ukraine due to constant electricity price increases which for FY2008 are expected at 41% and in 2009 - 32%. Coupled with the introduction of RAB based tariff calculation during the electricity sector reform in 2009-2014 we expect significant improvement both in margins and revenue volumes of the electricity distribution companies.
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