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Ukraine government resignation not approved by parliament
The Ukrainian parliament did not approve a resolution on resignation of the Cabinet of Ministers, which is led by Ms. Yuliya Tymoshenko, on Friday, July 11, 2008. The vote was preceded by a report from Ms. Tymoshenko outlining the achievements of her Cabinet. Of the 256 members of parliament in attendance, 174 voted for the resignation of the Cabinet; 32 voted against it and 1 abstained. 49 members of parliament did not vote. To be approved, 226 votes were needed.
The resolution was supported by 172 votes from the opposition Party of Regions, led by Viktor Yanukovych, and 2 votes from Nasha Ukrayina - Narodna Samooborona (Our Ukraine – People`s Self-Defense), a pro-presidential party. Factions of Yulia Tymoshenko’s Bloc, the Communist Party and the Lytvyn Bloc did not cast a single vote.
Parliament’s session was closed afterwards for scheduled vacations. The parliament will start its next session on September 2, 2008.
Our view:
A week ago we predicted that the question about such a resignation would be discussed very shortly. We also predicted that Ms. Tymoshenko`s Cabinet would not be dismissed this summer. The recent vote proves our forecast was right. The result of the vote attests that the resignation of the Cabinet is not in the best interest of most of the groups in parliament.
Our view is that the parliament will not see the government`s resignation until at least 4Q08. At the moment, there is no alternative candidate that would be approved by the majority of parliament. Therefore, we anticipate that the major political forces will not force the current Cabinet to resign until they agree on the next Prime Minister. The task will require several months to complete and would involve substantial negotiations. We do not expect that the new PM will be agreed upon before the end of September.
Ukraine parliament rejects two budget amendments
The Ukrainian parliament did not approve two amendments to the state budget that were proposed by the President and by the government on Friday July 11, 2008.
As reported earlier, the Cabinet of Ministers, led by Ms. Yuliya Tymoshenko, submitted a proposal to parliament to amend the existing budget to take account of higherthan-expected profits. It proposed that the additional profits would be distributed equally between social transfers, investments in several industries, and funds redirected to regional budgets. The overall budget deficit were to have shrunk by an insignificant 0.7%.
The President reacted by proposing an alternative amended budget that would also imply an unchanged deficit, but would lean much more towards spending additional profits on investments.
216 members of parliament voted in favor of the government`s budget, while the Presidential budget was supported by 58 votes. 226 votes were needed to pass either of the budgets.
The parliament’s session was closed afterwards for scheduled vacations. It will start its next session on September 2, 2008. Voting on the government`s budget will take place once more, shortly after the budget is discussed with the parliamentary committees and modifications are made.
Our view:
Earlier we pointed out that the deficit implied by the government`s amended budget, along with substantial social transfers, are not beneficial for the trade balance deficit and future inflationary prospects. As the government`s budget was not accepted, we expect that the proposed social transfers will not take place until at least November upon passing amendments in late September. Therefore, we do not expect inflationary impacts of the increased M1 before early 2009.
We also expect that a revised amended government budget will incorporate some changes proposed by the President. These amendments may be desirable from the perspective of the possible inflationary consequences.
Ukraine updates trade balance, gas import, GDP figures
The State Statistics Committee of Ukraine announced updated figures on Ukrainian trade balance deficit, natural gas imports, and real GDP for January-May 2008.
The trade balance deficit for January-May 2008 is USD 8.8bln; USD 1.4bln higher than in January-April and 2.4 times higher than in the same period in 2007.
Ukraine spent USD 4.2 bln on gas imports in January-May 2008; USD 0.9 bln more than in January-April and 19.3% more than in the same period in 2007.
The Committee increased the estimates of the earlier announced real GDP figure for January-March 2008. The real GDP in 1Q08 is 6.5% higher than in the same period in 2007. Industrial output grew by 8.7%, while agricultural output grew 0.4%. Construction fell by 1.5% and transportation grew by 10.1%.
Our view:
The updated figures are very much in line with the earlier forecasted ones. As expected, the growing trade balance deficit, driven by mostly gas imports, will be one of the hottest topics to address in the near future. However, we do not expect this deficit to have a substantial impact on the Ukrainian economy before the beginning of 2009.
We view a 6.5% GDP increase over the past 12 months in 1Q08 as a very good result demonstrated by the Ukrainian economy, especially given high inflation over this period. While we expect lower inflation in 2H08, we anticipate that, by the end of 2008, Ukrainian real GDP will reach 6.9% of the growth forecasted by us earlier.
Industrial output growth, driven by increased commodity prices, will be the main running force behind the growing GDP. Mediocre growth in the agricultural sector indicates the stagnation of Ukrainian agriculture, caused by the global food crisis coupled with the dire need of the sector for reforms.
Ukraine`s liquidity goes up
National Bank of Ukraine has announced prliminary figures on the banking sector for January-June 2008.
Assetts in the bank system went up by 16.7% compared to the same period of 2007, reaching UAH 699 bln. Ukrainian banks` equities grew by 21.7%, reaching UAH 84.7 bln. The banks` profits increased 1.7 times (UAH 5.3 bln) and liabilities increased by 16% (UAH 614 bln).
Our view:
While we view liquidity growth in the banking sector as just sufficient to compensate for the high inflation over the past six months, we also note that the Ukrainian liquidity crisis is not as severe as its global counterparts. We view this news on the banking sector as a positive indicator about Ukrainian liquidity and expect that the figures will improve further in July, following the drop of the Interbank overnight interest rates in early July. Overall, we expect a liquidity to increase in 3Q08.
Ukrnafta: mental vs. fundamental
Ukrnafta did not pay dividends in early summer 2007, contrary to expectations, and is in the midst of a shareholder conflict, upsetting investors. The stock behaved as a PFTS index dummy for most of 2008 (see right), ignoring roaring oil prices and Ukrnafta’s own profits. The 2Q08 results will remind investors once again that these are fundamentally good times for the business.
Executive Summary
• Natural gas price: USD 198 per thsd cbm long term. We assume that the natural gas price per thsd cbm will increase to USD 79 in 2009, USD 99 in 2010, and then to USD 198 in the long term. With Ukraine facing USD 400 at the Russia-Ukraine border already in 2009, this is by all means a conservative estimate.
• Extraction rent relief: payments down 8%. In late May, the State changed the rent payment system. Before this change, with Ukrainian oil and gas condensate worth USD 52.4 per bbl, the state took USD 29.4 per bbl in rent payments. The rent rate per bbl increased proportionally to Ukrainian oil price, that is, the rate per sales was 56.2%. The new rent payment system, which should be effective as of June 2008, differs a bit. With Urals (not clear which exactly price of this Russian blend) costing USD 100 per bbl, the state collects USD 41.3 per bbl of Ukrainian oil sold at Ukrainian auctions. The payments are proportional to the price of Urals. Assuming that Ukrainian oil sells at a 20% discount to Urals, we arrive at a payment of USD 41.3 for every USD 80 of sales, that is, a rate per sales of 51.7%, down 4.5 pp. In other words, rent payments will decrease by about 8%. This is a significant relief for Ukrnafta: for example, in 2007 the new rent regime could have saved USD 60 mln. The above-mentioned is a conservative estimate of the positive effect, because Ukrainian oil usually trades at a discount smaller than 20%, which means that the rent rate per sales would be less than 51.7%.
• Brent price revision: USD 120 in 2008, USD 110 in 2009, USD 80 long-term. With a barrel of BRENT averaging USD 109.6 in 1H08 and currently at USD 144, we revise (up, still conservatively) our forecasts: USD 120 for 2008, USD 110 in 2009, and down gradually to USD 80 in 2012. We assume that Ukrainian oil trades at a 20% discount to Brent.
• Fuel retail: 563 units, 7.5 mt per unit per day long-term. We no longer expect any filling station network expansion, and assume that the network will forever consist of 563 units. We conservatively expect sales volumes per unit per day to get back to normal levels only gradually: 2.5 mt in 2008, 3.5 mt in 2009, and so on to 7.5 mt in 2013.
• 2Q08: high expectations. For 2Q08, we expect (see Figure 5) net sales of USD 296 mln (+27% QoQ), an EBITDA of USD 202 mln (+63%), and an EBT of 168 mln (+88%). The great 2Q08 results will be due to high oil prices, and are just a glimpse of the good times ahead.
• Valuation. DCF (0% terminal growth, 11% WACC) yields USD 114.7 per share, implying a 165% upside. A comparative valuation based on 2008 forecasts (EV/EBITDA 2.1, P/E 3.1, Figure 8) yields a fair price of USD 135.3 (upside 213%). Recommendation: Strong BUY. Target price: USD 114.7 per share (165% upside).
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