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Market Comment
Finally on Tuesday, October 28, the PFTS caught a break, with its index growing 2.73% to reach 228.34. The equities turnover remained rather low despite this optimism, at a mere USD 1.96 mln. The leader in terms of volume was Khersonoblenergo [HOEN, BUY], which dropped a whopping 80.19% in ten trades, on USD 032 mln. Zaporizhya Abrasive Works [ZABR, N/R] finished even on USD 0.26 mln. All other volumes were less than USD 0.20 mln. For the first time in a while, trading saw a greater number of gains than losses. Volyn-Cement [VOLC, BUY] was the big winner, rising 36%, with other gains as follows: Aviidka Coke [AVDK, U/R] +20%, Ukrnafta [UNAF, U/R] shares +17.19%, Stahaniv Railcar Works [SVGZ, BUY] +12.5%, Enakievo ISW [ENMZ, U/R] +10.71%, Bank Aval [BAVL, U/R] +10%, Kryukiv Railcar [KVBZ, BUY] +9.59%, Zakhidenergo [ZAEN, BUY] +6.25%, Krasnoarmiyska-Zahidna #1 Coal Mine [SHCHZ, N/R] +5.84%, and Alchevsk ISW [ALMK, U/R] +3.57%. Some major losses were incurred: Slavutas Malt Plant [SSOL, N/R] 81.29%, Dubnovantazhavtotrans [DAKOR, N/R] -58.17%, Forum Bank [FORM, U/R] - 43.75%, Ukrainian Automobile Association [AVTO, N/R] -22.86%, Donbasenergo [DOEN, BUY] -19.23%, Pivdenny Bank [BPVD, N/R] -12.15%, Interpipe NTPR [NITR, U/R] -10.77%, and Azovstal [AZST, U/R] -5%. Optimism touched international markets on Tuesday as well, despite the fact that quarterly reports from the world`s major corporations have shown significant losses in the economy. European markets grew, with Frankfurt`s index soaring more than 11%. Positivity on European and Russian exchanges effectively influenced the Ukrainian market, allowing for an upward correction after the severe losses incurred in recent days. Wall Street also boomed, posting its second largest single-day point gain ever at 10.9%. However, the low volume of trades demonstrated that investors continued to exercise caution over such domestic factors as uncertainty over Parliament`s adoption of anti-crisis measures. We expect that negative sentiment will continue until an anti-crisis is successfully passed. The infusion of funds and liquidity through ongoing assistance programs to financial markets, and the continuation of mitigating the credit policy by many developed countries` central banks should assist in suspending such a strong market decline. The same may hold true for Ukraine`s prospective loan from the IMF, which is contingent on Parliament passing anti-crisis legislation. In the short term, trading on the PFTS may be influenced by yesterday`s encouraging results on world markets and positive trading results in Asian markets today. Most stocks in Asian and Pacific markets closed higher, with a 7.7% gain for Tokyo`s Nikkei.
S&P Downgrades 3 Ukrainian Banks: NEUTRAL
Standard & Poor`s Ratings Services has lowered its long-term counterparty credit ratings on Alfa-Bank Ukraine, JSC Kredobank [ZUKB UZ, U/R], and Ukrsotsbank [UCSB UZ, U/R] to `B` from `B+` and removed them from CreditWatch where they were placed with negative implications on October 16, 2008. The `B` short-term ratings were affirmed. At the same time, the Ukraine national scale ratings on Alfa-Bank and Kredo were lowered to `uaBBB` from `uaA-`. The outlook on all three banks is negative.
As explained by Standard & Poor`s Annette Ess, these rating actions follow the lowering of the long-term foreign currency sovereign credit rating on Ukraine to `B` from `B+` and that of the local currency rating to `B+` from `BB-` on October 24, 2008.
The ratings could be lowered following a further downward revision of the sovereign foreign currency rating, as well as due to a material deterioration of the banks` asset quality, capitalization, or liquidity. Conversely, the outlook could be revised to stable following a similar action on the sovereign, providing that the financial and business profiles of the banks prove resilient.
Our view:
These actions are just another brick in a sequence of downgrades made by leading rating agencies regarding to Ukrainian banking sector, which follow in suit with the overall downgrades of the foreign and local currency sovereign credit ratings. We see this news as NEUTRAL, considering the reasons for making this downgrade, which are related to the general problems in the Ukrainian banking sector as a whole rather than specific problems with these individual banks.
Furthermore, Ukrsotsbank, Alfa-Bank Ukraine and Kredobank are all banks with foreign capital, which are feeling the support of their parent structures these days. Especially noteworthy is the fact that Ukrsotsbank recently received a USD90 mln tranche as part of a larger USD360 mln credit agreement from Bank Austria. As well, Alfa-Bank Ukraine, according to its Chairman of the Board A. Volkov, will be receiving a USD700 mln line of credit from its parent structure – Alfa-Bank Russia. Likewise, Kredobank recently increased its capital by obtaining a USD5 mln subordinate debt tranche from PKO BP SA, and is also increasing its authorized capital by USD20 mln these days.
Azovmash gets USD 15mln loan from Bank Aval
Azovmash – a Ukrainian freight car manufacturer and a leader in the machine-building industry –has obtained a USD 15 mln loan from the Raiffeisen Bank Aval [BAVL UZ, U/R], according to a press release issued by the bank. This release revealed that the deal was concluded on October 27 and that this constitutes planned goal-oriented credit, which is to be channeled towards the construction of freight railcars. The sum of the tranche is equal to USD 15 million. The bank did not disclose other details of the deal. Azovmash is an Open Joint Stock Company. At its base in Mariupol, Donetsk Region, its plant produces tank cars, freight cars, metallurgy equipment, port-lifting cranes, refuelers, boxcars and consumer goods. The state owns a 50% + 1 stake share in the company (managed by the State Property Fund), while the Ukrainian Industrial and Transport Company owns a 50% - 1 share. Raiffeisen Bank Aval is one of Ukraine’s biggest banks. It is 95.68% owned by RZB`s Austrian holding company, Raiffeisen International Bank-Holding, which acts as a steering unit for the group`s banking and leasing subsidiaries in central and eastern Europe. For 2007, Azovmash reported a net profit of UAH 2.257 mln, when its net revenues rose by UAH 189.852 million or 66.9% to UAH 93.977 mln compared to 2006. Regarding Raiffeisen Bank Aval, as of October 1, its net assets were UAH 52.559 mln, its credit portfolio amounted to UAH 42.660 mln, and equity capital stood at UAH 5,724.7 mln. For January - September 2008, its net profit was UAH 680.6 mln, and its 2007 profit was UAH 587.4 mln.
Our view:
Most likely, these funds will be used for increasing the inventories and other current assets of the company. Such an increase in interest-bearing debt stays in line with our models for Azovzagalmash [AZGM UZ, BUY] and Mariupol Heavy Machinery [MZVM UZ, BUY], both of which are included into the Open Stock Company Azovmash
Cement producers cut short- and mid-term output: NEGATIVE
Cement output in September decreased by 6.2% MoM; however, considering the results for January-August, cement producers increased output by 8% up to 10.6 mln metric tons. Dyckerhoff Zement Ukraine posted a decrease in output in September. The ‘Volyn-Cement’ [VOLC UZ, BUY] factory, which is owned by Dyckerhoff Zement, lowered output by 0.8% to 136 thsd metric tons. In the same period, its other group – Yugcement – increased output by 14.1% MoM to 105.5 thsd metric tons. Eurocement Ukraine’s factories also started to decrease their output. In July 2008, the Balcem Plant decreased output by 21.5% MoM to 257 thsd metric tons, while the Kramatorsk “Pushka” Cement Plant [KRCS UZ, U/R] decreased output by 12.3% to the level of 58 thsd metric tons. According the State Statistics Committee, construction project works dropped by 7.2% for the period January-September. Specifically, the construction of buildings decreased by 7.3%, startup construction projects decreased by 5.9%, and the installation of construction equipment also fell by 5.6%. “We are totally dependent on construction works and projects in Ukraine. Currently we are losing our output volumes. How long will this output decrease last? Everything depends on the crisis,” explained Petr Loptaiev, CEO of the Ukrainian Cement Association “Ukratsement”. He further stated that factories will not only decrease their output, but also will try to focus on export markets. “We can only export cement via railway. So the countries to which we may export share the same borders with Ukraine. We don’t think this will include Russia. They have the same situation as we do.”
Our view:
We need to be cautious with respect to this situation, since we are now witnessing some negative moments on the local real estate market due to developers’ liquidity problems and a slowdown in the volume of construction in Ukraine. The fact that one-third of all construction projects in Kyiv have been frozen demonstrates the seriousness of this issue. We also have already seen some negative news from local and foreign developers, which have frozen some projects in Ukraine, as well as firing staff and reviewing their strategy for the 2009-2010 period. This news is NEGATIVE for Ukraine’s cement producers, since this represents a definite signal of decreasing local demand for Ukrainian production in the short-term and even mid-term. We think that cement output will decrease in 4Q2008, but that the 2008 annual results will be similar to output levels achieved in 2007. We also hold an optimistic view for the real estate sector in the long term due to the low market penetration level compared to the rest of Central and Eastern Europe. We expect that the decrease in cement output will closely match the decrease in construction works in Ukraine, since construction companies constitute key cement consumers. Cement factories will likely tailor output levels to produce as much cement as is required to meet the needs of construction companies. We don’t expect them, however, to stockpile cement, which will positively impact on their working capital structure. In the long term, we think that local demand will increase due to EURO 2012 preparation and we will see a rebound in the volume of construction in Ukraine. In Ukraine, more than 15 enterprises engaging in cement production account for a total annual output exceeding 20 mln metric tons. Among them, Sokrat recommends BUYing shares in Volyn-Cement, with a target price of USD
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