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IMF grants USD 16.5 bln standby loan to Ukraine
Over the weekend, the IMF announced that it is ready to grant a USD 16.5 bln standby loan to Ukraine to fight the economic crisis. The 24-month loan will be subject to a number of economic measures by Ukraine’s government aimed at addressing the current account deficit, supporting the banking sector and balancing the state budget. The IMF has emphasized that the Parliament’s acceptance of the legislative changes with respect to financial stabilization is a necessary prerequisite for the loan issuance.
The National Bank of Ukraine (NBU) previously announced that, as of the end of September, the regulator’s reserves amounted to USD 37.529 bln. The NBU has spent about USD 2 bln since the beginning of October on foreign exchange Interbank market interventions and some USD 1 bln for emergency support to the banking system. The NBU has also announced that by the end of the year, it expects its reserves to drop to the USD 33 bln level, mainly as a result of the UAH support on the Interbank.
Our view:
We view the loan issuance as a positive signal for the Ukrainian economy. While we view the earlier announced NBU reserves as just sufficient to prevent the financial crisis, the recent USD 3 bln drop in reserves and further anticipated Interbank interventions and banking system support will bring the reserves dangerously close to what we consider a critical threshold for the Ukrainian economy: the USD 29.5 bln level. Furthermore, Sokrat anticipates that the upcoming increase in imported natural gas prices will cause a further increase in the critical threshold to the USD 32 bln level.
We believe that the IMF loan will play a supportive role in the NBU banking system’s stabilization and UAH exchange rate support policies and will allow Ukraine to keep its reserves above the critical threshold level. Furthermore, we view that the standby status of the loan will offer greater flexibility with respect to the regulator’s policies. We do not anticipate that the IMF loan will have a serious inflationary effect as Ukraine will experience a shrinkage of FDI volumes in 2H08 and 2009 due to the global credit crunch. Thus, we anticipate that the IMF loan will compensate for the FDI drop in Ukraine’s capital and financial account. We expect, however, that political instability and the recent parliamentary crisis may harden the acceptance of the legislative changes requested by the IMF. Nevertheless, we foresee a temporary consolidation in Parliament that will result in the passing of the demanded measures.
AZST declares USc 6.1 dividend for 2006-2007: POSITIVE
Shareholders of Azovstal [AZST UZ, U/R], at their October 25 AGM, decided to declare dividends for 2006-2007 and dropped voting on dividends for 2002-2005. The total dividends for 2006 is UAH 524 mln (DPS of UAH 0.1246, or USc 2.47 at USD/UAH 5.05, payout ratio 50%, yield 20.4% at the October 24 last price of UAH 0.61). The total dividends for 2007 are UAH 771 mln (DPS of UAH 0.1835, or USc 3.63, payout ratio 36%, yield 30.1%). The total dividends are thus UAH 1.295 bln (DPS of UAH 0.3081, or USc 6.10, yield 50.5%). The payout period is Dec 15, 2008 – Oct 24, 2011. The ex-dividends date is most likely Dec 15, 2008. The rest of the income for 2006-2007 was left undistributed. The shareholders also decided not to vote on distributing income for 2002-2005. The total possible dividends for 2002-2007 were UAH 1.35 or USc 26.4 per share.
The shareholders also approved the results a USD 0.48 mln share offering that took place in Sep-Oct 2008. As a result of the offering, the total number of shares outstanding increased by 0.23% to 4.204 bln.
Azovstal is the third-largest Ukrainian steelmaker and a member of the Metinvest Group. In 2007, the company smelted 6.33 mln mt of steel, achieving net sales of USD 3.243 bln, EBITDA of USD 631 mln, and a net income of USD 420 mln. The MetInvest Group is an assembly of the metallurgical and mining assets belonging to Rinat Akhmetov, which is strategically directed by Metinvest Holding LLC. Vadim Novinskiy and his Smart Holding also have a 25%+1 stake in the Metinvest Group business.
Our view:
POSITIVE. The lower boundary for our dividend expectations, which were based on an analysis of Azovstal’s assets, was USc 5.9 per share, and the actual dividend declared slightly exceeded that figure.
UTEL Loses UAH 211.3 mln in 3Q2008: NEGATIVE
For its operations in the period July-September, Ukraine`s largest telecommunications enterprise Ukrtelecom [UTEL UZ, U/R] reported losses of UAH 211.261 mln (approx. USD 34.35 mln at 1USD = UAH 6.15). This drop compares to the results for 3Q2007, which recorded a net profit of UAH 98.057 mln. In 3Q2008, the company’s net revenues fell by 6.04% (or UAH 103.45 mln) to reach UAH 1,609 bln, while gross profit climbed by 59.6% to reach UAH 180.8 mln. The company finished January-September with a net loss of UAH 313.149 mln, compared to a net profit estimated at UAH 270.94 mln in the same period of 2007. Compared to the previous year, the first nine months of 2008 saw Ukrtelecom’s revenues fall by 3.9% (or UAH 196.298 mln) to a level of UAH 4.876 bln and gross profit declined by 46%, to UAH 693.59 mln. This information was released in a company report published through the information disclosure system of the State Commission for Securities and the Stock Market. The company`s financial plan foresees a net profit of UAH 8.5 mln in 2008.
Our view:
This news is unquestionably NEGATIVE for Ukrtelecom. The company has demonstrated losses in all three quarters of 2008. These losses and the company’s figures are in line with Sokrat’s forecasted estimates for the company’s financials in 2008. We see that new services such as mobile and ISP cannot cover the losses had in the fixed line segment or compensate for unprofitable state regulated services that the company has to subsidize. The company is also spending significant amounts on the advertising and promotion of new services, which puts pressure on company profit.
We expect that the fourth quarter will be better and probably result in profits due to the increasing tariffs for fixed line services, which is the core cash generating part of Ukrtelecom’s financials. Ukrtelecom definitely requires strategic investors, who will initiate a comprehensive reorganization process, improve sales, and focus on cost control. We believe that the privatization process for Ukrtelecom will occur in 2010, following the President election at the end of 2009. At present, 92.79% of Ukrtelecom is owned by the state, with the company’s staff members holding the other 7.14%. Earlier, on February 6, the Cabinet of Ministers approved an updated plan for sale of shares in this company under which the state would retain 25% + 1 shares in the company and 67.79% would be sold via an auction. We currently have Ukrtelecom’s stock under review and will keep investors posted as to important developments concerning this company as they arise.
Ukraine Gencos Financial Results for Jan-Sep 2008
Now that the third quarter of 2008 has drawn to a close, this past week has seen the release of quite a number of financial reports for Ukrainian companies. Indicated in the chart are the results for eleven separate Gencos and Oblenergos for period January-September 2008, including the details on net income, gross profit/loss and net profit/loss. Sokrat will provide additional information on several other Gencos and Oblenergos as the results of their financial reports are made public.
Our view:
The verdict is MIXED, since the above-listed results are good news for some Gencos and bad news for others. Gencos decreased their profits for the first nine months of 2008 due to the significant rise in the cost of coal and gas, in addition to increased state regulated tariffs. In this period, most of Ukraine’s Oblenergos increased their EBITDA figures two-fold or even as much as three times in some cases. We expect that those Gencos that have mitigated their bankruptcy risk and have significantly minor levels of overdue payables will continue to find themselves in the ‘safe zone’ through to the end of 2008. For those highly dependent on gas for heating purposes, further expected rises in gas prices may endanger those companies financials, which may be counterbalanced, correspondingly, by a subsequent increase in heating tariffs for their respective customers.
With respect to Kyivenergo’s, we expect its losses to continue decreasing through to the very end of 2008. This expectation is primarily related to the anticipated compensation from the budget of the Kyiv City Administration. This should, in effect, cover the bulk of Kyivenergo’s losses when the payment is eventually transferred. We remain POSITIVE about all thermal generation companies and recommend BUYing shares in the following companies: Centrenergo [CEEN UZ], with a target price of USD 5.77 and current upside of 133%; Donbasenergo [DOEN UZ], with a target price of USD 49 and current upside of 336%; and Zakhidenergo [ZAEN UZ] with a target price of USD 184 and current upside of 152%. 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 43%. However, if the additional share issue should be cancelled, our target price will go up to USD 657 per share, implying an upside of 110%.
To gain a better understanding of the development of the electricity market in Ukraine, see our reports “Five Questions on Ukrainian Gencos” of June 30, 2008 and “The electricity sector of Ukraine” Report of March 28, 2008. Additional clarification may be had from the report “Oblenergos: magnificent six” Report” of January 18, 2008 and individual reports on Kyivenergo, Chernivtsioblenergo, Khersonoblenergo and Khmelnitskoblenergo.
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