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NERC Retains Industrial Electricity Tariff for Dec: POSITIVE
The National Electricity Regulation Commission (NERC) retained its regulated electricity tariff for clients other than the general public at November’s level, which is UAH 436 (USD 65) per MW and UAH 585 (USD 87) per MW for large and small consumers respectively.
However, since December 2007, the electricity tariff for this category of consumers grew 45% and 42% for large and small consumers respectively. Electricity tariffs for the general population have remained unchanged since 2006 and are currently set at UAH 203 (USD 30) per MW.
Our view:
We completely disagree with the NERC’s practice of cross-subsidizing the population at the expense of industrial electricity consumers. In the forthcoming year, we expect a sharp increase in electricity tariffs for the general population and also the initiation of bilateral electricity contracts, which will diversify the electricity tariffs and move them to fair levels. According to our expectations, starting from the second quarter of 2009 and through to the end of the year, 10-15% of the generated electricity might be sold through bilateral contracts.
Ukraine’s Oil Complies with EU Standards: POSITIVE
The European Commission has acknowledged the compliance of Ukraine’s sunflower oil to European standards. The Commission inspected Ukraine’s oil producers in September. The results of the inspection were officially released yesterday by the Government of Ukraine. The Eurocomission admitted that Ukrainian state systems of prevention of oil contamination meets all European standards, which are defined in the Eurocommission decision # 2008/433.
However, the Eurocommision is now asking the Ukrainian Government to present them with information on the control system of the quality standards at oil processing plants.
Our view:
Issues due to contaminated oil emerged in April 2008, when crude oil by-products were revealed in Ukrainian exported sunflower oil. The problems were successfully resolved with Ukraine implementing a quality control procedure, ensuring such contamination will not happen in the future. Moreover, domestic oil producers have implemented their own systems of control, which will help them to independently control the quality of their own oil exports.
Fitch Downgrades Myronivskiy Khliboprodukt Bonds: NEGATIVE
Fitch, an international rating agency, downgraded the Myronivskiy Khliboprodukt [MHPC LI, U/R] bond’s rating B in foreign currency from stable to negative. According to an official press release made by Fitch yesterday, the downgrading occurred as a result of the narrow focus of the company on the Ukrainian poultry market, coupled with possible problems with expansion plans for 2009.
Our view:
We expect the growing demand for poultry on the domestic market, on the back of decreasing real disposable incomes and changing consumer preferences, towards cheaper poultry meat.
The revenues of Myronivskiy Khliboprodukt (MHP) increased at 35% CAGR over the period 2005-2007. The company’s EBITDA margin in 2007 amounted to 34.3%, which is considerably higher than the average 12% EBITDA margin of developed market’s peers. Given the current performance of MHP, and its short- and long-term debts, coupled with the anticipated growing demand for MHP’s output, we view the possibility of corporate default for this company as very low.
Court Refuses Kyivstar 3G License Complaint: MIXED
The Higher Administrative Court of Ukraine has refused to accept a complaint issued by CJSC Kyivstar GSM, requesting that the Court cancel a ruling by Kyiv Administrative Court of Appeals, issued in July 2008, regarding a case about the issuance of a license to use 2.1 GHz frequency bands for 3G mobile communications without using a tender-based process.
Our view:
We think this news is POSITIVE for Ukrtelecom [UTEL UZ, U/R]. The national incumbent operator is the only operator to have received a 3G license in 2005 without any tender required by the Court. It started providing 3G services in November 2007. In November 2008, Ukrtelecom mobile users pool grew by 47% MoM, increasing to 92 thsd clients. The company ambitiously aims to achieve a total of 200,000 3G service subscribers by the end of 2008, but we hold a skeptical view regarding this plan.
Kyivstar is the largest 2G mobile operator in Ukraine, with an estimated 23.3 mln mobile users as of November 2008, but company’s development is kept back because it still hasn’t received a 3G license. We think that Kyivstar and MTS, Ukraine’s second largest mobile operator, are ready to go ahead with 3G services in Ukraine, but the key problem is the process of obtaining a license.
We think that Ukrtelecom could soon lose its monopoly status, as the National Communication Regulation Commission (NCRC) recently announced it will start accepting applications from companies wanting to purchase 3G mobile licenses in the UMTS standard to render 3G communications services. The auction will be organized in 2Q2009. The NCRC just began to study the demand for such licenses this week. This no longer excludes the possibility of increased competition and, consequently, a reduced market share for Ukrtelecom. We also hold skeptical view that auction will take place as scheduled, based on the current political and economical instability in Ukraine. The Court must find free band frequencies for the auction’s winners; however, the key role in this issue is played by the Ministry of Defense. Based on several examples in Ukraine and Russia, we are also skeptical that the Ministry of Defense will make a decision quickly.
92.79% of the OJSC Ukrtelecom is currently owned by the state, with the other 7.14% held by the company’s staff. We currently have this company under review and will keep investors posted as to important developments concerning this company as they arise.
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