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Ukraine inflation accelerates in October
According to the early morning announcement of the State Statistics Committee of Ukraine, inflation in October hit 1.7% MoM (18.0% YTD and 23.2% YoY). This is the lowest September inflation since September 2005, when it was 0.9% MoM. In October 2006 and October 2007, MoM CPI growth was 2.6% and 2.9% respectively.
The inflation in October followed a MoM deflation of 0.5% and 0.1% in July and August respectively and somewhat accelerated in September to 1.1%. Prices for the food component of the consumer basket in October 2008 grew by 1.1% MoM, utilities by 4.4%, and health care by 1.5%, while transportation prices grew 1.0%.
Our view:
In an earlier flash note issued by Sokrat in the beginning of July, we forecasted that average monthly inflation in October-December 2008 will stay at the 1.3-1.5% level.
We also postulated that Ukrainian inflation is largely excess demand-driven and is only insignificantly affected by the social transfers of the government. Consumer crediting and a reduction in savings are much more important driving forces of inflation in Ukraine. We anticipate that the recent acceptance of the IMF loan may require Ukraine to graduate move towards the inflation targeting paradigm, in which case inflation may become more predictable in 2009.
We confirm our earlier forecast at around 4% for inflation in 4Q08 and predict that it will reach 20.5% December to December level.
We also confirm our earlier preliminary forecast of 15.5% inflation in 2009, yet we are looking forward to see the results of the gas prices discussion between Russian and Ukrainian authorities as we expect the gas prices to be one of the most important drivers of the CPI growth in 2009.
Ukraine foreign reserves fall 14.9% in October
The National Bank of Ukraine (NBU) announced that the country’s foreign reserves fell 14.9% MoM in October USD 5.6 bln) reaching USD 31.9 bln. The reserves fell 1.7% YTD (USD 539 bln). The balance of the NBU foreign exchange market interventions in October was USD 4.1 bln. As it was previously announced, the foreign reserves fell 1.4% MoM in September and reached USD 37.5 bln by the beginning of October.
The reserves grew 45.9% in 2007 and 14.8% in 2006.
Our view:
We see two main sources of the reserves decline in October: the NBU interbank interventions to support the depreciating hryvnya and the USD strengthening against EUR, in which a part of the foreign reserves is stored.
Sokrat anticipates that the USD 16.4 bln IMF loan announced earlier this week will support the level of the foreign reserves. We further anticipate that the continuing support of the depreciating Ukrainian currency driven by the substantial current account deficit will push the level of the foreign reserves down further.
While we view USD 30 bln as a critical level of the foreign reserves for Ukraine, we expect that the reserves will stay above this level due to the anticipated USD 4 bln first batch of the IMF loan in November. We further anticipate that UAH will stay below the 6 UAH per USD until the end of 2008 and may somewhat appreciate to 5.5 level from current 5.8 level. Yet, the exact dynamics of the foreign reserves and foreign exchange rates will be determined by the NBU foreign exchange market paradigm.
SMASH To Provide USD 65 mln in Equipment to Gazprom: POSITIVE
Sumy Frunze Machine Building [SMASH UZ, N/R], one of largest European producers of equipment for the oil, gas, and chemical industries, plans to supply four gas pumping devices worth USD 65 mln to Russia’s natural gas monopoly Gazprom for use at the Griazovetskaya compressor station. The deal is worth USD 65 mln and is to be completed by July 2009, the contract for which was signed back in September.
In a separate deal worth USD 70 mln, Sumy Frunze Machine Building also intends to supply gas compressors to Gazprom for equipping the Zapolyarnaya linear compressor station at the Zapolyarnaya oil-gas-condensate deposit (Russia) by April 2009. For that contract, the company will produce 12 gas pumping units, each of which will have a capacity of 16 MW, to transport natural gas to a trunk gas pipeline.
The Open Joint-Stock Company Sumy Frunze ended 2007 with a net profit of UAH 102.449 mln, when its net revenues increased by UAH 89.023 mln (or 5.77%) to UAH 1,632.026 mln, compared to 2006.
The company was founded in 1896 and specializes in the production of gas pumping units and complete compressor stations for different purposes, centrifugal, vacuum, chemical pumps, centrifuges and equipment for chemical, gas and petroleum industries. It is part of the Energy Standard Group (Kyiv) owned by Ukrainian businessman Kostiantyn Grigorishin, along with a number of other large machine manufacturing enterprises.
Our view:
This news is POSITIVE for Sumy Frunze, since it means that the company is successfully filling its order book, which confirms its high quality and competitiveness. About 40% of the equipment for Gazprom’s gas pumping capacities is produced by SMASH. Gazprom is one of SMASH’s main customers. Their continued strong cooperation will provide for the growth of Sumy Frunze sales in the background of Gazprom’s large projects, such as the building of the “North Strand”, “South Strand”, Caspian gas pipeline and “Yamal-Europe-2” pipeline.
In terms of SMASH’s 2008 orders, it appears that the company supplied Gazprom with an estimated USD 95 mln in products, apart from the several large orders that have yet to be fulfilled. Apart from the two above-mentioned projects, this includes equipment for the reconstruction of existing units at the Urengoy oil-gas-condensate field. In September 2008, Gazprom also received equipment for the reconstruction of a compressor station at the Yamburg field.
The fact that SMASH is also not completely reliant on Russian clients is a good sign, as Central Asian deposits of oil and gas are explored and developed. The company recently signed contracts for the delivery of oil and gas equipment worth USD 94 mln to two separate corporations in Turkmenistan - the state business concern "Turkmengas” and "Turkmenneft”. Correspondingly, these orders are to be fulfilled by August and July 2009. SMASH is strengthening its position in this region, which will drive its orders in the near future.
InBev’s revenues dropped in 3Q08: NEUTRAL
InBev, one of the leading global beer producers – second in terms of beer output in Russia and first on the Ukrainian beer market – issued an official press release on its financial results for 3Q08. Its revenues in volume terms declined 10.5% on the Russian market and 8.5% on the Ukrainian market.
The Russian and Ukrainian beer market’s stagnation are the reasons for plummeting sales. The company’s market share in Russia was squeezed in the last nine months. Nevertheless, InBev has retained its strong positions as leader on the Ukrainian beer market.
The company is going to concentrate on the premium beer segment, especially in Russia, where it sells premium beer brands like “Klinskoye” and “Siberia Crown”. InBev’s consolidated revenues in 3Q08 in volume terms decreased 0.2% to 61.6 mln hl and its consolidated net income dropped 13.9%, amounting to EUR 447 mln. Net revenues increased 7.7% to EUR 3.95 bln.
Our view:
We see the following reasons for the fall in InBev’s revenues in Ukraine and Russia. Firstly, unfavorable weather conditions (a rainy September and October). Secondly, decreased consumer spending on the back of the global crisis. Thirdly, a slowdown of the Ukrainian beer market growth and the stagnation of the Russian beer market.
In our view, InBev’s revenue growth in money terms is contributed mostly to increasing sales in the premium beer segment. Nevertheless, we expect a decrease in sales in this segment in the short run.
Vinnitsaoblenergo Sees UAH 5.2 mln Profit in 3Q2008: POSITIVE
In the period July-September 2008, the Open Joint-Stock Company ‘Vinnitsaoblenergo’ [VIEN UZ, BUY] finished 3Q2008 with a net profit of UAH 5.245 mln. In this period, the company increased its net income by 33.13% (or UAH 37.06 mln) to UAH 148.93 mln, compared with the same period last year.
In the first nine months of 2008, the company finished with a net profit of UAH 24.951 mln and increased its net income by 32.1% (or UAH 110.06 mln) to UAH 452.95 mln, compared with the same period of 2007.
Vinnitsaoblenergo ended 2Q2008 with a net profit of UAH 8.01 mln, having increased its net income by 31.1% (or by UAH 32.96 mln) to UAH 138.93 mln, compared with the same period in 2007.
In 2007, the company finished with a net profit of UAH 4.65 mln and increased its net income by 20.45% (or UAH 83.91 mln) to UAH 494.19 mln, compared to 2006. 20.3% of the shares in Vinnitsaoblenergo are owned by Grayham Investments Limited (Cyprus), which is associated with businessman Konstantin Grigorishinym. The remaining 75.002% stake belongs to the State.
Our view:
This information for 3Q2008 is certainly POSITIVE for Vinnitsaoblenergo. This data is in line with our estimations; however, we expect that the company’s profit for 4Q2008 will decrease due to a drop in the demand for power by industrial consumers. At the same time, this decrease in profit can be covered should there be an unexpected increase in tariffs for all Oblenergos.
VIEN is one of leaders among Oblenergos in terms of EBITDA growth, which is 240% YoY, and a growth in net income by 433% YoY. We also hold a positive view since VIEN has restructured its overdue payables for a period of up to 10 years.
The electricity and thermal heat generation market in Ukraine is covered in our June 30 report “Five Questions on Ukrainian Gencos” and our March 28 report “The electricity sector of Ukraine”. Additional insight is provided in the report “Oblenergos: magnificent six” of January 18, 2008 and individual reports on Kyivenergo [KIEN UZ, BUY], Chernivtsioblenergo [CHEN UZ, BUY], Khersonoblenergo [HOEN UZ, BUY] and Khmelnitskoblenergo [HMON UZ, BUY].
UAH 10.3 mln profit for Prykarpatoblenergo in 3Q2008: POSITIVE
For the period July-September, Prykarpatoblenergo [PREN UZ, BUY] finished with a net profit of UAH 10.27 mln. In this period, this Ivano-Frankivsk regional company saw its net income drop by 9.16% (or UAH 12.05 mln) to UAH 119.51 mln, compared with the same period in 2007.
For the first nine months of 2008, the company recorded a net profit of UAH 43.46 mln and reduced its net income by 0.44% (or UAH 1.69 mln) to UAH 386.04 mln. In 2Q2008, PREN achieved a net profit of UAH 19.29 mln, while its net income declined by 1.27% (or UAH 1.54 mln) to UAH 119.29 mln compared with the same period in 2007.
The company’s net profit for 2007 was UAH 4.87 mln, after increasing its net income by 16.49% (or UAH 76.96 mln) to UAH 543.70 mln, compared to the previous year. The state owns a 25.02% stake in the Open Joint-Stock Company ‘Prykarpatoblenergo’, the management of which has been transferred to the National Energy Company of Ukraine. Another 16.89% of shares belongs to Cyprus Larva Investments Limited and Bikontia Enterprises Limited, 16.55% to Cyprus Lex Perfecta Limited, and 11.04% to Cyprus Margaroza Commercial Limited.
Our view:
This information for 3Q2008 is certainly POSITIVE for Prykarpatoblenergo. PREN is one of the leaders among Oblenergos in terms of its EBITDA margin and net margin growth, which is 19% and 11% YoY respectively.
The electricity and thermal heat generation market in Ukraine is covered in our June 30 report “Five Questions on Ukrainian Gencos” and our March 28 report “The electricity sector of Ukraine”. Additional insight is provided in the report “Oblenergos: magnificent six” of January 18, 2008 and individual reports on Kyivenergo [KIEN UZ, BUY], Chernivtsioblenergo [CHEN UZ, BUY], Khersonoblenergo [HOEN UZ, BUY] and Khmelnitskoblenergo [HMON UZ, BUY].
Dniprooblenergo to Close Investment Program for 2008: NEGATIVE
The OJSC ‘Dniprooblenergo’ [DNON UZ, N/R] the largest regional electricity supply company in Ukraine, has announced that it is closing its investment program in relation to the financial crisis. Due to instability in the banking system, its funds in the Kyiv-based Prominvestbank have been blocked.
"We are hostages to the situation and our funds are blocked. The only thing to do is to close this year`s investment program," said Serhiy Yefimov, Acting Deputy Director General for Financial Planning. Dniprooblenergo claims the 2008 investment program, which was projected at UAH 256 mln – was fulfilled by 75% (UAH 197 mln). The company is apparently also having problems with Rodovid Bank [RODB UZ, N/R], which is refusing access to company funds, thus disallowing it to pay contractors.
The company has seen a fall in sales due to the drastic reduction of energy consumption for metallurgical enterprises in the Dnipropetrovsk Region – its key consumers. This caused a significant decline in revenue in 2008 compared to planned targets, resulting in a reduction in the electricity volume purchased on the wholesale electricity market by 17.5% (or UAH 140 mln) less than in September.
"If Dniprooblenergo bought electricity worth UAH 800 million on the energy market in September, in October this was worth UAH 660 million, although it is natural for this figure to grow: tariffs are growing and a rise in consumption was always seen in the fall and winter period," he said.
Our view:
This development is blatantly NEGATIVE for Dniprooblenergo. However, yesterday DNON restructured its overdue paybles of USD 400 mln (30% of the company’s sales in 2007) to Energorynok. Based on this information, we are downgrading the bankruptcy risk for DNON. This development is really POSITVE for company. The restructuring of overdue payable is still an actual issue for Oblenergos such as DOON and KREN, and has became a problem because the moratorium which prohibits energy companies from declaring bankruptcy will be not prolonged past January 1, 2009.
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” of January 18, 2008 and individual reports on Kyivenergo [KIEN UZ, BUY], Chernivtsioblenergo [CHEN UZ, BUY], Khersonoblenergo [HOEN UZ, BUY] and Khmelnitskoblenergo [HMON UZ, BUY].
Mostobud Contracts for Kyiv, Kremenchug Bridges: POSITIVE
Mostobud [MTBD UZ, BUY] has revealed the core of its domestic bridge-building plans for the next few years, which are to focus on two bridges in the Kyiv Region and one in the city of Kremenchug. This information was revealed by Vladimir Prodivus, the Chairman of Mostobud’s Supervisory Board during the recent conference “Russia and the CIS: prosperity through partnership”.
In particular, the two bridges to be constructed in the capital region are for the new ring road around Kyiv. The first of these, to be built in the Ukrainka area, will be nearly 5 km. The preliminary work for this project is worth USD 1.5 bln. The second project is for a bridge through the Kiev reservoir in the Vyshgorod area. It is to run more than 8 km and this work is tentatively valued at more than US 2.5 bln.
Additionally, Vladimir Prodivus stated that the company plans to construct the Kremenchug bridge, which is to be 1.7 km in length and an estimated value of more than US 5.2 bln.
Our view:
Despite the company’s efforts to diversify its project portfolio by placing an increased focus on commercial real estate projects and actively seek out opportunities to participate in international contracts (see today’s related story in the Sokrat daily), we see this news as being POSITIVE for Mostobud, since it is continuing to apply its world-renowned capacities in bridge building.
While it may be true that the bridge-building segment is less lucrative than other commercial segments, the company certainly is still earning profits by engaging in this activity. Pre-Euro 2012 projects will boost the company’s net sales by 80%, implying a CAGR of 37%. Mostobud’s order volume will be enhanced by USD 3.4 bln over the next five years, increasing the company’s net sales and net margin. After 2012, we expect sales to slow down before a growth at 2% CAGR until 2018, supported by planned expansion abroad.
The company continues to hold the dominant market position in Ukrainian bridge construction, with a market share above 80%. Mostobud remains the main contractor in Ukraine capable of undertaking extremely difficult and complex bridge structures, with two other current projects being the Podol Bridge across the Dnipro River in Kyiv and the bridge across the Dnipro in Zaporizhie.
We see optimistic prospects for Mostobud in the coming years and recommend BUYing shares in the company, with a target price of 521 USD per share.
Mostobud wins four tenders in Romania: POSITIVE
Mostobud [MTBD UZ, BUY] has won four tenders in Romania for the expansion of a 4-lane section of the ‘South Bucharest’ bypass and for the rehabilitation of national roads at the ‘Vyrfule – Stey’ site. The total monetary value of the collective work for these projects is more than EUR 95 mln.
This information was revealed by Vladimir Prodivus, the Chairman of Mostobud’s Supervisory Board. He noted that these deals are the result of three months of intense negotiations held in Romania and Poland during various international consortia.
During one international consortium in September, Mostobud also pre-qualified to participate in the construction of the road for the North Bridge in Poland and is now awaiting the final decision and technical drawings for the second phase of the tender.
Next week, the company will also partake in a tender in Romania to undertake work for a road rehabilitation project at the ‘Deva – Oradea’ road.
Our view:
This development is POSITIVE for Mostobud, which is continuing to diversify its strategy. While it holds the dominant market position in Ukrainian bridge construction, with a market share above 80%, the company’s management is making efforts toward the gradual diversification of its project portfolio beyond focusing solely on the less lucrative bridge-building segment. At the same time, it certainly has not shied away from bridge-related projects that have come its way (see today’s related story in the Sokrat daily).
For one, the company is placing an increased focus on commercial real estate projects. Pre-Euro 2012 projects will boost the company’s net sales by 80%, implying a CAGR of 37%. Mostobud’s order volume will be enhanced by USD 3.4 bln over the next five years, increasing the company’s net sales and net margin. After 2012, we expect sales to slow down before a growth at 2% CAGR until 2018, supported by planned expansion abroad.
Secondly, Mostobud has begun to actively seek out opportunities to participate in international contracts, as demonstrated by the above news about Romania and Poland. Company officials have been trying to attract the attention of foreign players to the company’s capacities and have begun exploring areas for cooperation with potential contractees in Russia, various Asian states, with Baltic and Western European companies, as well as those from both North and South America. We see optimistic prospects for MTBD in the coming years and recommend BUYing shares in Mostobud, with a target price of 521 USD per share.
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