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External debt of Ukraine grows in 3Q08
The gross external debt grew 42.0% or USD 31.2 bln between October 2007 and October 2009 and reached USD 105.4 bln.
The sovereign debt grew 6.8% and reached USD 14.2 bln. The external debt of the banking sector grew 63.2% and reached USD 42.1 bln. The external debt of other sectors grew 40.2%, reaching USD 44.3 bln.
Our view:
We view the modest dynamics of the sovereign debt as somewhat comforting in light of the anticipated drop of Ukraine’s foreign reserves in 2009 that were spent on supporting the UAH and the Ukrainian banking system. The foreign reserves of Ukraine remain above USD 30 bln, which, coupled with the outstanding balance of 11.9 bln of the IMF standby loan, will suffice to allow for coverage of the sovereign debt.
We further view the currency reserves of the banking system as fully sufficient to cover the banking system’s foreign debts. Additionally, we see most of the foreign debt accumulated in the banking system falling on those banks that are affiliates of foreign banks, which can provide support for their daughter banks denominated in foreign currency, decreasing their sensitivity to the UAH’s devaluation.
We find companies in the real sector of the Ukrainian economy as the potential victims of the increased foreign debt. We further view those companies oriented towards the domestic market as the most vulnerable to their foreign debt increase given the unprecedented UAH devaluation. Nevertheless, we still view the Ukrainian real sector’s Eurobonds issuers, such as Interpipe (INPIP), Azovstal (AZOVTL) and Mironivskiy hliboprodukt (MHPSA) as fully capable of servicing their foreign debt, as these companies export much of their output. At this point, we would like to recommend treating another real sector Eurobond issuer – Naftogaz Ukrayiny (NAFTA) – with caution as we believe that its default risks and vulnerability to the currency risks are higher than those for other Ukrainian Eurobonds with a similar yield.
Ukraine CA deficit shrinks in 3Q08
The CA deficit in Ukraine shrunk in 3Q08 to USD 1.6 bln; a 47.5% decrease compared to the CA deficit in 2Q08 of USD 3.0 bln. The trade balance deficit has contracted to USD 2.1 bln, compared to USD 3.6 bln in 2Q08. The financial account surplus was not altered substantially, staying around USD 2.3 bln. Foreign direct investment fell to USD 3.4 bln, compared to USD 3.8 bln last quarter.
Therefore, the CA deficit in January-September 2008 reached negative 5.8% of GDP or USD 8.4 bln. However, a high financial account surplus resulted in a positive balance of payments at the USD 6.3 bln level.
Our view:
The CA deficit’s contraction in 3Q08 is mainly caused by a decline in the trade balance deficit. Such a dynamic is traditional for Ukraine at harvest time as agricultural exports increase. We forecast that the devaluation of the UAH in 4Q08 will have a supporting effect on the CA until the end of 2008 and beyond. We anticipate that the CA deficit in 2008 will not exceed USD 14.5 bln. Natural gas imports and a decline in steel exports will be the main driving forces behind the CA deficit’s acceleration in 4Q08.
We believe that the continuing depreciation of the hryvnia will support domestic production while suppressing imports in 2009, leading to a trade balance deficit shrinkage in 2009 compared to this year. The anticipated increase in imported gas prices, coupled with the continuously low prices for steel, the main Ukrainian export article, will counteract the effect of the UAH’s devaluation in terms of the trade balance deficit shrinkage.
Based on the historical record, we anticipate that the services balance will continue to stay positive and will somewhat compensate for the merchandise deficit. Sokrat anticipates that the trade balance deficit will amount to USD 15.5 bln in 2009. We further anticipate a 23.0 bln CA deficit in 2009.
Parliament restricts pharma TV advertising: POSITIVE
Ukraine’s Parliament has taken a decision to restrict TV advertising of drugs, medical equipment, methods of preventing medical problems, diagnostics, healing and rehabilitation, as well as all medical services.
The key point of this law’s approval is to make Ukraine’s laws accord with the European convention about cross-border television broadcasts, which has been signed by Ukraine.
Our view:
The fact that pharmaceuticals are not going to be advertised on television is POSITIVE for local pharmaceutical companies. Foreign drug manufacturers dominate the market in value terms, with a 78% market share and this share has demonstrated an increasing tendency. One of the factors in foreign pharmaceutical producers’ market share increase is their aggressive marketing strategy.
It’s hard to overestimate the significance of marketing in the pharmaceutical sector. Local producers do not have the possibility of successfully competing with foreign ones in terms of marketing and moving products directly to the customer, since the foreign producers are able to finance more expensive and efficient marketing campaigns. They provide greater “incentives” for doctors to move their products as well.
We expect pharma companies to switch their marketing strategies to alternative advertizing sources like radio, press or internet advertising.
As a result, we expect the demand for foreign drugs to slightly drop. We also believe that during the crisis, customers will purchase local pharmaceuticals, which are, on average, seven times cheaper than their foreign equivalents.
Astarta sells its carbonic quotes: POSITIVE
Astarta [AST PW, BUY] has reached an agreement on selling its carbonic credits to the International Fund of Carbonic Credits that was founded by the European Bank of Reconstruction and Development in cooperation with the European Investment Bank. The credit is estimated at 300 thsd tons of carbon dioxide from five sugar plants in Astarta’s ownership. The agreement will be valid until 2012 and is the first agreement on this issue conducted in Ukraine. The final sum of the agreement has not yet been disclosed.
In 2008, Astarta was able to reduce energy consumption at its sugar plants by at least 10%, while, at the same time, expanding its output capacities by 10-15%. Astarta has invested a total of USD 15 mln in the modernization of its sugar plants in 2008.
Our view:
This news is definitely POSITIVE for Astarta, as its opens up a new opportunity for the injection of additional funds in such times that are tight regarding liquidity. Based on the statement of one EBRD representative that the average cost of the carbon quotes is EUR 10 per mt, we estimate approximately EUR 3 mln will be received to support Astarta’s financial position. Furthermore, the current agreement, in our view, is an obvious sign of stable and strong cooperation between Astarta and the EBRD, which provides a promising possibility for the company attracting additional debt financing in the future. Moreover, this would be advantageous as the average interest rate from international institutions for Ukrainian companies is LIBOR +10-15%, which is considerably lower than the interest rate from domestic banks (25-36%).
Astarta to launch bioethanol production: POSITIVE
Astarta [AST PW, BUY], is planning to launch bioethanol production at its Yaresivskiy sugar plant. According to Mr. Ivanchyk, the CEO of the Astarta holding, work has been started and its planned output capacities can reach 200 cubic meters per day. Currently, the estimated total value of the project is not finalized and will be defined in the process.
Our view:
Biodiesel accounts for 80% of European biofuel production, with bioethanol at 20%. Furthermore, the European Biofuel Directive, adopted by the European Parliament and the European Council, was designed to promote and support biofuel production and use. According to a European Commission forecast made for EU-27, biofuel production is expected to grow at a 10% CAGR over 2007-2010.
Despite the alluring prospects, the production of bioethanol in Ukraine is restricted until the Ukrainian Government will take appropriate moves towards implementing proper legislation. However, most agricultural companies involved in sugar processing are able to adopt their own facilities for biofuel production in the short-term, while, at the same time, continuing to carry out their sugar processing operations.
Motor Sich forecasts sales growth in 2009: POSITIVE
The Zaporizhya-based Motor Sich [MSICH UZ, BUY] company – the largest producer of aviation jets and gas-turbine units in the CIS – has publicly stated that its order portfolio for 2009 has grown considerably and that signed agreements will allow the company to retain a positive pace of sales growth in 2009 According to a report posted Wednesday, revenues from contracts for the supply of aircraft engines and helicopter engines will total at least USD 450 mln. "The company’s logical policy is aimed at diversifying sales markets, which has allowed the company to boost its number of orders from Asian countries, which have suffered less from the international crisis," the company’s statement read.
Motor-Sich also noted that its key Russian clients have also increased orders, which will deliver a boost in helicopter engines sales by over 45%, with the growth rate in 2009 rising to as much as 60% for some engines. As well, the company noted that in addition to contracts with its traditional large partner – Russia – its 2009 portfolio includes large contracts with China and Algeria worth over USD 60 mln and USD 30 mln respectively, and contracts with Iran worth around USD 20 mln.
Motor Sich reported a net profit of UAH 236.190 mln in 2007, while its net revenues increased by 52.04% (or UAH 146.066 mln) to UAH 426.743 mln compared to 2006. A 9.7% stake in Motor Sich, which is an open joint-stock company, belongs to Bartens Alliance Ltd, (USA), 5.7% to the Kyiv-based Finance and Credit Bank, and 61% belongs to management and employees, including a 15% stake owned by Vyacheslav Bohuslayev, the Chairman of Motor Sich’s Board of Directors. About 24% is a free float.
Motor Sich – one of the largest manufacturers of airplane and helicopter engines in the world – produces engines for Mi-8, Mi-17, and KA-226 helicopters as well as engines for Àn-70, Àn-124, Àn-140, Àn-148, and Yak-130 airplanes.
Our view:
We see this as POSITIVE for Motor Sich, though this announcement may be something of a PR measure given the recent announcement by Anatoliy Malysh, the Chairman of MSICH’s Supervisory Board, of an expectant decline in production in 2008 YoY level due to the current economic downturn. While production output in January-September 2008 rose 127% YoY, the crisis will see this indicator drop to 102-103%. Simply put, the last three months have devastated the company’s performance, the specter of which might also be seen in early 2009.
The company’s statements affirm the sales strategy identified by Sokrat for MSICH, especially given its record over the past few months. Apart from Russia, this jet and turbine giant has increasingly been directing more attention towards foreign-source contracts, as demonstrated by recently concluded contracts with Iranian, French, Chinese, Libyan and Indian clients, the details of which were reported by Sokrat in previous daily news. We think that new contracts in Asia will be positive steps towards the diversification of MSICH’s client portfolio, which will allow the company to decrease its dependence on the Russian market. MSICH also runs the risk in future of losing the Russian market, which currently accounts for about 50% of MSICH`s exports. This possibility is dependant on Ukraine`s integration into NATO. In the meantime, the company will be able to maintain its Russian orders in the short- to medium-term, due to specialized Russian orders that are reliant on MSICH-specific engine technological capacities and due to plans to open an engine repair plant in Dubna (Russia). Slated to occur by the end of 2008, it is expected to reach 100% capacity utilization next year.
According our estimates, MSICH’s revenue in 2008 will be USD 392.3 mln, with an EBITDA margin of 16% and net margin of 8%. We reiterate our BUY recommendation, with USD 182.9 as a fair value per share.
Telecom revenues down 5.2% in November: NEUTRAL
The State Statistics Committee of Ukraine revealed that, in November, revenues of enterprises providing communications services fell by 5.2% in hryvnia terms compared with October, from roughly UAH 3,910 mln to UAH 3,705 mln. Since the hryvnia depreciated in November by an average of 17%, this actually means that telecom revenues decreased by 19% MoM (in USD terms).
This general decrease in revenues is related to an overall decrease in the volume of mobile cellular communications services for the month. Operators` revenues from mobile cellular communications services fell by 4.7% MoM to nearly UAH 2,301 mln. In November, revenues from mobile communications services accounted for 62.1% of all revenues from communications services in Ukraine.
In the period January-November, revenues from all communications services were roughly UAH 41,864 mln (or USD 7,926 mln), representing a 15% increase (in USD terms) from the results for the same period in 2007.
In this same period, mobile telephone revenues increased by 19% YoY to USD 5,345 mln (and 19% MoM in November in USD terms, or 4.7% MoM in hryvnia terms). Fixed-line telephone revenues decreased by 3% YoY to USD 1,745 mln (down 22% MoM in November in dollar terms, or 9% MoM in hryvnia terms). In terms of ISP services, revenues increased by 48% YoY (in USD terms) to USD 426 mln (down 17% MoM in November in USD terms, or 2.1% MoM in hryvnia terms).
As Sokrat reported last month, October communications revenues fell by 2.5% compared with September, from roughly UAH 4,008 mln to UAH 3,910 mln. In 2007, revenues from communications services were roughly UAH 39,870 mln.
Our view:
We see this news as NEUTRAL for Ukrtelecom [UTEL UZ, U/R], since the overall drop in revenues for telecommunications service in October was mainly dependent upon the 4.7% revenue drop for the mobile phone segment. In revenue terms, the effect on the market share for UTEL, which has a 3G license and is a subsidiary of Ukrtelecom, is negligible. We see the fact that the overall telecom revenue is down as being directly connected with the current global crisis and a decrease in consumer spending, especially for heavy corporate customers, on telecommunications services in Ukraine. We think that such corporate customers can quickly migrate to using IP service vs. traditional fixed-line services provided by Ukrtelecom, which can negatively impact on the incumbent’s revenue. We think that telecommunications revenues in December will be higher due to increased pre-holiday user activity, especially amongst mobile customers.
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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