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Ukraine narrow money falls; M3, deposits grows in 11M08
The National Bank of Ukraine (NBU) has reported that narrow money fell 0.3% MoM in November (21.8% growth YTD), thus reaching UAH 172.8 bln (USD 23.4 bln), while M3 grew 0.4% MoM (22% growth YTD), reaching UAH 483.2 bln (USD 65.3 bln). The NBU has also reported that money volume outside of the banking system fell 3.4% MoM (27.2% growth YTD), reaching UAH 141.3 bln (USD 19.1 bln). The fall is attributed largely to the population increasing its currency purchases in November, as reported earlier (see Sokrat daily from December 5, 2008). The dynamics of money supply in November is also largely attributed to an increase in the Ukrainian Government’s national currency accounts by 48.7% MoM, reaching UAH 17 bln through quarterly tax profits, as well as through collecting over UAH 7 bln via domestic debt instruments.
The overall volumes of banking deposits grew 2.4% MoM (21% YTD growth), reaching UAH 338.9 bln (USD 45.8 bln). The growth was observed in both foreign currency deposits and domestic currency accounts.
Our view:
We consider the reported figures as a weak signal of potential stabilization in the Ukrainian banking system. However, we believe that measures such as the continuing moratorium on the early withdrawal of deposits renewed by the NBU late last week (see yesterday’s Sokrat daily) are needed to prevent the collapse of the Ukrainian banking system.
We view the suppressed dynamics of monetary figures as a consequence of distrust in the Ukrainian economy due to the devaluating hryvnia, which depreciated 52.6% since August. We believe that the caution that economic agents exercise towards the UAH is expressed in the low demand for the domestic currency and in the tendency to seek safe haven in more stable foreign currencies.
Notably, however, we see some strong signals such as that currently an excess demand for foreign currencies is causing the lack of hryvnia in the banking system, with hryvnia overnights peaking over 70% in late November and corresponding accounts balances falling to their 800-day low. Overall, we anticipate that, in the short term, a slight rebound caused by the UAH deficit is possible, with the exchange rate rising to 6.8-7.0 UAH per USD from the current level of 7.40 UAH per USD. Nevertheless, we anticipate that the devaluation will continue in 2009 and the exchange rate will reach 8.0-8.5 by the end of the next year.
AvtoKrAZ to supply 160 vehicle sets to Cuba: POSITIVE
The AvtoKrAZ Holding Company [KRAZ UZ, N/R], based in Kremenchug, Poltava region, has reached an agreement whereby the company will supply 160 vehicle sets to Cuba and engage in long-term cooperation in the framework of a project for modernizing Cuba’s motor transport vehicle fleet.
According to a company press service, AvtoKrAZ has already loaded 100 kits of KrAZ trucks for Cuba in fulfillment of this contract. The other 60 truck kits will be loaded by the end of 2008.
As the second main aspect of this agreement, AvtoKrAZ officials have also signed an administration contract whereby the management of a vehicle repair enterprise in the city of Cienfuegos on Cuba will be transferred to the AvtoKrAZ Holding Company. The official signing ceremony for this part of the agreement took place in the city of Cienfuegos and involved Cuba’s Construction Minister and other top state and municipal officials.
The first stage of the work for this contract entails the restoration of Cuba’s dilapidated and broken equipment from Soviet time, dating back to 1961. This part involves over 10,000 trucks of different makes.
In the second stage, the Cuban side will be capacitated to create KrAZ trucks, to be assembled in Cuba with the right of realization activities in the countries of Latin America. A related decision was taken, included in a protocol, about the start of administrative work to organize assembly production in Cuba.
Our view:
This news is POSITIVE for AvtoKrAZ, as it represents a significant step in its cooperation with Cuba. While the company has supplied over 200 KrAZ-6510 trucks and KrAZ-6124P4 truck mixers to the Caribbean country since December 2007, those were one time supplies. The signing of this contract signifies a more systematic work regime.
According to the trade and economic mission at the Ukrainian Embassy in Cuba, AvtoKrAZ supplied products worth USD 17 mln to Cuba in 2008. To put this in context, the entire trade turnover between Ukraine and Cuba in 2007 was valued at USD 20 mln. While the dollar figure for this most recent contract has still not been disclosed, it is also very significant, for the Ukraine-Cuba trade turnover in general, and specifically for AvtoKrAZ.
The export of AvtoKrAZ products is going to serve as a hedge for the company against its falling share on the domestic market.
We see several disadvantages for AvtoKrAZ in 4Q2008 and 2009. Firstly, this economic crisis is impacting on the construction sector, which is the major consumer of heavy trucks, with respect to its traditional use of and reliance on credit financing. Secondly, the cost of raw materials and components has increased. Thirdly, market competition from foreign truck producers has increased significantly, and namely from KAMAZ (Russia), MAZ (Belarus), in addition to several producers from the USA, Western Europe, China and India. Finally, the Company – like many others – faces the challenge of limited access to credit to boost its financial resources and liquidity.
ZAZ output drops 63.5% in November: NEGATIVE
In November, the Zaporizhia car assembly plant (ZAZ) – the largest producer of cars in Ukraine – reduced its production by 63.47% (or 11,539 cars) to 6,641 cars, compared to October. This data was released in a statement made by the plant, according to the Ukrainian News agency.
The breakdown of the total number of assembled cars can be broken down by mark as follows: 158 ZAZ, 1,401 VAZ, 128 Îpel, 135 Chery, 703 Chevrolet, 197 Sens, 3,739 Lanos and 180 ÒÀÒÀ.
In November 2008, the enterprise reduced production by 76.3% or 21,373 cars YoY.
In the period January-November 2008, ZAZ production fell slightly by 0.41% (or 1,031 cars) to 251,621 cars, compared with the same period in 2007. In October, the plant’s production had fallen by 20% (or 4,560 cars) to 18,180 cars.
The plant ended 2007 with a net profit of UAH 0.564 bln and increased its net revenue by 86.3% (or UAH 5.999 bln) to UAH 12.951 bln, compared to that achieved in 2006.
ZAZ, which is registered as a closed joint stock company, is controlled by the UkrAVTO Corporation [AVTO UZ, U/R], otherwise known as the Ukrainian Automobile Association.
Our view:
We see this data as a NEGATIVE reflector of developments for the Zaporizhya car assembly plant (ZAZ) and its parent company, the UkrAVTO Corporation. While negative, this news is neither surprising nor unique. We currently see that all auto producers in Ukraine have decreased production output due to the economic crisis, whose impact includes a significant drop in consumer demand and limited access to auto loans for customers. The hryvnia’s sharp depreciation and the lifting of import restrictions following Ukraine’s WTO accession have also contributed to undermining demand for Ukrainian-produced autos on the domestic market. But Ukrainian producers are taking the classic defensive stance of calling on the government to introduce trade protection against imports.
We see three recent POSITIVE developments for the company, which may help it with respect to output and sales. The first is that it has received a syndicated loan for USD 62.5 mln, which will likely be spent on the modernization the plant’s press machine, which is currently being installed and is slated for completion by the end of 2008. The second is the newly-apparent strategy of expanding UkrAVTO penetration into new markets. The third is UkrAVTO’s recent introduction of a new leasing program, through which customers can buy a car paying 4.99% per annum in hryvnia and independent of involvement of any banking institutions.
Auto companies have proposed a package of anti-crisis measures, including the proposal to increase import duties, introduce a mechanism of lowering the payment for loans drawn for production needs, and make state financial aid available. We think the Ukrainian Government will implement a 25% duty on imported cars to protect local producers. While this measure will contradict the World Trade Organization terms, it will save the local players.
Other than the implementation of the 25% import duty, we believe local producers must also optimize the local business process, cut staff, and decrease the price of cars produced locally. Earlier, ZAZ affirmed its intention to maintain production targets for 2008, while predicting that ZAZ production could indeed fall in 2009; however, we see the risk that the company may indeed fall short of its production targets for 2008.
Motor Sich may benefit from Mi-17 contract: POSITIVE
Given the exclusive niche held by Motor Sich [MSICH UZ, U/R] in the aircraft engine industry, it seems that it is bound to benefit from a deal signed this past week in India. During the recent visit of Russian President Dmitry Medvedev to India, the Rosoboronexport enterprise signed a contract worth USD 1.3 bln for the manufacture and supply of 80 Mi-17V-5 medium lift helicopters – the biggest defense deal with Russia in recent times according to the Financial Times – in order to replace aging Mi 17 helicopters amongst the Indian Air Force’s fleet and will be used to transport supplies to crucial areas, including the Siachen Glacier. They will be delivered between 2010 and 2014.
As part of this overall order, we expect that Motor Sich will be named as the main supplier of the required engines for these choppers, which may be valued in the range of USD 300-400 mln for the engines over a period of three years.
Motor Sich – one of the largest manufacturers of airplane and helicopter engines in the world – produces various modifications of the VK-2500 and TV3-117 engines for Mi-17 helicopters and supplies more than 90% of all engines installed on Russian helicopters.
Our view:
We see the prospects for Motor Sich for gaining this contract as POSITIVE, and also view the benefits that such a contract could bring to the company as beneficial. The company is in a highly unique position to land this contract, in addition to a whole series of other international agreements it has recently entered into. MSICH is one of the only Ukrainian machine-building enterprises, at the moment, whose order book is virtually full for the next few years ahead. Not only is this company bound to deflect any serious negative impact of the current financial crisis on its operations and sales, but so too does it seem to be maintaining a steady growth in demand for its products.
There exists a 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 the fact that MSICH will open an engine repair plant in Dubna (Russia) by the end of 2008 (expected to reach 100% capacity utilization next year) and due to specialized Russian orders that are reliant on MSICH-specific engine technological capacities.
The above-mentioned developments, coupled with MSICH’s recent contracts with Iranian, French, Chinese, Libyan and other Indian clients – all of which have previously been reported by Sokrat – demonstrate that Motor Sich is directing more attention towards foreign-source contracts.
Sokrat Research: Motor Sich: Facts Support Strong Prospects
Motor Sich is the only Ukrainian company and one of the world’s largest companies engaged in the development, production, testing and repair of modern aviation engines. The main driver of the company’s net revenue growth is the expected significant increase in helicopter and aircraft production in Russia, as well as the growth in demand for this equipment in other developing countries with which Russia has historically maintained close relationships. Despite Russian authorities’ announcement about starting-up the serial production of helicopter and missile engines in Russian plants, we are skeptical about the timely realization of these plans. We see the most probable and advantageous way for both parties is close cooperation in engine production.
Executive summary
• MSICH’s penetration in the CIS region is dramatically high – almost 90% of mid-weight to heavy helicopters and 60% of aircrafts in use in the region are equipped with Motor Sich engines. Such a market penetration and the 100-year history of the company confirm the high quality of its products. Moreover, high entry barriers to the market and the company’s strong collaboration with Russian enterprises provide MSICH with an exclusive position in such sectors as helicopter and missile engines on the Russian market.
• The core company revenue generators are new engines sales – accounting for 56% of net revenue based on 2007 results. In our model we estimate the company’s output growth for helicopter engines at 6% CAGR during the period 2008-2012. Combined with price increases, we expect revenue from helicopter engine deliveries will grow 12% CAGR during this period. As for aircraft engines, we see the highest prospects with D-436 and ÀI-222-25, ÀI-25TLSH engines in the short- to mid-term.
• We conservatively estimate the net revenue growth of MSICH at 14% CAGR for 2008-2012 and 5% CAGR for 2013-2017. Also, reflecting the current growth in the cost of debt, as well as the increase in the return on investment capital requested by shareholders, results in WACC of 20% for this year, which decreases slightly to 12% in 2012 due to the anticipated stabilization of the situation.
• We expect weak financial results in 2008 due to the growth in prices for raw materials and an increase in administrative expenses this year. Thus, the EBITDA margin is estimated to decline to 14.4% in 2008, compared to the peak 22.8% last year. It is then expected to smoothly recover to 17%.
• Recommendation. Our DCF model is based on a three-fold method that equally takes into account perpetuity growth rate, exit EBITDA and P/E multiples. The DCF method valued MSICH at USD 234.4 per share, while the Comparative method resulted in a value of USD 107.1 per share. The average of these two mentioned methods results in a USD 182.9 as a fair value per share, with a 363% upside potential. We reiterate our BUYing recommendation.
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