Construction

Real estate developers face significant problems that are preventing them from completing existing projects. The demand for real estate has dropped significantly due to currency fluctuation in Aug-Nov and the fact that mortgage interest rates skyrocketed from 15.7% (Apr 2008) to an average of 23.2% in UAH and from 11.7% to 17.5% in USD. Prices on the secondary real estate market dropped USD 4% in Sep-Oct 2008. The recent slowdown of construction works and the increase in mortgage interest rates, along with the banking system crisis, has forced the Cabinet of Ministers to create a special working group to implement a number of measures towards reducing negative consequences in the construction sector, which could lead to a high unemployment rate and the real estate sector’s slowdown. Depending on the effectiveness of implementing the below-listed anti-crisis measures, we think that a real estate prices in Kyiv could fall, varying from a slight decrease of 10-15% in a best-case scenario up to 25-30% in a worst-case scenario. In Ukraine’s regions, they could drop 10-15% in the short term, with about a two-month time lag behind the capital. However, we view the construction sector as a far more attractive sector for long-term investment.

We decided to review our forecasts for Volyn-Cement [VOLC] as the factory is highly dependent on local real estate developers, that face significant problems in terms of financing existing and new construction projects. We also expect increased pressure due to gas prices increase in 2009. Under current financial crisis conditions, we have revised WACC components, the risk free rate and market risk premium for Ukrainian equities. However, we maintain our BUY recommendation for VOLC shares with a target price of USD 11.2 and an upside of 117%.

Dnipropetrovsk Steelworks n.a. Babushkin [DZMK] is one of the largest producers of steelwork for non-residential construction, heavy industry, bridge construction, and the electricity sector in Ukraine. The company specializes on difficult custom-executed orders of high expertise demand. DZMK is supplying its products well beyond the Ukrainian market including markets in Asia, the Far East, Africa, and Russia. Although it is not completely vertically integrated, the company is part of the Industrial Union of Donbas (IUD), one of the three largest industrial groups of Ukraine.

Volyn-Cement is one of the top five cement players in Ukraine with a market share of 10% in 2007. We believe that VOLC is a good investment opportunity for investors due to several factors: a high demand for cement in Ukraine based on the construction boom, increased capacity and its utilization, transparency and strong margins, an announced significant modernization program, and a safe position relative to global players.

Mostobud has a dominant market position in Ukrainian bridge construction with a market share above 80%. Pre-Euro 2012 projects will boost the company’s net sales by 80%, implying a CAGR of 37%. After 2012, we expect sales to slow down before growth at 2% CAGR until 2018, supported by planned expansion abroad. The recent signing of a contract for the construction of new bridges with American investor Sun Land Group resulted in a 42% surge in MTBD’s stock price, compared to 91% YoY total growth. This shows a fast PFTS reaction to good news about the company. We see optimistic prospects for MTBD in the coming years.