Flash notes

On 23, June Ukrainian Parliament has passed a bill #3585 which main official aim is to “overcome the consequences of financial crisis” how it is written in the name of draft. This document regulates some issues of debt restructuring procedure, restricts foreign currency lending and preliminary external debt repayments. The law was passed by the overwhelming majority of parliament and main disputable issues were solved in compromise way, therefore we anticipate that President will sign this law soon. The final version of bill that was passed still hasn’t been officially published, therefore in our analysis we rely on information available from open sources such as news postings, newspapers, authorities’ interviews and latest available versions of draft.

In 1Q09, OJSC Enakievo ISW sold its 37.04% stake in JV Metalen LLC to Metinvest Holding LLC. The price is unknown; our estimate is USD 55-65 mln. Our interpretation: Metinvest Holding provided OJSC Enakievo ISW with liquidity, to be used in particular for the construction of Blast Furnace No. 3. Metinvest benefited from that deal by effectively increasing its share in the Enakievo ISW group, because OJSC Enakievo ISW will now have to issue 9.07 mln new shares in order to acquire all rights in Metalen (previously, we expected the issuance of 5.71 mln new shares). We also do not rule out additional share issuances aimed at financing BF No. 3’s construction.

A memorandum on economic policy was sent to the IMF this week, Ukrainian officials have announced. The memorandum describes a number of actions aimed at stabilizing the economic situation in the country. The key points of the document will be announced once it is signed by the President, Prime-Minister, the Governor of the National Bank and the Minister of Finance.

The instability regarding currency exchange has become the main theme in Ukrainian life these days. Severe UAH devaluation has cast doubt on the ability of some Ukrainian companies to meet their FX obligations, as well as the ability of retail loan borrowers to repay their FX debts. Ukraine’s President Viktor Yuschenko, NBU Chairman of the Board Volodymyr Stelmakh and Ukraine’s Finance Minister Viktor Pynzenyk have made a series of important declarations about their intentions and further actions regarding the stabilization of the situation in the banking sector and the FX market. As well, Prime Minister Yulia Tymoshenko has said that she wants the President to resign the NBU’s Chairman of the Board, the respective draft legislation for which has already been registered in the Parliament. We would like to provide our view about the latest declarations made by authorities.

The Ukrainian Government has approved the 2009 privatization list. The major names are the same again: fixed-line communication operator Ukrtelecom [UTEL], turbine producer Turboatom [TATM], ammonia and carbamide producer and operator of ammonia pipeline Odesa Portside Plant (OPP), 60% shares in each of four electricity generators (CEEN, DNEN, DOEN and ZAEN) and 25-27% shares in six electricity distributors (CHEON, LVON, ODEN, POON, PREN and Sumyoblenergo). The government didn’t specify in which way the privatization process will be arranged. It also hasn’t decided how much it expects to gain from the privatization of all the above-mentioned companies. However, it has already urged the State Property Committee of Ukraine to gain UAH 3 bln from privatization in the first quarter of 2009.

On the November 11, 2008 the Carlsberg Group – the holding company for Slavutych –held a conference on the latest tendencies on the Ukrainian beer market and released 9M2008 financial consolidated results for Slavutych and Lvivska Pyvovarnia. In spite of the slowdown of the Ukrainian beer market, Slavutych was able to increase its sales 48% YoY in value terms and expand its position on the domestic market, reaching 23.8% in 9 months 2008. We reiterate our BUY recommendation for Slavutych and put the target price of the company’s shares under review.

On November 12, 2008, 272.57 mln of shares of Khartsyzk Pipes & Tubes (10.49%) changed hands. Most remarkably, the deal went through the PFTS exchange, the price being UAH 2.12 (USD 0.367) per share, for the deal’s total of USD 100.15 mln. We argue that the deal was not technical, and instead likely indicates that Metinvest needs cash, likely for an acquisition. The shares may now serve as the collateral. Should more HRTR deals go through, it may indicate a complete and permanent sellout, but only with additional support for such a possibility.

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.

The corporate structure of the Enakievo ISW group requires a cleanup: the OJSC Enakievo ISW and Metalen LLC should merge. We speculate that the reorganization: (1) will take place by the year’s end, (2) will follow a particular scenario, and (3) will be positive for Enakievo ISW’s stock.

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%.