Research

A UAH 5.53 Metinvest hint on its intentions? ENMZ’s Potential has unfolded in 2007. The significant 2000–2007 modernization and expansion program culminated in the July 2007 launch of Blast Furnace No 5, which is among the most advanced in the CIS. The company started to demonstrate profits, and the stock has appreciated 16 times YtD.

Khmelnitskoblenergo [HMON] is one of Ukrainian electricity distribution companies where privatization is yet to come, with the state currently holding a 70% stake. The upcoming privatization of electricity companies, announced in summer 2007, foresees reducing the state share to 60% through selling 10% of HMON through open auctions. This will positively influence the stock as privatization will increase current free float and the liquidity of the stock.

As the Ukrainian economy continues to grow at full steam, a new class of Ukrainian - economically active, financially independent and politically prudent - is emerging. We can now confidently speak of the Ukrainian middle class. Although it differs from its classical Western counterpart, the Ukrainian middle class nevertheless includes Ukraine’s most pro-active, educated and innovative people.

Megabank [MEGA] is a mid-size, Kharkiv-based bank, and is moving towards becoming one of Ukraine’s top 20 banks. Notably, it combines considerable growth with a high quality loan portfolio and a low cost-to-income ratio. MEGA is also a very transparent, and works with World bank, EBRD, and the IFC on a number of corporate governance and lending programs. Megabank should significantly benefit from the growing Ukrainian middle class: 40% of its retail business is represented by car loans, which, in turn, have one of the highest levels middle class penetration levels – 23%. When combined with mortgage-secured consumer loans, car lending should enable MEGA to achieve a true breakthrough in retail.

Another chapter of Ukraine’s political history is now written: its pre-term parliamentary elections are over. The election itself has not solved all of Ukraine’s power struggles. It has, however, paved the way for consideration of which political directions the country may now take, and of what alternative political structures may evolve in the near future. The orange camp has been more successful than was anticipated, but things are not yet all over for Yanukovich either.

Naturally, the stock market is sensitive to political news. Historically, the Ukrainian pre-election period has seen a decrease in stock market activity due to the frequently uncertain political climate. Then, activity surges once more as soon as the outcome of the elections becomes clear.

A ripe takeover target, Zaporizhstal is inferior to many Ukrainian and international peers as a portfolio investment, we believe.

The Ukrainian auto market is booming: last year, sales increased 40%. UkrAVTO Corporation is a major Ukrainian auto player with a 40-50% market share. Both the sales and the production of new cars are set to increase significantly in 2007. UkrAVTO wants to attract substantial investments, and has initiated a substantial cleanup effort. We think that in due time the company would consolidate its financials with those of its numerous subsidiaries and affiliates. The most important subsidiary to consolidate is ZAZ, the core production segment company. We assemble the finances of UkrAVTO and ZAZ and evaluate the result.

Ukrainian electricity distribution companies (oblenergos) have, we believe, strong upside potential. This potential is currently obscured by two factors. One is heavy industry regulation; the other is their current “cost plus” tariff formation method. Both factors have produced unimpressive financial results. Combine this with low household electricity tariffs and a high level of electricity grid depreciation, and the need for two things becomes strikingly apparent - intensive modernization and industry reform.

Ukrnafta has two business arms. The hydrocarbons extraction arm pumps oil and condensate (71% of domestic output) and extracts natural gas (16%). The retail arm sells fuel via company’s own filling stations network (its market share by volume was 24% in 2005 and 19% in 2006). Both business arms are fundamentally strong, but are held back by Ukrnafta’s strategic investors.