Research

The profitability of coke makers depends on the balance between the prices of furnace coke (70-85% of sales, used in iron & steel production) and coking coal (75-90% of costs, most important grades are K and Zh). During the week of August 11-15, Ukrainian coking coal prices increased dramatically: K grade concentrate appreciated from USD 227 to USD 378 per mt (+67%), whereas Zh grade concentrate jumped from USD 199 to USD 346 per mt (+74%) (source: Metal Courier). We fully expected such an increase (see our July 15 Flash Note) in our valuations of Ukrainian coke makers. During the same week, coke appreciated 15% (from USD 612 to USD 702 per mt), adding to the 30-60% jump during the week of July 7-11. We reiterate our valuations of the three best companies in the sector, in which such a coal price increase had been accounted for. The risk of a coke price decrease following the recent correction in steel prices is also discussed.

On August 15, Azovstal, the leading Metinvest Group steelmaker, announced its intentions to invest USD 1 bln into ecological improvements. We focus on one of the items of this program that were announced, a stepwise retirement of three coke batteries. We have long suspected that Metinvest will shut down these coke batteries eventually, which would likely secure a substantial, about 1.1-1.2 mln tpa, increase in output for Avdiivka Coke, the main Metinvest coke maker. Today’s news confirms our suspicions and strengthens the case for BUYing Avdiivka Coke.

We initiate our coverage of the Ukrainian railway sector in aims of highlight the most promising investment picks for the year 2008. We analyze the demand and supply of freight and passenger railcars in the CIS based on Ukraine, Russia and Kazakhstan since they maintain 90% of the railway rolling stock in the region. According to our estimations, all covered companies have a great upside potential.

Applying financial analysis to the Ukrainian economy’s aggregated assets and liabilities data allows for the identification of industry-specific prospects and challenges. In this report we take a look at the aggregated economy-wide assets and liabilities data along with data on key sectors of the Ukrainian economy.

Kovelmoloko is a main asset of the Western Milk Group (WMG), accounting for 33% of the group’s total output. WMG is one of the top domestic dairy producers with a 4.1% market share in 2006. WMG has a wide distribution network and is represented in all parts of Ukraine. KMOL’s sustainable financial growth, healthy investments in the plant’s modernization, improving staple access and the company’s exposure to an unsaturated market niche of functional products will enrich the value of Kovelmoloko and drive the market share price up. We recommend BUYing for KMOL with a fair price of USD 1.02.

The State Statistics Committee of Ukraine has announced CPI figures for July 2008. CPI fell 0.5% MoM, thus indicating monthly deflation for the first time since March 2006 and breaking the deflation record set six years ago. Therefore, YTD inflation went down to 14.9% (compared to 15.5% in June) and YoY inflation decreased to 26.8% (compared to 29.3% a month ago).

Based on the stock market fall by 44% YtD and the current low liquidity, we decided to introduce a monthly strategy report for our clients, where we present our visions about the next month on the Ukrainian stock market. We believe that this material will help investors to better understand the situation on stock market, the macro conditions, and also find our top-picks based on our analysis

On July 30, Bagliy Coke launched its brand new coke battery No. 7-bis (490 thsd tpa). As a result of the launch, the output is expected to increase by 30% in 2008 (to 900 thsd mt), and further by 37% in 2009, reaching the long-term level of 1.23 mln tpa (source: Metal Courier). Source material supplies and sales should be secured through affiliation with the powerful Evraz Group, as well as due to the high domestic demand for coke. The launch increases capacity by 50%, and distinguishes the relatively small company as having the largest upside potential among the entire Ukrainian coke maker sector, which is very exciting right now.

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.

It has just become clear that Enakievo ISW and Metalen LLC will indeed merge, and that this will happen soon. We take investors beyond overcoming these risks through the question of HOW the merger will happen. We emphasize that the minority shareholders of Enakievo ISW will be diluted 1.54 times in order to finance the acquisition of Metalen, according to the usual practice in Ukraine (Azovstal in 2006 is the most relevant example). The dilution is not a risk but a certainty, which has, for some time, been fully accounted for in our valuation of the company.