Research

Ukrainian thermal generation companies are industrial giants traded on PFTS. Built in the late 1960s, they have supplied electricity not only in Ukraine but to bordering countries as well. Reforms of the 1990s presented new challenges while, at the same time, opening up new prospects: the announced electricity sector reform, privatization of electricity companies, and possible export liberalization raise questions that need to be answered.

State owned Turboatom is one of the largest CIS producers of turbines for hydro, thermal and nuclear power plants. Capacity utilization was calculated as being 65% in 2007 while amortization of fixed assets reached by our estimation 50%. Therefore for further growth and successful participation in international tenders TATM needs large investments in production facilities' modernization. The arrival of strategic investors in TATM - Russian Power Machines for instance - would provide the company with such investments and stable growth in its orders. This would certainly drive up the value of the stock. However privatization attempts of the state’s stake have not yet been successful and remain uncertain since the company is considered by many to be of strategic importance to the state.

On July 11, 2008, coke prices in both Ukraine and Russia jumped 30-60%. Coal prices have much room to grow, and certainly will use some of it. This news is clearly negative for steelmakers and positive for coal mines. Our focus here is coke producers, which depend on a balance between coke and coal prices. In our view, both the profits and profitability of Ukrainian coke makers will increase even further in 2H08.

Ukrnafta did not pay dividends in early summer 2007, contrary to expectations, and is in the midst of a shareholder conflict, upsetting investors. The stock behaved as a PFTS index dummy for most of 2008 (see right), ignoring roaring oil prices and Ukrnafta’s own profits. The 2Q08 results will remind investors once again that these are fundamentally good times for the business.

Astarta, a dynamically growing vertically integrated agro-holding with a diversified business structure, has aggressively expanded its land bank by 30% CAGR over last four years. This leaves room for more expansion, which we estimate at 26% CAGR over the next five years. Excellent corporate governance, strong financial results and expanding operational margins are constantly enriching the value of the company’s stock. We reiterate our recommendation to BUY with a fair price of USD 29.9.

Uzbekistan is the most inhabited country in the Central Asia region. It had prolonged the post-USSR stagflation period, but it is now becoming more competitive as its growth accelerates. Uzbekistan has the biggest human and resource potential in the Central Asia region. Its economy is diversified and provides a wide spectrum of opportunities for investors; on the other hand, many of Uzbekistan’s assets remain undervalued.

The middle class expansion in Ukraine is among the key drivers of the Ukrainian economy. We covered this issue in October 2007, just before inflation started to dilute real incomes; however, by looking closer at the dynamic processes in the current Ukrainian economy we identified that one of the key inflation drivers is the expansion of the middle class. In this report we introduce an amended approach to middle class identification in Ukraine and suggestions as to which sectors will benefit the most from middle class growth.

The Head of the National Bank of Ukraine (NBU) Council, Petro Poroshenko, announced that the official USD/UAH exchange rate in 2H08 will be at 4.85 UAH/USD. The official rate will not be allowed to leave a +/- 4% corridor, i.e. it must stay within the 4.65 to 5.05 range. The NBU has kept the UAH/USD exchange rate constant since 4M05, at the 5.05 level with an acceptable corridor between 4.95 and 5.25 UAH/USD.We view it as a step towards the floating exchange rate approach.

Yasynivka Coke has been rebuilt over 10 years under the Energo Group ownership. The company is now well positioned to process concentrate supplies secured by Energo affiliation on its modern facilities. We expect the company to discontinue leasing two coke batteries and selling coking charge mix, increasing the more profitable sales of coke to 2 mln mt from the current 0.4–0.5 mln mt. Due to expected 74% increase in coke price in 2008, we project an EBITDA margin of 15.8%, up 2.2 pp YoY. In 1Q08, EBITDA margin reportedly reached 17.6% (up 5.9 pp YoY) on top of 66% increase in net sales. Coke production has become a profitable business, is expected to remain such, and Yasynivka Coke is one of the best companies in the sector.

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.