Ukraine Markets Daily (April 30, 2015)

Market news

  • NBU says first stage in banking reform to be completed by June 31, 2015 
  • MHP’s sales down by 8% y/y, EBITDA up by 42% y/y in 2014
  • AutoKRAZ’s sales up by 63% y/y, EBITDA up by 2.5x in 2014

Market comment

The UX Index was up by 2.4% in UAH terms on Wednesday, and up by 8.8% in the US dollar terms, while the PFTS index was up by 0.1% in UAH terms. All ten companies in the UX index were up in the UAH terms, with the largest increase in prices observed for Alchevsk MP (9.0%), Enakievo MP (7.5%) and Ukrnafta (5.2%).

On the interbank exchange market, the USD/UAH spot rate was down by 5.9% with the closing price of 20.75 (mid price) on Wednesday according to Bloomberg. The official exchange rate reported by the NBU was 21.05.

Ukraine 5-year CDS were up by 4.1% on Wednesday.


NBU says first stage in banking reform to be completed by June 31, 2015 

NBU head Valeria Gontareva outlined the major landmarks for reform during a meeting with the heads of the largest banks of Ukraine. The reform consists of three stages, namely cleansing, rebooting, and sustainable growth. 

The first stage of the banking reform should be completed by June 31, 2015. By this time, the 35 largest banks which passed the 2014 stress testing should complete recapitalizing. At this stage, the banking system will get rid of banks, which mostly generated systemic risks. At the same time, the preconditions for rebooting of the banking sector stipulated by the second phase of the reform should have unfolded. 

The central bank has already made the necessary preparatory works for this stage, including draft legislative changes, strengthening of supervision and financial monitoring, as well as introduction of a “permanent supervision” procedure for the overall banking system. 

A one-year term is needed to fully reboot the system, according to the NBU Head. During this time, the Central Bank expects to gradually phase out the limitations imposed on individual deposits and FX operations. The NBU refinancing rate is also subject to downward review as soon as inflation returns to viable level. Corporate and risks management in the banking system will be strengthened too. Trust into the banking system is anticipated to resume as a result. The third stage supposes sustainable development of the banking system, where the regulator will fully stick to inflation targeting and flexible exchange rate policy. 

On a recent development, the Ukrainian president sent to the parliament two draft bills, intended to strengthen the institutional base of the NBU and its efficiency, in line with the clauses of the Extended Fund Facility program approved by the IMF. The draft will increase the independence of the National Bank and its management capacities, and align Ukraine’s central bank practice to that of the European Union.

Our view: 

The news is positive, and additionally enhanced by current positive developments on the FX and financial markets. Several large banks have already improved their financial health through large capital increases in 1Q2015, including Privatbank (by UAH 5 bn) and Ukrsotsbank (UAH 5.868 bn). A number of large banks have also been taken out of the market, including Delta-bank (4th bank by assets) and Nadra Bank (11th bank). The national bank notes a revival of interest in the Ukrainian banking system from the side of foreign investors.


MHP’s sales down by 8% y/y, EBITDA up by 42% y/y in 2014

Yesterday MHP, one of the leading agro-industrial companies in Ukraine focusing on the production of poultry and the cultivation of grain, announced its financial results for 2014. The company’s revenue was down by 8% y/y to USD 1,379 mn, mainly as a result of a decrease in grain prices in line with global trends, while production volumes increased across all segments. MHP reported an operating profit of USD 415 mn, up by 53% y/y, while the company’s EBITDA increased by 38% y/y to USD 555 mn. EBITDA margin improved by 14 pp to 40% on the back of lower production costs in USD terms. The company reported a net loss of USD 412 mn, which included USD 778 mn of non-cash FX losses (net income excluding FX loss: USD 365 mn).

MHP’s operating cash flow before working capital charges increased by 28% y/y to USD 516 mn, however net operating cash flow decreased by 23% y/y to USD 254 mn as a result of an increase in inventories and accounts receivable. The company’s capital expenditures dropped by 43% y/y to USD 127 mn as the company did not increase its land bank in 2014. MHP’s net cash flow from financing activities was negative at USD 175 mn due to a low amount of borrowing and a USD 100 mn cash outflow to pay out the dividends to shareholders. The company reported a cash balance of USD 99.6 mn, a 42% y/y decrease compared to 2013.

The Board of Directors of MHP approved the payment of an interim dividend of USD 0.47429 per share, equivalent to approximately USD 50 mn. The dividend will be paid on May 14, 2015 to shareholders of record as of May 8, 2015.

Our view:

The news is POSITIVE for MHP. The company managed to increase its profitability and achieve a substantial growth of sales volumes despite a turbulent year and a 48% devaluation of the local currency in 2014. MHP’s plans to increase its production capacity to 900,000 tonnes of poultry by 2019 and expand its land bank to around 450,000 hectares by 2016 should ensure the further organic growth of the company. We expect the company to retain its high operating margin in 2015, but slightly decrease revenues as a result of a further UAH devaluation in 1Q2015.


AutoKRAZ’s sales up by 63% y/y, EBITDA up by 2.5x in 2014

According to the financial statements of AutoKRAZ, the only Ukrainian producer of heavy trucks, disclosed on the website of Stock Market Infrastructure Development Agency of Ukraine (SMIDA), the company increased its sales by 63% y/y to USD 146 mn in 2014 as a result of a 57% y/y increase in the volume of sold vehicles (from 920 to 1,448 units) and a higher share of specialized military vehicles. At the same time, AutoKRAZ’s EBITDA grew by 2.5x to USD 44 mn, in line with our forecasts, on the back of lower production costs and SG&A expenses in USD terms. The company reported a net loss of USD 13 mn, which included USD 55 mn of non-cash FX losses (net income excluding FX losses: USD 42 mn). 

The company’s cash flow from operating activity was positive at USD 26 mn in 2014 as opposed to a net outflow of USD 32 mn in 2013. AutoKRAZ’s cash flow from investing activity was negative at USD 6 mn. The company reported a net cash flow from financing activity of USD -10 mn, however the amount of repaid loans and borrowings was approximately the same at UAH 2 bn (USD 95 mn using the current USD/UAH exchange rate), which could indicate that the company has successfully refinanced some of its banking debts. AutoKRAZ reported USD 9 mn of cash and cash equivalents as of end-December 2014 as compared to USD 2 mn in 2013.

Our view:

The company’s financial results were generally in line with our forecasts apart from net income, which was affected by the revaluation of obligations in foreign currency. The increased demand on the domestic market, caused by several large orders from the Ukrainian Army, and stable export volumes allowed the company to substantially increase its production volumes and sales. We expect AutoKRAZ to produce around 1,900 vehicles in 2015 and keep the revenue flat in USD terms, considering the recent devaluation of UAH (domestic sales currently account for about 50% of the company’s total sales). At the same time, we forecast the company’s EBITDA to increase by 2% to USD 45 mn in 2015, while net income should amount to USD 21 mn. 

We reiterate our BUY recommendation with a new target price of UAH 0.341 (USD 0.016) based on comparative valuation. You can read more about the company in our report dated February 12, 2015.



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