Ukraine Markets Daily (June 9, 2015)

Market news

  • The Finance Ministry reported on the results of the first six months of its work 
  • Serinus’ Ukrainian subsidiary had been granted a new concession in Kharkiv region 
  • AEG’s sales up 184% y/y to USD 23 mn in 2014

Market comment

The UX Index was up by 1.8% in UAH terms on Monday, and up by 1.4% in the US dollar. The PFTS index was up by 1.2% in UAH terms. All ten companies in the UX index were up in UAH terms, with the largest increase recorded for Enakievo MP (6.6%), Alchevsk MP (3.6%) and Bank Aval (2.6%).

On the interbank exchange market, the USD/UAH was up by 0.4% to 21.13 (mid price) on Monday, according to Bloomberg. The official exchange rate reported by the NBU was UAH 21.10.

Ukraine 5-year CDS grew by 0.8% on Monday.


The Finance Ministry reported on the results of the first six months of its work

The Finance Ministry reported about the results of its activities during the first six months since the appointment of the new government in December 2014. According to the report, during this period the Ministry managed to secure the stability and regular functioning of the financial system, stabilized and rehabilitated the public finances, and improved the management of public companies and the Ministry itself. 

In securing the stability of the financial system, the Ministry notes the successes in securing the IMF agreement to extend the USD 17.5 bn four-year EFF facilities to Ukraine and in obtaining USD 7.5 bn financial commitments from other bilateral and multilateral sources, to be effective in the next two years.  The launch of the debt restructuring negotiations with the holders of Ukrainian Eurobonds is also reported among the achievements of the Ministry in this field. And lastly, the Ministry has been active in stabilizing the banking sector and improving the functioning of state-owned banks, namely taking the decision to sell the state-owned Ukrainian Bank for Reconstruction and Development, and merging the Kyiv Bank with Ukrgazbank.

In stabilizing and rehabilitating the public finances, the Ministry singles out the adoption of a more balanced state budget for 2015 with a 4.1% target deficit, fiscal decentralization in favor of local governments, as well as the simplification of the tax system through reduction of the number of taxes from 22 to 11 and through expanding the taxable base. 

A landmark in improving the management of public companies and the Ministry itself is related to the involvement of high-profiled foreign experts from the USA, Canada, Germany, and Slovenia in the work of the Ministry, as advisers in the reform of the Ministry and public finances, and in tax policy.

Our view:

The news is positive, marking a departure from past and transition to a new practice of open, transparent, and accountable public management. In our opinion the Finance Ministry has become a consistent provider of reforms in the country, and instrumental in securing financial and other international support to the country’s economic rehabilitation. We should note, however, the failures of the Ministry to work out a mutually suitable debt negotiation approach with Ukraine’s sovereign debt holders. Some tax initiatives of the Ministry were deemed highly controversial and became subject to urgent revision as well. Among others, this includes the issues of royalty rates, introduction of additional import charges, and the calculation of tariffs on utilities for households.


Serinus’ Ukrainian subsidiary had been granted a new concession in Kharkiv region 

According to the press-release of Serinus [SEN PW], an international oil&gas exploration and production company with assets in Ukraine, Algeria and Romania, the company’s 70% owned subsidiary Kub-Gas LLC had been granted a new concession in Eastern Ukraine. The West Olgovskoye block, located in the Kharkiv region (not affected by the conflict in the Donbass region) was awarded to KUB-Gas Borova LLC (a newly incorporated subsidiary of KUB-Gas) by way of a Special Permit by the State Service of Geology and Minerals of Ukraine. 

The block immediately offsets the Olgovskoye and North Makeevskoye licences currently owned and operated by KUB Gas and covers an area of 449 km2. The existing Druzhelyubovskoe field is located in the immediate vicinity of the block, and  is believed to have produced over 180 Bcf of gas (starting from 1979) from the same Moscovian and Bashkirian zones that produce in KUB-Gas’ Olgovskoye and Makeevskoye fields. 

According to Serinus, the term of this new Special Permit is for 20 years with the right to a 20 year extension, during which KUB-Gas will be allowed to conduct both exploration and production activities. There are work commitments of UAH 202 mn (USD 10 mn), which include geological studies, seismic acquisition, processing and interpretation, and drilling and development (almost 90% of the total required spending is scheduled for between 2018 and 2020). Serinus notes that it will immediately commense geological studies and interpretation, and KUB-Gas anticipates mobilizing a seismic crew for new data acquisition in 4Q2015.

Our view:

The news is POSITIVE for Serinus and Cub Energy (which has a 30% working interest in Kub-Gas LLC), as it expands the companies’ land base in Ukraine and provides several exploration and development opportunities, while location of the new concession is less risky than the existing operating fields of Kub-Gas, situated some 100 km from the frontlines.


AEG’s sales up 184% y/y to USD 23 mn in 2014

Yesterday Active Energy Group [AEG LN], an international supplier of wood chip and forestry and natural resources development company, announced its financial results for 2014. The company’s revenue was up by 184% y/y to USD 23 mn as a result of a significant increase in shipping volumes of wood chip for MDF (+126% y/y to 154,000 tonnes). The company reported an operating loss of USD 1.3 mn in 2014 (compared to a loss of USD 3.4 mn in 2013), however excluding the non-cash and non-recurring items AEG’s adjusted EBITDA amounted to USD 0.36 mn. 

AEG reported that it had spent USD 0.4 mn on research and development of the new pelleting technology, and invested some USD 0.8 mn in the development of its JV project in Canada (with the main purpose to commercialize 256,000 ha of native-owned lands containing valuable forestry resources), in which the company has a 45% share. In its earlier announcements, the company reported that it had received three alternative investment offers totalling over USD 300 mn. As was stated in the 2014 report, one of those potential investors was selected, and a Term Sheet was signed. An exclusive due diligence period was granted within that Term Sheet, and the due diligence process is at an advanced stage.

However, AEG also noted that it had to assign the balance of its loss-making contract to supply wood chip for energy generation to an Italian customer to an unrelated third party (the company reported a loss of USD 0.25 mn related to the termination of this contract in 2014). 

According to the company, in 4Q2014 it secured several high-volume contracts to supply up to 600,000 tonnes of wood chip for MDF in 2015. To achieve such an increase in shipment volumes, AEG has secured long‐term charter shipping arrangements and is in the process of installing additional processing equipment (for which it plans to spend around USD 2 mn in 2015) in its Yuzhny port facilities that are scheduled to be operational in 2H2015. This will allow the company to increase the wood chip processing capacity to 1,280,000 tonnes p.a. from 313,500 tonnes p.a., and extend the product offering to include the softwood wood chip.

Additionally, the company reported that it had renegotiated the terms of its debt facility to USD 1 per ton of shipped wood chip from March 2015 and onwards (compared to USD 5 per ton in 2H2014). AEG reported a total debt of USD 6.1 mn (excluding USD 1.6 mn of convertible debt) and a cash balance of USD 3.2 mn as of end-December 2014. 

Our view:

The news is moderately POSITIVE for the company. It seems that the company is on track to securing the funding for its JV in Canada (which is the main value driver), while simultaneously increasing the shipment volumes of wood chip to Turkey. In its 2014 report AEG mentioned that the segment’s margins did not improve as anticipated due to the devaluation of UAH, however it is too early to estimate the effects until the 1H2015 report is released. Additionally, we note that as of this date, no specifics had been disclosed as to the commercialization plan for the JV (whether the forestry assets will be developed by the JV itself, or instead commercialized through the sale of tree farming permits). Thus, for the time being, we reiterate our BUY recommendation for AEG’s shares with the target price of GBp 17.35 per share.



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