Ukraine Markets Daily (January 12, 2015)

Market comment

The UX Index was up by 0.9% in UAH terms on January 6, the first trading day in 2015 (the UX exchange had only one trading day last week), while the PFTS index was up by 1.7% on Tuesday, and traded flat on Thursday-Friday. Nine out of ten companies in the UX index were up in the UAH terms with the largest increase in prices observed for Enakievo MP (5.5%), Avdiivka coke (5.1%) and Alchevsk MP (2.8%).

 On the interbank exchange market, the USD/UAH spot rate declined by 0.8% over the past week with the closing price of 16.15 (mid price) on Friday, according to, while the average exchange rate reported by the NBU was 15.75.

Ukraine 5-year CDS were up by 9.6% on Friday.

Market news

  • Germany to provide loan guarantees to Ukraine in the amount of EUR 500 mn 
  • Ferrexpo’s iron ore production up 2% to 11.0 mt in 2014
  • JKX to suspend its CAPEX program for 2015
  • AutoKRAZ’s production up by 55% in 2014


Germany to provide loan guarantees to Ukraine in the amount of EUR 500 mn

According to the statement on the official website of the Ukrainian government, a joint declaration was signed to provide EUR 500 mn of loan guarantees to Ukraine during the official visit to Berlin on January 7, 2015. The declaration was signed by the Minister of Economic Development and Trade of Ukraine Aivaras Abromavicius and the State Secretary of the Federal Ministry of Economy of Germany Mathias Mahnik.

As was stated by Ukraine’s PM Arseniy Yatsenyuk, the priority use of the attracted funds will be the rebuilding of infrastructure in the Eastern regions of Ukraine. According to him, the loan will be granted for a period of 20 years at a very low interest rate. Currently the Ukrainian PM is on a two-day trip to Berlin at the invitation of Chancellor Angela Merkel, along with the Minister of Finance Natalie Jaresko, the Minister of Economic Development and Trade  Aivaras Abromavicius, the Minister of Foreign Affairs Pavlo Klimkin and the Chairman of the Board of “Naftogaz of Ukraine” Andriy Kobolev.

It is also worth noting that the IMF mission arrived in Kyiv on January 8, 2015, and is now working with the Ukrainian government. According to the IMF, the mission is expected to conclude its work by the end of January. The Ukrainian government asked the IMF to consider the revision of the program in the direction of increasing funding or rescheduling obtaining of credit tranches, so that the first tranche in 2015 would amount to USD 5 bn instead of the previously expected USD 2.7 bn.

Our view:

The news is POSITIVE for the Ukrainian economy. The continued support of Ukraine by its European partners is extremely important as the country’s foreign reserves are at a dangerously low level (less than USD 10 bn as of end-November). The provision of the loan guarantees by Germany will allow the Ukrainian government to fund the restoration of railway tracks, bridges, roads and community buildings, simultaneously improving the state of foreign reserves. However, we expect that the IMF’s decision on the next tranche will be highly dependent on the willingness of the Ukrainian government to show meaningful progress on the economic reforms implementation.

In 2014, Ukraine received EUR 1.4 bn of macro-financial assistance from the EU (MFA program), as well as USD 4.6 bn under the stand-by program of the IMF (out of the total approved amount of USD 17 bn). Another USD 1.3 bn in loans was disbursed to Ukraine by the World Bank to support the budget and finance the reform of the financial sector (DPL program), while the US provided loan guarantees in the amount of USD 1 bn.  


Ferrexpo’s iron ore production up 2% to 11.0 mt in 2014

Ferrexpo [FXPO LN], a Ukrainian iron ore producer and exporter, released its operational results for 4Q2014. The company reported that its production of pellets was 11,021 ths tonnes in 2014, up 2% y/y. According to Ferrexpo, 144 ths tonnes of pellet production were lost due to electricity shortfalls in December 2014. 

The company produced 5,803 ths tonnes of 65% Fe pellets in 2014 (53% of total production), up by 16% y/y. Conversely, the production of 62% Fe pellets was down by 10% y/y to 5,218 ths tonnes, which was due to the company’s quality upgrade program. 

Our view:

The news is moderately NEGATIVE for the company. The annual production of pellets was in line with our previous forecasts (11.04 mt), albeit it was still lower than was planned by the company before (12 mt). The continuing decline in iron ore prices (62% Fe China iron ore price has fallen by 10% q/q to USD 70.5/t) have already led to the company’s margins being significantly lower in 2H2014, despite the positive effect of local currency devaluation on costs. We estimate the current operating margin of the company to be around 30% in 1Q2015 vs. 36% in 1H2014. However, we expect that Ferrexpo might improve profitability by fully conversing to the production of 65% Fe pellets, which are priced with a premium.

Ferrexpo currently trades at 2015 EV/EBITDA multiple of 2.2x and 2015 P/E multiple of 4.7x vs. global EV/EBITDA multiples of 4.9x and P/E multiples of 9.4x according to data compiled by Bloomberg.


JKX to suspend its CAPEX program in Ukraine for 2015

According to the recent statement of JKX Oil & Gas [JKX LN], an international oil and gas producer with assets in Ukraine, the combination of Ukrainian Government-imposed restrictions on selling its gas to industrial clients and high rate of gas production tax (55% of sale price for gas wells of depth less than 5,000 meters, and 28% for gas wells of depth greater than 5,000 meters) requires the company to suspend its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve. 

The company has reported that it sold approximately 80% of its December gas production capacity to industrial customers, with only 20% of its gas production capacity shut-in during the month after the announcement of sales restrictions imposed on private gas producers by the Ukrainian Government Decree of 29 November 2014. Furthermore, JKX reported that it anticipates that gas sales may reduce to less than 50% of its production capacity in Ukraine whilst the Decree remains in force and will necessitate shut-in of a proportionate level of gas production.

JKX also announced that test results from well E-303 in its Elizavetovskoye field were successful. The co-mingled production from the sandstone and carbonate was 5.21 MMcfd of gas and 18 bpd of condensate, which brought about an overall cash generative well result.

Our view:

The news is moderately NEGATIVE for the company. The prolongation of high oil and gas royalty rates on an indefinite term, which was incorporated in the amendments to the Tax Code recently passed by the Ukrainian government, creates unfavorable conditions for gas producers. The decrease in profitability of the industry, caused by the new tax changes, strips producers of cash needed to invest into drilling and exploration, which is essential for maintaining the production levels of oil and gas. Moreover the tax increase is being imposed amidst rapidly falling oil prices. Thus, we retain a negative overall outlook on the industry in 2015.

JKX currently trades at 2015 EV/EBITDA multiple of 0.6x and 2015 P/E multiple of 1.0x vs. global EV/EBITDA multiples of 5.2x and P/E multiples of 17.3x according to data compiled by Bloomberg.


AutoKRAZ’s production up by 55% in 2014

According to the press-release of AutoKRAZ [KRAZ UK], the leading Ukrainian producer of heavy-duty trucks, the company increased production by 49% y/y to 1,386 vehicles in 2014, and sold 1,428 vehicles (up more than 55% y/y). As was stated by AutoKRAZ, the share of platform trucks in the total output amounted to 38%, chassis - 47%, specialized vehicles - 10%, dump trucks - 2%, road tractors - 3%. Furthermore, the company also noted an increase in the production of other segments. In particular, spare parts output grew by 12% y/y to UAH 53.4 mn, casting - by 15% y/y to UAH 65 mn.

In December 2014, the company produced 168 vehicles, which was 50% higher than in December 2013 and 56% higher than in November 2013. However, compared to October 2014, the company’s production volume in the last month of 2014 was down by 22%.

Our view:

The news is moderately POSITIVE for AutoKRAZ. The company finished the past year on a high note, showing a substantial increase in both sales and production volumes. Despite lower production volumes in November-December, overall output in 2H2014 was almost twice as much as in 1H2014 (907 vs. 479). We expect that this trend will continue, and see a potential output increase of 30-50% for AutoKRAZ in 2015, considering that UAH 20 bn (USD 1.26 bn) is expected to be spent on re-equipment of the Ukrainian military forces this year (more than 4x higher than in 2014).



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