Ukraine Markets Daily (April 3, 2017)

Market news

  • DTEK to cover up to 80% of Moldova’s electricity needs
  • Kernel sells Taman grain terminal (Russia), finalizes acquisition of Ukrainian Agrarian Investments
  • Metinvest reported 48.8% y/y revenue growth in January 2017

Market comment

The UX index increased by 1.1% on Friday and the PFTS index was down by 0.2 (in UAH terms). The WIG-Ukraine index was down by 0.1%. On the interbank exchange market, the USD/UAH was up by 0.3% to UAH 27.04 (mid price), according to Thomson Reuters. The official exchange rate reported by the NBU was UAH 27.02


DTEK to cover up to 80% of Moldova’s electricity needs

On April 1, 2017, the Moldovan Economy Ministry announced that DTEK Trading Company has signed an electricity delivery contract with JSC Energocom (Moldova), following a tender to supply electricity to this country for the period to March 31, 2018. DTEK together with Energocom offered a more attractive price (USD 50.2 per MWh) during the tender, compared with the Moldovan Regional Hydro-Electric Power Plant (Transdniestria) owned by the Russian Inter RAO, which has proposed a final price of USD 54.4 MWh, according to the information. After examining the bids of SA “Energocom” and the Cuciurgan Power Plant and as a result of negotiations held with these companies, on March 31 the regulated operators working on the Moldovan energy market - ICS Gas Natural Fenosa Furnizare Energie SRL, ICS Red Union Fenosa SA, Furnizare Energie Electrica Nord, IS Moldelectrica, SA Red Nord and SA Red Nord Vest – signed contracts for the supply of electricity for the mentioned period with SA “Energocom”, the statement reads. According to the ministry, the difference between the final prices proposed by the participants will allow saving about 300 million lei (c. USD 15 mn). The yearly power import of the country amounts to about 3 bn KWH, the Russian newspaper “Kommersant” reported, referring to insider sources, and DTEK is said to have signed a preliminary contract in this volume with Energocom ahead of the tender. Moldova covers up to 80% of its electricity consumption from imports, according to the report

Our view:

The news is POSITIVE, showing DTEK to successfully compete on foreign markets, diversifying its markets, and laying the prerequisites for export-led growth. Considering that DTEK virtually displaces the Russian-controlled monopolist power supplier located in the breakaway Moldovan republic of Transdnistria, the deal positions the Ukrainian company in the center of a grand geopolitical game, acting, among others as a close ally of the Ukrainian and Moldovan states. Nevertheless, we think that complying with the contract will be a huge challenge to DTEK, considering the loss of facilities in the breakaway territories of Donbas, potential restrictions on electricity exports due to issues of domestic power balances, as well as risks of additional costs ensuing from the recent development in the eastern Ukrainian conflict.


Kernel sells Taman grain terminal (Russia), finalizes acquisition of Ukrainian Agrarian Investments

Ukrainian agribusiness group Kernel is selling its 50% stake in the Taman grain terminal in Russia, according to the daily Kommersant newspaper, referring to Glencore Agri CEO Chris Mayoney. The adviser on the sale of Kernel's stake in the Terminal is Deutsche Bank, the newspaper reported. Swiss commodities trader Glencore, which owns the other half of the terminal, is seen as the most likely buyer, according to the report. Grain market experts estimate that Kernel's stake in the terminal is worth anywhere from USD 70 mn to USD 150 mn, and the deal should complete Kernel’s plans to completely pull out of Russia, stated last year. Meanwhile, kernel is near to finalize the acquisition of the Ukrainian Agrarian Investments, turning into the largest farmland owner of Ukraine, according to the Liga Business information agency, referring to investment bankers and market players with knowledge of the deal. The completion of the deal should bring Kernel’s land bank up to 700 thousands of hectares, according to experts’ assessments. The company is currently looking for the agreement of Ukraine’s Antimonopoly Committee, according to the report

Our view:

If confirmed, we consider the news to be POSITIVE, showing Kernel to be consistently consolidating its business, and sticking to a well-defined long-term business strategy. The disposal of the Terminal is implied by the new structure of Kernel’s business after the sales of its major production assets in Russia. We think that the overall move is dictated by the company’s willingness to diversify its business from the predominance of the oil segment, through expansion of its land and crop planting base, as well as to reduce its exposure to the Russian market


Metinvest reported 48.8% y/y revenue growth in January 2017

On March 31, 2017, Metinvest Group (Metinvest or the Group) disclosed its monthly report for January 2017, in line with the Scheme of Arrangement related to the restructuring of the company’s Eurobonds. Metinvest’s sale revenues increased by 48.8% y/y and amounted to USD 598 mn, as the revenues of the metal division grew by 48.9% y/y to USD 472 mn, whereas the revenue from the mining business was up by 48.2% y/y to USD 126 mn. In the metal division, the sales of finished products grew by 63% y/y to USD 326 mn, thanks most of all to growth in the sales of flat products by 61.0% y/y to USD 256 mn. The sales of long products generated a revenue of USD 69 mn (68.3% y/y). In the meantime, the segment of semi-finished products benefitted above all from sales expansion in slabs and square billets by 58.3% y/y to USD 38 mn and by 50.0% to USD 27 mn respectively. The sale of coke and chemical products fell by 24% y/y to USD 19 mn. The mining division gained support from a 51.6% y/y growth in the sales of iron ore products to USD 97 mn, thanks above all to growth in the sales of pellets by 178.9% y/y to USD 53 mn. The sale of coking coal concentrate fell by 37.5% y/y to USD 10 mn. The development left the company with an adjusted EBITDA of USD 155 mn, emerging from a negative EBITDA of USD 15 mn in January 2016. Metinvest reported a cash flow from operations before working capital changes equal to USD 120 mn (-USD 23 mn in January 2016), ending in a net cash from operating activities worth USD 35 mn (34.6% y/y). The company used USD 33 mn (120% y/y) in investing activities to purchase property, plant and equipment, while recording a net cash inflow of USD 19 mn on financing activities (compared with an outflow of USD 49 mn in January 2016). Metinvest reported an expansion of its balance of cash and cash equivalent by 79.7% y/y to USD 248 mn, against a total debt of USD 2980 mn (2.4% y/y)

Our view:

The monthly development is POSITIVE, especially considering the complications related to the company’s businesses in the war-torn eastern region of Ukraine. We see Metinvest to have benefitted from its business rebalancing strategy, implying a shift of the production mix towards premium pellets, and promoting production at the facilities less exposed to the eastern Ukrainian conflict, on background of the price rally on the global commodity markets. Meanwhile, the strong January results seems to uphold the company’s assertion about a negligible impact of the so-called nationalization of the assets located in the disputed areas of Donbas on its operations, allowing therefore expecting a further consolidation of Metinvest’s business following the recent restructuring of its Eurobonds