[SELL] Avangard: The struggle continues (June 4, 2015)

The recent figures for 1Q2015 showed that Avangard still experiences the consequences of the conflict in Eastern Ukraine, which brought the company’s laying hens flock down by  37% y/y, and  has not regained stability.  Furthermore, Avangard’s exports were greatly affected by the current situation in Middle East, which resulted in lower demand on dry egg products from countries such as Jordan. The company reported a  52% y/y drop in revenue to USD 72 mn and a 90% y/y drop in EBITDA to USD 6 mn in 1Q2015 (USD 17 mn excluding non-recurring items), while Avangard’s net loss for the quarter amounted to USD 52 mn.

[BUY] AutoKRAZ, revision of target price (April 30, 2015)

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). 

Avangard: Fighting the Tide (April 16, 2015)

Avangard posted a 37% drop in revenues and a 49% drop in EBITDA for 2014. The key drivers for this were the negative effect of the UAH devaluation on sales (while average shell egg prices grew by 12% in UAH terms, in USD terms they fell by 24%) and the decrease in production capacity as a result of the annexation of Crimea and active military clashes in Eastern Ukraine (laying hens’ flock declined by 31% y/y to 18.6 mn as of end-December, which caused a 10% drop in production of shell eggs). The combination of the aforementioned factors with the declining prices of dry egg products and the conflict in Middle East, which affected Avangard’s export sales to the MENA region, resulted in a really bad 4Q2014: the company’s production of shell eggs dropped by 37% y/y, while 4Q2014 EBITDA amounted to just USD 24 mn, a 76% y/y drop compared to 4Q2013. On the positive site, the company’s export share in 2014 amounted to 37%, 8pp higher than in 2013, while Avangard recorded a five-fold increase in sales of its own packaged eggs brand ‘Kvochka’ (although it still comprised only 5% of egg sales). Thus, while the company now looks much “smaller” in terms of production volumes and sales, we are moderately positive on the future prospects of Avangard, reiterating our BUY recommendation with a new target price of USD 4.52 per GDR, or a 61% upside to the current price of USD 2.80. 

Cub Energy: Stepping on the Gas (April 6, 2015)

Cub Energy is an upstream oil & gas producer with 4.8 MMboe of 2P reserves in two prospective gas basins in Western and Eastern Ukraine, operated through the company’s fully-owned subsidiary Tysagaz and 30% WI in Kub-Gas (the other 70% belongs to Serinus). The company uses its western expertise to develop under-explored basins, and has managed to quadruple its production over the past four years (from 450 boepd in 2011 to 2,112 boepd in 4Q2014), climbing up to 7th place in the top-10 natural gas producers in Ukraine. Due to close proximity of Cub’s assets to the current area of active hostilities in Eastern Ukraine, the company’s shares have declined by 85% in 2014, reflecting investors’ concerns about the security situation and overall stability in Ukraine. The share price also reacted to the tax rate hike in August 2014, which brought gas royalty rates to 55% from 28%, which pressured the company’s netbacks. In our view, the government will have to review the royalty rates soon unless it wants to deal with a major drop in the production of natural gas, which gives us a reason for cautious optimism. Furthermore, Cub’s gas producing assets are located some 100 km away from the conflict area, behind the defensive lines of the Ukrainian military. Thus, considering the risks attached to such an investment, we issue a SPECULATIVE BUY recommendation for the company on the basis of our conservative NAV valuation with a target price of CAD 0.042, or a 109% upside to the current price of CAD 0.02.

Active Energy Group: Powering Ahead (March 24, 2015)

On July 18, 2014 Active Energy Group Plc (AEG) announced that it had entered into a landmark joint venture agreement to commercialize over 250,000 hectares (ha) of land in Canada, which contain at least 108,000 ha of mature timber as well as other natural resources.  Since that date, the company’s stock has gone up by 75% to USD 0.076 per share, implying a market capitalization of just USD 42 million.

However, in our view AEG’s stock price is largely undervalued, considering that the company can net as much as USD 130 million in value over the next few years from its JV project by realizing long-term Tree Farming Permits to timber investment management companies (TIMOs). At the KAQUO Métis Settlements Economic Development Summit, held on 27 January 2015, KAQUO commented that it had received three non-binding, conditional offers, in aggregate amounting to USD 300 million subject to further due diligence, which demonstrates a high level of interest by investors in the asset. Moreover, with the Canadian project, the company has significantly changed its business and risk profile – expanding from its original business of wood chip manufacturing exclusively in Ukraine to timberland and natural resources development and management in Canada. 

Thus, given the joint venture value and the considerable international growth opportunities in the company’s other market sectors (wood chip for MDF/OSB panel board manufacturing, wood chip for power generation, and biomass fuel technologies), we issue a BUY recommendation for the stock with a target price of USD 0.260 per share, implying 244% upside.