KRAZ: Full Throttle (February 11, 2015)

JSC “AutoKRAZ” is the only Ukrainian producer of heavy trucks. The company produces 34 basic models and more than 300 modifications, including dump trucks, platform trucks, chassis, timber lorries, road tractors, as well as specialized utility vehicles and military-purpose vehicles.  KRAZ is well-placed to benefit from the increased demand on military trucks and special-purpose vehicles from the Ukrainian Army in the next couple of years. Moreover, the company also has a promising JV with a Canadian armored vehicles manufacturer Streit Group, which resulted in new models “Shrek One”, “Cougar” and “Spartan” presented to the international public. The company has already increased its production by 50% in 2014, and we forecast it to grow by at least 35% in 2015. Furthermore, KRAZ currently trades at a 58-65% discount to the emerging market peers and global peers based on 2014e EV/EBITDA multiples, and at 94-95% discount based on 2014e P/E multiples due to its low market capitalization. Thus, we issue a BUY recommendation for the company’s shares with a target price of USD 0.017 (UAH 0.431), which corresponds to an upside of 288%. 

Ukrainian military orders to boost revenues in the next couple of years.  In 2014, the company produced 1,388 vehicles, up by 50% y/y, and sold 1,428 vehicles, with 50% of total sales going to the domestic market. Ukraine’s National Guard placed one of the biggest orders with the company (UAH 361 mn or USD 23 mn), and  we expect another order for 500+ vehicles from the Ukrainian Ministry of Defense this year. We estimate that the company will produce at least 1,800 vehicles in 2015, which is still lower than 4,000+ produced in 2007.

New JV with Streit Group a major upside for the company in future. Recently  the company presented a new multi-purpose armored vehicle “Shrek One”, produced in cooperation with Streit Group. In our view, it could attract the attention of international organizations such as the UN Peacekeeping Force. In April 2014, 10 special KrAZ armored vehicles were delivered to Dakar (Senegal).  

Export sales margins will improve due to the UAH devaluation. Aside from the military segment, last year’s confirmed orders included shipments to Azerbaijan, Turkmenistan, Egypt, Cuba, Kazakhstan, Senegal, Russia and the EU. Thus, due to the fact that the company supplies a majority of its trucks abroad (86% in 2013, and more than 50% in 2014), its export prices are fixed in hard currencies, while a large portion of production costs is linked to the UAH. 

High level of debt to put a strain on the company’s bottom line.  As of 31.12.2013, KRAZ had UAH 1.5 bn of long-term and short-term debt, and another UAH 530 mn in bank penalties on overdue loans. We believe that this level of debt is manageable, considering the increased amount of orders and future prospects of the company. Moreover, according to the information we have most of the debt is UAH-denominated, so it should go down significantly in USD terms due to the devaluation of UAH. Still, it will significantly decrease net income as a result of high finance costs.

Relative valuation suggests an upside of 288%, or a target price of USD 0.017 based on EV/EBITDA and P/E multiples of global peers in developed countries and emerging markets, and our estimates of the company’s EBITDA and net income in 2014-15.



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