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Research

Since the very beginning of equity trading in Ukraine Sokrat has built a strong research team of professional and experienced analysts who provide insightful, objective and action-oriented information for financial professionals and self-directed investors, so that they may make informed investment decisions.

Sokrat Research includes coverage of both equity research on particular companies, as well as on strategic macroeconomic and political issues in Ukraine and the CIS.

Research

Metals and Mining
September 3, 2010Ukraine’s steel — waiting for justice

Recent stabilization in the global environment should make an impact on the domestic steel sector. Less negative news on the property market in China and positive movements regarding European debt concerns give domestic steel-makers a chance to end the year not so bad. A decline in the price of iron ore in China, after some capacities were withdrawn from the market, should make the input and output prices of steelmakers more balanced, while an expected global restocking cycle should fuel demand and result in an increase in output. Despite some livening in 3-4Q10, we do not regard domestic steelmaking companies as the best investment targets due to expected weak financial results because of the deterioration of steel markets and outstripping growth in raw materials for most of the year.

Agriculture
September 3, 2010Landkom — Smaller yields favor recommendation downgrade

Landkom International PLC is a Ukrainian producer of agricultural commodities including rapeseed, wheat, barley, sunflower, corn and soybeans. Recently, it published rapeseed harvest results, which were lower than expected. The reason for this decline was adverse weather conditions. We believe that Landkom will not be able to increase its crop yield by year end and thus we downgrade our forecasts on the other grain yields. Currently, its stock trades near its fair value and our aggregate valuation implies just a modest upside of 7%. We recommend HOLDing the stock with the target price of USD 0.16.

Banking
August 17, 2010Banking sector update. Mildly positive 1H2010

Slow recovery, compared to pre-crisis levels. The Ukrainian banking system reported a net loss of UAH 8.3 bln in 1H10 (compared to UAH 38.5 bln in 2009), thus providing –13.5% ROE. Net spread was reduced by 0.9 p.p. to 4.3%, which is also depicted in the lower net interest margin (down by 0.8 p.p. to 5.4%). In 2H10, the net spread will remain around 4.5% and the net interest margin will rebound to 5.6%. Loan loss reserves (LLR) continue to grow and currently are 17.6% of gross loans, which is the main cause of the net loss in 1H10. If the world economy continues to be under pressure in 2H10, LLR may reach 18.5% and the net loss will remain at current levels. Interestingly enough, banks are gradually increasing investments in securities, whose share in assets grew to 7% in 1H10, up from 4.5% (during the last 4 years). This dynamic is positive and indicates that banks have started to look for ways to diversify their income sources.

Machinery
August 16, 2010LUAZ — Stuck In a Market Jam

In 2010, Bogdan Motors, a member of Bogdan Corporation (the second largest Ukrainian automobile producer), will only begin its slow recovery after a major hit inflicted by the financial crisis. The company’s net sales are poised to gain a mere 2% this year over 2009, yet this will account for only 12% of its pre-crisis 2008 sales. Although the Company is claiming to turn profitable in 2010, we retain a more conservative forecast of a net loss of USD 23 mln, based on its net loss of USD 11 mln posted for the 1Q2010. During the past two years, Bogdan absorbed a huge debt of USD 353 mln, and interest payments will erode its bottom line for 2010 and 2011. Bogdan’s net margin will probably not return to a green zone until 2012. The stock’s EV/EBITDA and P/E multiples are of no relevance due to Bogdan’s oversized debt and forecasted net loss in 2010-11, while its 24% discount to emerging market peers in 2011 P/Sales is unwarranted. SELL.

Banking
July 21, 2010Raiffeisen Aval – Profitable, Yet Too Expensive

Raiffeisen Bank Aval shows recovery in financial results, strong interest margins and capital base. At the same time, the stock is traded with a 36% premium compared to its peers, which can be explained only by deferred robust growth in 2012-13. But these types of expectations are too cautious and we suggest a SELLing recommendation, expecting the stock to go lower in order to reduce its unjustified premium.

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Daily monitor

Metals and Mining
September 3, 2010Ferrexpo pellet output down 8.7% MoM in August

Ferrexpo [FXPO LN], Ukraine’s second-largest iron ore producer—and which controls Poltava GOK [PGOK UZ]—decreased pellet output by 8.7% MoM in August to 787,000 tonnes (+15.5% in 8M10). These results were published by the Company.

Metals and Mining
September 3, 2010Ukraine increased coke output in August by 7.4% MoM

Domestic producers showed increased coke output in August by 7.4% MoM to 1.5 mln tonnes (+7.4% in 8M10), Ukrcoke reported.

Economy and politics
September 3, 2010Ukraine’s governmental debt increased to 33.5% of GDP in July

Total governmental debt increased by 6.3% m/m, to USD 45.9 bln, in July 2010. Direct governmental debt increased by 5% m/m, to USD 34.9 bln, and government-guaranteed debt grew by 10% m/m to reach USD 12 bln.

Banking
September 3, 201025%of government share in banks will be sold

The Ukrainian Cabinet of Ministers has developed a project that proposes a sale in the market of 25% of the government share of financial institutions that experienced government recapitalization. During the month, the plan is expected to be approved or rejected.

Machinery
September 2, 2010SPFU offers termination of the Luganskteplovoz acquisition contract to TMH

The State Property Fund of Ukraine presented Bryansk Machine Building Plant (a member of Transmashholding, Russia) with an offer to terminate their contract on acquisition of 76% share in Luganskteplovoz [LTPL UZ] by agreement between the parties. Bryansk Machine Building Plant was supposed to pay 100% of the share price by August 31 2010, which did not happen. Now the company will have 20 days to terminate the contract or to pay the full contract price, including the competition pledge and fines, at an overall cost of USD 15.7mln.

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