Consumer goods

The Ukrainian Parliament has endorsed legislation on increasing the excise tax on beer by a total of 58.1% in 2009. The increase will be implemented in two steps. Beginning January 1, 2009, the excise tax will be increased to USD 0.05 (UAH 0.39) and then subsequently, in July 2009, will finally be raised to USD 0.065 (UAH 0.49).

Our view: The government is exploiting its alternatives to fill the state budget gap through an increase in the excise tax on beer. However, this is still below the excise tax level imposed in Russia and Poland, which is USD 0.12 and USD 0.28, respectively.

In previous years, beer producers used to pass the excise tax increase in the cost of the end product. In our view, intense competition within the industry, in synergy with the current economic downturn and the further rise of excise taxes, will squeeze operating margins. This increase will knock small and some medium-sized breweries out of competition, providing M&A targets for top domestic players.

The Kyiv Cardboard Paper Mill [KIKP UZ, N/R] in Obukhiv (Kyiv Region) – a leading Ukrainian pulp and paper producer – has released results for the first eleven months of 2008. From January to November 2008, the company increased production by 36.7% YoY (to UAH 1.029 bln), according to Interfax-Ukraine.

Its growth in output was due to an increase in production of almost all types of the mill`s products. The most quickly growing product is corrugated boxes, which rose by 23.6% (to 122.89 mln sq.m.). In terms of corrugated boxes, the Kyiv mill is the second biggest in Ukraine, second to the Rubizhne Cardboard Mill (see today’s Sokrat daily for news on the Rubizhne Mill).

Apart from corrugated box production (250 mln sq.m. per year), its cardboard production facilities have an annual capacity of 200,000 metric tons and paper production facilities have an annual capacity of 60,000 metric tons. The mill exports its products to the CIS, Iran, Turkey, former Yugoslavia, Hungary, Bulgaria and the Netherlands.

In 2007, the company reported a net profit of UAH 70.94 mln, which is 12% (or UAH 80.448 mln) less YoY. Its net sales revenues in 2007 were UAH 850.675 mln; an increase of 21.4% YoY. The Kyiv Cardboard Paper Mill shareholder structure is as follows: 40.18% is owned by the Austrian Pulp Mill Holding GmbH, 24.99% by the Dutch company Dollard Holding B.V., 13.44% by the German company Jacob Jurgenson Papier und Cellstoff, and 12.23% is owned by the Kyiv Cardboard Mill Trade House. Another 9.16% is free float.

Our view: This news is POSITIVE for the Kyiv Cardboard Paper Mill. We previously thought that the pulp and paper sector in Ukraine, and especially those companies that are working with the consumer sector, are more or less safe from feeling the direct effects of the economic crisis in Ukraine; However, it now appears that the crisis is impacting on all industries. We think the company’s positive results in comparison to major competitors in this industry is connected with the good location of KIKP, which is situated near the Ukrainian capital, where a high demand for the mill’s products is concentrated (See our other news in today’s daily about two other competitors – the Rubizhnoye and Zhydachiv Mills – operating in this sector).

Nevertheless, the UkrPaper association of pulp-and-paper industry companies has expressed anxiety about the falling demand for corrugated cardboard due to the food industry’s cut in production. While enterprises in the pulp-and-paper industry are functioning without essentially cutting production volume and personnel, a number of disturbing tendencies have surfaced. First, output has fallen in the food industry (by 20% in October -November), which is worrisome since the food industry consumes about 80% of homemade cardboard for packing. The second is the slump in prices within the pulp & paper industry.

The UkrPaper Association, which unites 33 pulp & paper producers, has lobbied the Ukrainian Government to support the sector and give timely refunds of VAT, which has become a critical since the state owes the pulp-and-paper industry companies more than UAH 100 mln in VAT refunds. UkrPaper has asked Prime Minister Yulia Tymoshenko to resume using tax anticipation bills and to take a number of other measures to support the sector, including exempting pulp & paper producers from paying target markup for gas, awarding a six-month grace period for paying tax on profits, introducing a moratorium on electricity prices increases for the industry, lowering rental prices for using property complexes of state-run paper enterprises to the 2006 level, securing affordable credit resources for the industry, and cutting taxes (VAT, profit tax).

We hold a positive view about KIKP, since it has implemented new European standards and received new certifications for their products, which will allow the company to increase exports of their products to Western Europe and also be competitive with foreign players on the local market. The mill’s financials are looking very attractive for investors; however, the availability of its shares on the market is negligible, which means that the company is not liquid on the PFTS.

The Luhansk-based Rubizhnoye Cardboard and Packaging Mill one of Ukraine's largest cardboard packaging producers – cut corrugated cardboard production in January-November 2008 cut production by 20.2% compared to the same period in 2007 (to 167.135 mln sq.m.).

In November, the mill cut its output of corrugated cardboard boxes by 26% relative to October (to 12.225 mln sq.m.). According to Interfax, in 11M2008, the production of corrugated cardboard components (cardboard and fluting) fell 10.2% (to 163.887 thsd metric tons). Despite this drop in production, the mill is still the leader in Ukraine in terms of cardboard box production. The value of the mill's output in 11M2008 grew 9.2% YoY (to UAH 561.9 mln).

Rubizhnoye’s clients are concentrated in consumer goods such as beverages, sweets, cooking oil, fruits and vegetables. Among the mill’s largest clients are Sandora Juice, Kraft Foods Ukraine, Nestle, Roshen, Uniplast, the Dnipropetrovsk Cooking Oil Refinery, Philip Morris, and Procter & Gamble. A major part of the mills’ products are consumed on the domestic market.

Our view: We think this news is certainly NEGATIVE for the Rubizhnoye Cardboard & Packaging Mill. The company has a broad pool of customers including multinational corporations from the consumer goods sector, which means both the good quality and reputation of RKTK among its clients. We think the economic crisis is influencing consumers, especially in terms of demand in the premium segment. We feel the production drop is connected to a decrease in clients’ orders. The results of these 11 months are also negative for the company in the lead-up to the holidays. While the fourth quarter is traditionally considered to be a more profitable quarter for cardboard producers in comparison to the months before that, that is not the case this time around.

The Zhydachiv Pulp and Paper Plant [ZCPK UZ, N/R] – the monopoly producer of newsprint in Ukraine, and located in the Lviv Region – recorded a 16.7% increase in production (to UAH 420.294 mln) YoY for the period January-November 2008. These figures were released by the plant’s owner Osnova-Papir.

In that time, cardboard packaging output rose 0.7% (to 52.130 thsd metric tons), corrugated cardboard production was up 5.1% (to 38.36 mln sq.m.). Cardboard production fell by 9% (to 102.774 thsd metric tons), including packaging cardboard, whose output dropped 9.5% (to 92.011 thsd metric tons), and box cardboard, whose output grew by 4.1% (to 10.76 thsd metric tons).

The Osnova-Papir company also stated that its other property – the Izmail Pulp and Cardboard Mill – increased corrugated box output by 13.1% YoY (to 45.867 mln sq.m.) in January-October. The value of the mill`s total output grew 29% (to UAH 108.29 mln). This mill produces corrugated cardboard components and containers, which are bought by large companies.

Our view: These results are POSITIVE for both the Zhydachiv Pulp and Paper Plant and the Izmail Pulp and Cardboard Mill, in addition to benefiting their parent company, Osnova- Papir. A major part of the mills’ products are consumed on the domestic market in Ukraine.

We think that the pulp and paper sector, and especially companies that work with the consumer sector, are more or less safe from the economic crisis in Ukraine. The main clients of the two mills are concentrated in the consumer goods sector and healthcare, including producers of vodka, confectionary items, toothpaste, fruits and vegetables, etc. For instance, among the largest clients of the Zhydachiv Pulp and Paper Plant for corrugated packaging are Svitoch, Roshen, and the VolynHolding (Torchyn-Product). Key buyers of its newsprint include Presa Ukrainy, Kyivska Pravda, Zarya, Tavryda and Express.

The availability of this company’s shares on the market is negligible, which means that the company is not liquid on the PFTS. (See our other news in today’s daily about two other companies operating in this sector in Ukraine – the Rubizhne Cardboard Packaging Mill and the Kyiv Cardboard Paper Mill).

Shostka [SHMK UZ, N/R], a Ukrainian dairy producer, is going to consider a private additional share issue of 0.4 mln ordinary shares at a par value of USD 2.4 (UAH 19.21) and the injection of a USD 0.9 mln (UAH 7.4 mln) into its Statutory Fund, according to the Ukrainian News agency. The final decision is to be taken by Shostka’s shareholders at their AGM on February 3, 2009.

Our view: We believe that the main reason behind this additional share issue is that company is trying to prop up its working capital with additional funds. The company is mainly concentrated on the domestic market, which is affected by the current economic downturn, with trade receivables accounts having slipped 22% YoY in 3Q08. Approximately 20% of Shostka’s production (mainly cheese) is exported to Russia, where we see a tendency towards a decrease in cheese consumption as well.

We expect the company’s cash flow will be squeezed in 2009. Considering the problems with the liquidity of Ukrainian banks, the easiest way to attract financial funds in the current situation is via an additional share issue.