Research

The instability regarding currency exchange has become the main theme in Ukrainian life these days. Severe UAH devaluation has cast doubt on the ability of some Ukrainian companies to meet their FX obligations, as well as the ability of retail loan borrowers to repay their FX debts. Ukraine’s President Viktor Yuschenko, NBU Chairman of the Board Volodymyr Stelmakh and Ukraine’s Finance Minister Viktor Pynzenyk have made a series of important declarations about their intentions and further actions regarding the stabilization of the situation in the banking sector and the FX market. As well, Prime Minister Yulia Tymoshenko has said that she wants the President to resign the NBU’s Chairman of the Board, the respective draft legislation for which has already been registered in the Parliament. We would like to provide our view about the latest declarations made by authorities.

Belarus (literally translated as ‘White Rus’) is a landlocked economy in transition, located in Eastern Europe and neighboring Ukraine, the Russian Federation, Latvia, Lithuania and Poland.

Motor Sich is the only Ukrainian company and one of the world’s largest companies engaged in the development, production, testing and repair of modern aviation engines. The main driver of the company’s net revenue growth is the expected significant increase in helicopter and aircraft production in Russia, as well as the growth in demand for this equipment in other developing countries with which Russia has historically maintained close relationships. Despite Russian authorities’ announcement about starting-up the serial production of helicopter and missile engines in Russian plants, we are skeptical about the timely realization of these plans. We see the most probable and advantageous way for both parties is close cooperation in engine production.

The Ukrainian Government has approved the 2009 privatization list. The major names are the same again: fixed-line communication operator Ukrtelecom [UTEL], turbine producer Turboatom [TATM], ammonia and carbamide producer and operator of ammonia pipeline Odesa Portside Plant (OPP), 60% shares in each of four electricity generators (CEEN, DNEN, DOEN and ZAEN) and 25-27% shares in six electricity distributors (CHEON, LVON, ODEN, POON, PREN and Sumyoblenergo). The government didn’t specify in which way the privatization process will be arranged. It also hasn’t decided how much it expects to gain from the privatization of all the above-mentioned companies. However, it has already urged the State Property Committee of Ukraine to gain UAH 3 bln from privatization in the first quarter of 2009.

While Ukrainian equities, similar to most of their foreign counterparts, are demonstrating negative dynamics with the PFTS Index’s YTD fall of 76.9%, Ukrainian fixed income instruments demonstrate attractive investment opportunities for both domestic and foreign players. In this paper we present the top investment ideas about what we believe to be the most secure fixed income investments with the highest yield.

On the November 11, 2008 the Carlsberg Group – the holding company for Slavutych –held a conference on the latest tendencies on the Ukrainian beer market and released 9M2008 financial consolidated results for Slavutych and Lvivska Pyvovarnia. In spite of the slowdown of the Ukrainian beer market, Slavutych was able to increase its sales 48% YoY in value terms and expand its position on the domestic market, reaching 23.8% in 9 months 2008. We reiterate our BUY recommendation for Slavutych and put the target price of the company’s shares under review.

On November 12, 2008, 272.57 mln of shares of Khartsyzk Pipes & Tubes (10.49%) changed hands. Most remarkably, the deal went through the PFTS exchange, the price being UAH 2.12 (USD 0.367) per share, for the deal’s total of USD 100.15 mln. We argue that the deal was not technical, and instead likely indicates that Metinvest needs cash, likely for an acquisition. The shares may now serve as the collateral. Should more HRTR deals go through, it may indicate a complete and permanent sellout, but only with additional support for such a possibility.

A revision of Ukrnafta’s prospects incorporates sharply lower expectations, but nevertheless renders the stock underpriced.

Real estate developers face significant problems that are preventing them from completing existing projects. The demand for real estate has dropped significantly due to currency fluctuation in Aug-Nov and the fact that mortgage interest rates skyrocketed from 15.7% (Apr 2008) to an average of 23.2% in UAH and from 11.7% to 17.5% in USD. Prices on the secondary real estate market dropped USD 4% in Sep-Oct 2008. The recent slowdown of construction works and the increase in mortgage interest rates, along with the banking system crisis, has forced the Cabinet of Ministers to create a special working group to implement a number of measures towards reducing negative consequences in the construction sector, which could lead to a high unemployment rate and the real estate sector’s slowdown. Depending on the effectiveness of implementing the below-listed anti-crisis measures, we think that a real estate prices in Kyiv could fall, varying from a slight decrease of 10-15% in a best-case scenario up to 25-30% in a worst-case scenario. In Ukraine’s regions, they could drop 10-15% in the short term, with about a two-month time lag behind the capital. However, we view the construction sector as a far more attractive sector for long-term investment.

The President of Uzbekistan recently signed the “2009 Investment Program”. The overall 2009 CapEx will amount to USD 7.8 bln including USD 1.4 bln FDI. USD 0.9 bln FDI will be invested in the oil & gas sector. Implications of the 2009 investment program include: the building of new roads, bridges, gas and water pipelines; the building of new public health and educational structures and other establishments; the modernization of several industrial enterprises. As a result, we assume that particular companies will be the focus and benefit from the investments in Uzbekistan next year: