Research

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 A decline in the price of iron ore in China, after some capacities were withdrawn from the market, should make the input and output prices of steelmakers more balanced, while an expected global restocking cycle should fuel demand and result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.

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.

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.

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.

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.

Stakhaniv Railcar Works, which is a member of AutoKrAZ Holding and is controlled by the Finance & Credit Group, is the largest Ukrainian producer of gondolas and hoppers, the most universal and popular freight railcars. The recovery in the railcar building sector led to the strong operational and financial performance of the Plant and forced us to review SVGZ’s target price with buying recommendation.

In 2010, Ukrnafta will finally bring its oil prices in line with the global benchmark oil prices, a drastic change from the 50% average discount last year. This should offset an increase in the company’s royalties and add an additional USD 0.3 bln to Ukrnafta’s gross revenues in 2010, while its net sales should grow by 12% to USD 1.4 bln. Due to improved pricing, Ukrnafta’s net profit should increase by a considerable amount, USD 162 mln, which implies that its net margin will go from 4% in ’09 to 15% this year. Our valuation shows an aggregate 90% upside to the company’s current share value of USD 31.2. We upgrade Ukrnafta to BUY with the target price of USD 59.1 per share.

In 2010 Ukrsotsbank will show moderate financial results because of the unstable macroeconomic conditions and further economic drawdown in the second half of 2010. The stock has reached its fair value at USD 0.073, and we see no reason for it to go higher than its previous 52w high of USD 0.0945.

The Creativ Group is a vertically integrated agricultural holding and a leading manufacturer of oils and fats in Ukraine. It should significantly improve its financial state showing in 2010 and thereafter due to a threefold increase in production capacities in 2H2009. The growing sales (+40% YoY in 2010) and the increasing margins (EBITDA +2.6 p.p YoY) indicate that Creativ is an attractive investment target. Additionally, the stock’s liquidity should improve soon as the Holding has recently announced plans to take a listing at local Ukrainian Exchange. We reiterate our BUY recommendation with a target price of USD 23.1 per DR.

Luhanskteplovoz is the only Ukrainian producer of locomotives and one of the leading CIS producer of main-line diesel locomotives. Russia is the core market for the Plant – nearly 78% of output goes to Russia. After returning of the 76% stake in LTPL to State Property Fund at the end of 2009, a new privatization auction was announced. We expect Russian Transmashholding (TMH) to win the auction and re-acquire LTPL, which would open a huge market for the plant and would act as a catalyst for operational performance of the Company. According to our valuation, future sales growth has already priced-in, while expected low margins will restrict minority value and result in a HOLDing recommendation.