Research

The Ukrainian new car market is demonstrating a drop in sales for the second month in a row. The main reason is a decrease in the dispersal of auto loans since May 2008. We downgrade our forecast for the sector’s market growth for 2008 to 14%; however, we retain our estimates for LUAZ car production at the 90 thsd level. The current liquidity crunch that has already reached Ukraine has led us to increase the WACC in the DCF model. Also taking into account details of an additional share issuance of a 33% stake, which is expected this autumn, we downgrade our 12M Target Price for LUAZ to USD 0.284 per share (USD 0.31 before additional share issuance) and retain our recommendation to BUY shares in the Bogdan Automobile Plant.

After consultations with major political forces on Wednesday, October 8, 2008, President of Ukraine Viktor Yuschenko dissolved the Ukrainian Parliament. The appropriate TV message was broadcasted late night on October 8, 2008 and today, the decree appeared on the President’s website.

На прошлой неделе Холдинг Астарта объявила о своих стратегических планах на 2008-2012. Компания собирается ввести в эксплуатацию новый элеватор до конца 2011 года и инвестировать в общей сложности 50-60 млн. долл. в модернизацию сахарных заводов. Кроме того, Астарта планирует увеличить производство сахара на 29-42% до 200-220 тыс. тонн в 2008 году и расширить свой земельный банк с нынешнего 160 тыс. га до 180-185 тыс. га в 2009 году. Указанные цифры соответствуют нашим ожиданиям, поэтому наши основные предположения остаются неизменными. Тем не менее, мы понижаем нашу целевую цену из-за использование для акций украинских компаний в моделях DCF более высокой risk free rate - 8,6% (ранее 6,1%). Наша новая целевая цена составляет 25.2 USD с потенциалом роста 165,3%. Мы подтверждаем нашу рекомендацию ПОКУПАТЬ.

From mid-2007 till now, it has been a difficult period for the global economy. Despite not being fully integrated into the global economic system, the Ukrainian economy has felt the influence of the economic crisis. In this report we analyze the performance of the Ukrainian economy in 2008 so far and give our forecast for the macroeconomic performance towards the end of 2008 and onwards.Executive summary The Ukrainian real sector grew at impressive rates in 2000-2007. While we anticipate that the global financial crisis and the anti-inflationary war will somewhat slow down the GDP, real GDP growth will nevertheless stay between 5 and 6.5% for the next five years. The machinery, trade and transportation sectors will continue to be the main driving forces of the real sector’s growth. The performance of the chemical and metallurgical sectors will depend heavily on global markets, while Ukrainian agriculture may get a boost if the Parliament lifts the land trade moratorium. As we anticipate world steel prices to decline and imported natural gas prices to rise, we forecast the worsening of an already high trade balance deficit, driving a slight UAH devaluation in 2009. Despite record inflation in late-2007 to early 2008, we see clear signals of price stabilization, driven by the economy’s cool-down and the government’s anti-inflationary policies. While we anticipate inflation to stay double-digit until 2010, we view the recent summer deflation as the beginning of a CPI growth rate slowdown. While Ukraine observed the collapse of the Parliament’s coalition in September 2008, we anticipate the consolidation of major political forces as we witness a very effective current lawmaking process in the Parliament, coordinated by recent foes – the Bloc of Yuliya Tymoshenko and Party of Regions. While we see some possibility of the President dissolving Parliament, we do not consider the odds of this happening to be very high.

Ukraine’s Parliament has finished vacations and commenced its new session on Tuesday, September 2. The day finished with the collapse of the majority coalition and an escalation of the conflict between President Viktor Yuschenko, goaded into the confrontation by the Head of his Administration, Viktor Baloga, and Prime Minister, Yuliya Tymoshenko as Tymoshenko used the opposition Party of Regions, led by Viktor Yanukovych, to pass several legislative amendments limiting the President’s power.

Despite being traditionally a low activity month on the PFTS, August 2008 was marked by another wave of unprecedented sales of Ukrainian stocks, lowering the PFTS index to its 52W low 513.84 points by the end of August with equity trading volumes of USD 138 mln being 29% lower compared to July 2008. As American and European stock markets have more or less digested the negative impacts of the credit crisis – Dow Jones Industrial Average +1.92% MoM, S&P 500 +1.79 MoM, FTSE 100 index +4.70% MoM, CAC 40 index +3.67% MoM – Ukraine emerges as considerably undervalued with the current PFTS level 533.68, equaling the level of January 2007 that preceded the 135% rally of 2007. In our previous strategy document in August “Fundamental factors – real drivers for stock prices”, we supposed two scenarios of market development: at the 620-660 bps level and the 550 bps level (a negative scenario). We see that the market has dropped significantly below our negative scenario to the 513.84 level. We saw several factors which impacted on this drop: traditionally low stock market activity in August; the Ukrainian position in the conflict between Russia and Georgia; still high EOP inflationary expectations and the Ukrainian credit crunch; influence of the global stock markets and, specifically, declines on the US, European and Russian stock markets during the year. The bearish trend continued dominating in August despite all the positive news on the real economy and industry, with fundamental changes once again showing the strong dependence of the Ukrainian stock market on global stock market trends. We believe that the market will follow with a decrease in September due to the fact that there are no available strong internal and external factors capable of returning the market trend towards growth.

The Bogdan Automobile Plant [LUAZ] is one of the largest auto producers in Ukraine. LUAZ assembles Russian VAZ, South Korean Hyundai and KIA brand cars, which hold strong positions in the market based on 2007 sales. The company also produces buses and trucks. Bogdan is carrying out an active strategy for market gaining and will benefit from the sales growth of new cars in Ukraine.

On August 22, various sources reported that POSCO, a leading world steelmaker, is interested in several unnamed Ukrainian assets: an iron ore mine and, possibly, a steelmaker and even a shipyard. We think that Zaporizhstal, together with CJSC Zaporizhya Iron Ore Combine, may be the targets.

Dnipropetrovsk Steelworks n.a. Babushkin [DZMK] is one of the largest producers of steelwork for non-residential construction, heavy industry, bridge construction, and the electricity sector in Ukraine. The company specializes on difficult custom-executed orders of high expertise demand. DZMK is supplying its products well beyond the Ukrainian market including markets in Asia, the Far East, Africa, and Russia. Although it is not completely vertically integrated, the company is part of the Industrial Union of Donbas (IUD), one of the three largest industrial groups of Ukraine.

According to a press release issued by Kovelmoloko, the company is going to increase its charter fund by 15.2 times to USD 58.61 mln. The final decision on increasing the charter fund is up to KMOL’s shareholders and will be made at the company’s AGM on August 27, 2008. Its management is planning to use the proceeds from the additional share issue toward the modernization and development of its assets. Our earlier target, adjusted for the share issue, is USD 0.20 per share. We reiterate our recommendation of “BUY” for Kovelmoloko.