Строительство

On October 23, shareholders of the Eurocement Group Ukraine (Kyiv) will gather for an Extraordinary General Meeting, at which participants will consider the sale of more than 50% of the company’s property.

The meeting of Eurocement Group Ukraine, originally scheduled for November 24, has been bumped up by nearly an entire month. According to Interfax-Ukraine, publicly-released company reports had earlier indicated that a number of issues up for discussion were listed on the agendas for Balcem’s EGM, originally scheduled for December 21, and the EGM for the Kramatorsk ‘Pushka’ Cement Plant, originally scheduled for December 22.

The Eurocement Group Ukraine includes the OJSC Balcem, based in the Kharkiv Region, and the OSJC Kramatorsk ‘Pushka’ Cement Plant [KRCS UZ, U/R], which is based in the Donetsk Region. While KRCS stock is regularly traded on the PFTS, the Balcem’s stock is not currently listed, as it was removed from the PFTS listing in 2006; however, recent market rumors say that the stock might be relisted on the PFTS in the near future.

Other topics up for discussion at that time include renaming the post of director and changing the company`s business address, according to a statement the company had issued to Interfax-Ukraine. Apparently, the meeting’s agenda also includes the approval of changes to the company`s statute, as well as providing powers to the Directors’ Generals of the respective companies to sign agreements.

The joint production capacities of the Balcem Company and Kramatorsk “Pushka” are 5 mln metric tons of cement per annum. The Eurocement Group Ukraine ranks third among domestic producers of cement in Ukraine.

The Eurocement Group Ukraine commenced operation in June 2005. It is a subsidiary of the Russian holding OJSC Eurocement Group, which produces and sells cement and unites 16 enterprises in Russia, Ukraine, and Uzbekistan. It has an annual total output capacity of 35 mln metric tons, making it the region’s biggest producer with a 40 percent share of the Russian cement market. Earlier in 2008, the Cyprus-based Galaks Holdings Limited bought the controlling stake in the OJSC Eurocement Group Ukraine. The current ownership of the two comprising companies are broken down as follows: 99.17% Galaks, 0.83% freefloat (for Balcem); and 92.86% Galaks, 7.14% freefloat (for Kramatorsk ‘Pushka’). It is unclear who controls Galaks Holding Limited.

Our view:We view this as NEGATIVE for minority shareholders. We have been trying to obtain any comments from the Eurocement Group’s central office in Moscow. The Head of the company’s Press Center, Elena Rudovska, strongly refused to comment on the possible asset stripping of over 50% of the company’s assets.

The Eurocement Group has performed a lot of minority shareholder squeezes in Russia and we believe that it might also happen in Ukraine. Moreover, the agenda for this approaching EGM indicates that the General Director of the Company will be authorized to sign a number of connected Agreements for a sum that exceeds 50% of the Company`s property, in addition to Specifications, Transfer-Acceptance Acts and Additional Agreements that grant him the right to individually define the order and term of cash settlements on behalf of the Company.

Watch out for our upcoming report on the JSC Balcem and the Kramatorsk “Pushka” Cement Plant. For a better understanding of the construction market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008.

The financial results for the first ten months of 2008 have been released for the Open Joint-Stock Company Balcem, a subsidiary of the Eurocement Group Ukraine. Its output was 2.587 mln metric tons of cement, compared to roughly 2.477 mln metric tons for the same period in 2007 – this represents a 104.4 % increase YoY. The volume of clinker production experienced 122% growth YoY, at 2.246 mln metric tons for January-October 2008, while it was roughly 1.848 mln metric tons for the same period in 2007.

Along with its brother company, the Kramatorsk ‘Pushka’ Cement Plant [KRCS UZ, U/R], Balcem has benefited from investments over the past two years on the part of its parent holding, the Russia-based Eurocement Group. Funds have gone towards programs aimed at the purchase of equipment, production maintenance support and upgrading, environment protection, creating appropriate working conditions, medical service, etc. (for Pushka’s 10M2008 results, see our news from November 13, but see related news about Eurocement Group Ukraine in today’s Sokrat daily)

Since 2005, direct investments in the company’s production and development have increased ten-fold, totaling UAH 136.445 mln. Of this, UAH 80 mln was spent on production modernization, and UAH 16 mln was invested in infrastructure development.

For the period January-October 2008, investment can be broken down as follows: production and prospective development — UAH 136.445 mln; mining works — UAH 54.319 mln; economic security — UAH 4,645.9 mln; information technologies — UAH 0.834 mln; construction — UAH 35.957 mln; maintenance and supply — 2.493 mln. Among developments that have improved the enterprise’s efficiency and production capacity was the restoration of the fifth production line - the largest rotary kiln in Europe.

The OJSC Balcem is one of Ukraine’s largest cement manufacturers, producing more than 20% of locally-made cement. The company plans to produce approximately 2.8 mln metric tons of clinker and more than 3 mln metric tons of cement by the end of 2008. Its main competitors being Ivano-Frankivskcement [IVFC UZ, U/R], Volyn-Cement [VOLC UZ, BUY], and Doncement, which belongs to the Heidelbergcement Group holding.

Our view: The Balcem Plant is already demonstrated a slightly decreased output in 4Q2008; however, we expect the company to produce about 3 mln metric tons of cement in 2008.

According to the recent slowdown in the construction sector, all cement producers are currently decreasing their output. We expect that the cement market will grow at 0% CAGR in 2009. On the other hand, the Balcem Plant is less affected by this negative trend as far as it is the largest Ukrainian cement exporter.

Watch out for our upcoming report on the JSC Balcem and the Kramatorsk “Pushka” Cement Plant. For a better understanding of the construction market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008.

The State Statistics Committee of Ukraine (Goskomstat) revealed that, in October 2008, the production of slate cement increased 2.2% to reach 63.8 mln tiles, compared with output in October 2007. For the purposes of this calculation, slate includes corrugated plates, slate and other asbestos cement products.

October’s slate cement production rose by 2.4% compared with September, in which month the company achieved a production level of 62.3 mln tiles, representing an increase of 2.1% YoY.

In the period January-October, slate cement output rose by 0.3% to 526 mln tiles, compared with the first ten months of 2007. As Sokrat earlier reported, slate production rose by 2.1% to 62.3 mln tiles in September 2008, compared to the same month in 2007. In 2007, Ukrainian slate production fell by 15.4% to 633 million tiles to 633 million tiles, compared with 2006.

Our view: This news is POSITIVE and even more fortunate on the part of cement producers than otherwise might have been expected, considering the declining economic climate. October saw an increase, albeit a small one at 0.1% over the YoY monthly output for September.

This rise in output is good for Ukrainian slate producers in general and particularly, for Ukraine’s three largest producers of slate cement: Ivano-Frankivskcement [IVFC UZ, U/R], Volyn-Cement [VOLC UZ, BUY], and the Balcem Plant, which is not listed on the PFTS at this time.

Despite the continuing demand for these companies’ products, we are witnessing a lagging real estate market due to developers’ liquidity problems and a slowdown in the volume of construction in Ukraine (see related news in today’s Sokrat daily). While we expect that local demand for Ukrainian cement production may decline in the short to mid term, so far this doesn’t seem to be affected the demand for slate cement. We suppose that cement output will decrease in 4Q2008 but that annual results YoY will be higher. In the long term, we think local demand will increase due to EURO 2012 preparations and we will see a rebound in the volume of construction in Ukraine. The first sign of this was the Government’s affirmation this week that all planned Euro-2012 projects to be financed from the government and budget resources will continue as planned, with the only setback to be suffered by privately-financed hotel projects.

While we are currently reviewing the prospects of Ivano-Frankivskcement,put forward a favorable forecast in terms of the future development of Volyn-Cement and the Balcem Company. While we assume that VOLC’s output will stay at the same level as in 2007, we expect that the company`s financial results in 2H2008 will still be high. We recommend BUYing shares in Volyn-Cement, with a target price of USD 11.20 and an upside of 127% (as of Nov. 1).

For a better understanding of the construction market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008. Also watch out for our upcoming report on the JSC Balcem and the Kramatorsk “Pushka” Cement Plant.

In October 2008, Ukraine’s cement production fell by 10.1% to 1.291 mln metric tons, compared with October 2007. This information was released yesterday by the State Statistics Committee of Ukraine, with additional news issued about the growth of the country’s slate production (see related news in today’s edition of the Sokrat daily). Production of cement fell by 9.6% in the month of October, in comparison to the levels achieved in September. In the period January-October, cement production rose by 5.2% to reach an output of 13.495 mln metric tons, relative to the same ten-month period in 2007.

As earlier reported by Sokrat, Ukraine’s cement production for September 2008 fell by 6.2% to 1.428 mln metric tons YoY. In 2007, the cement output of Ukrainian producers rose by 9.1%, in comparison to the same period in 2006, reaching the level of 14.989 mln metric tons. Ukraine’s cement producers include over 15 separate enterprises, resulting in a total annual capacity of more than 20 mln metric tons.

Our view:This news is NEGATIVE for Ukraine’s cement producers, since this represents a definite signal of decreasing local demand for Ukrainian production in the short term and even mid term. We think that cement output will decrease in 4Q2008, but that the 2008 annual results will be similar to output levels achieved in 2007 or even 5% higher. We also hold an optimistic view for the real estate sector in the long term due to the low market penetration level compared to the rest of Central and Eastern Europe.

We expect that the decrease in cement output will closely match the decrease in construction works in Ukraine, since construction companies constitute key cement consumers. The demand for real estate has dropped significantly since mortgage interest rates have skyrocketed from 15.7% (in Apr 2008) to an average 23.2% in UAH and, respectively, from 11.7% to 17.5% in USD. Prices (in USD) for secondary real estate dropped 4% for the period Sep-Oct 2008.

Cement factories will likely tailor output levels to produce as much cement as is required to meet the needs of construction companies. We don’t expect them, however, to stockpile cement, which will positively impact on their working capital structure. In the long term, we think that local demand will increase due to EURO 2012 preparation and we will see a rebound in the volume of construction in Ukraine.

For a better understanding of the construction market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008. Also watch out for our upcoming report on the JSC Balcem and the Kramatorsk “Pushka” Cement Plant.

The preliminary results for January-October 2008 for the OJSC Kramatorsk ‘Pushka’ Cement Plant [KRCS UZ, U/R], a member of the ‘Eurocement Group Ukraine’ and affiliate of the Eurocement Group Holding, have been released. The company produced 369.1 thsd metric tons of clinker, which amounts to 107% of the company’s target of 344.8 thsd metric tons. Due to the current situation on the construction market, cement production for the same period in 2007 was 490.4 thsd metric tons, which was 90% of its 551 thsd target.

For the last two years, the two plants of the Eurocement Group Ukraine – Kramatorsk ‘Pushka’ and the Balcem Plant – have benefited from active investment by its parent company in programs for production maintenance support and upgrading, environment protection, creating appropriate working conditions, medical service, etc. The scheduled costs for modernization, repairs and equipping of social facilities for the first ten months of 2008 amounted to UAH 3.17 mln, while UAH 5.68 mln was spent on environmental improvement, including the upgrading of the electrostatic precipitator of rotating kiln #1.

For January-September 2008, the plant`s tax expenses increased three-fold YoY. Tax assessments towards all necessary authorities totaled UAH 24 mln, with UAH 12 mln of that amount going towards income tax.

Taken together, Eurocement Ukraine’s plants are among the top producers of cement in Ukraine, with its main competitors being Ivano-Frankivskcement [IVFC UZ, U/R], Volyn-Cement [VOLC UZ, BUY], and Doncement, which belongs to the Heidelbergcement Group holding (see related news in today’s Sokrat daily regarding cement and slate production for 10M2008).

Our view: We see that clinker output is falling due to the decreasing demand for real estate in Kiev and in Ukraine’s regions. Demand for real estate has dropped significantly since mortgage interest rates have skyrocketed from 15.7% (in Apr 2008) to an average 23.2% in UAH and, respectively, from 11.7% to 17.5% in USD. In the period Sep-Oct 2008, prices for secondary real estate dropped USD 4%.

Considering clinker’s decreased output level, we expect that Pushka’s cement total output level for 2008 will be about 20-25% less than for 2007 and will constitute about 500 mln metric tons. However, according to the announced modernization programs, Eurocement plans to switch Ukrainian cement plants’ production method from wet to dry, which will allow them to increase the aggregated output for the Balcem Plant and Kramatorsk Puska to 5.5 mln metric tons.

We expect cement output to further decrease in 4Q2008, but the resulting volume of aggregated cement market for 2008 will be about 15.7 mln metric tons, which is about 5% more than in 2007.

For a better understanding of the construction market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008. Also watch out for our upcoming report on the JSC Balcem and the Kramatorsk “Pushka” Cement Plant.