Market comment
Trading halts on Thursday and Friday set the tone for the week in Ukraine, where the PFTS tumbled 13% this week to230.88, bringing year-to-date losses to more than 80%.No stock was safe as virtually all trades forced prices into the red.In the global sell-off Friday, the exchange was open for roughly an hour the entire day – even as Russian markets announced their closure until next Tuesday.
Both Ukraine’s Eurobonds and currency came under pressure as the Rada considers the president’s proposed rescue package and awaits details of the IMF negotiations.Heavy demand for dollars from the local banking system pushed the hryvnia to a multi-year low, trading through 6.0 per dollar in the interbank market.At the same time, the sovereign’s largest outstanding Eurobond, the 6.58% 2016s, widened to all time highs of nearly T+2000bp, more twice the spreads of just one month ago.This spread widening is happening as S&P downgrades Ukraine’s sovereign rating to single B.
International investors are largely absent in the Ukrainian market and combined with local demand inbeing weak in a financial system hungry for cash liquidity, there is little support for equities at present.
Corporate news
Kyivenergo reports UAH 157mn in 3Q losses
One of Ukraine’s largest GenCos Kyivenergo reported a UAH 157mn (US$ 28.5mn) 3Q08 loss to bring its 9M08 net loss to UAH 278mn (US$ 50.5mn), more than 11x higher (UAH 253.2mn) than the same period in 2007 when the company posted roughly UAH 25mn in losses.Management attributed the losses to the inadequate compensation from the Kyiv municipal budget and the need to invest in ongoing repairs and maintenance. Nuclear power stations decreased their production this year due in part to the breakdown of unit No.2 at Khmelnytsk NPP, and thermal generators faced coal supply problems yet again despite the rise in domestic coal production. To some degree these developments helped Kyivenergo reduce the drop in its electricity output to only 1.5% y/y in 9M08. Nevertheless, increasing gas prices will not favour the company’s margins, and we expect the company to struggle to break even this year.
Stirol bucks the ammonium nitrate production trend
Chemical company Stirol managed to increase its ammonium nitrate output 71.3% y/y to 28,600 tonnes in September despite a 23% y/y monthly decline in the sector overall. Stirol is much more export-oriented than most other Ukrainian producers, and has benefited from strong foreign demand that is outstripping demand from domestic agribusinesses. Ukrainian farmers have been delaying grain sales due to falling prices for most of their crops after a bumper harvest and therefore have not been able to buy fertilizers in quantity.
Akhmetov, Smart Group win EU antitrust approval
Ukraine’s richest man Rinat Akhmetov and Smart Group, owned by Vadym Novynsky, won an antitrust appeal in the European Union to jointly control steel and iron ore giant Metinvest BV. The European Commission’s ruling allows Akhmetov, through System Capital Management, and Smart Group’s Energees Investments Ltd. to control Metinvest, Ukrainian subsidiary Makiyivka Metals Plant and Bulgarian subsidiary Promet Steel. According to news sources, Metinvest is 75% owned by Akhmetov and 25% by Smart Group.
Alchevsk stops 2 oxygen converters
Alchevsk Metals Plant halted operations at two new oxygen converter plants that had recently been launched. Of the plant’s 21 oxygen converters, only 12 remain active, and management said through the first 20 days of October, the plant cut production capacities on a daily basis. The steelmaker’s sheet-rolling capacities are currently working at only 50%. The Industrial Union of Donbas (IUD), which controls the plant as well as Alchevsk Coke, DMK Dzerzhinskoho Steel and Dnipropetrovsk Pipe, announced earlier this week it was freezing all investment projects in Ukraine. Given the group’s lack of vertical integration and exhausted debt financing options we see several of the company’s assets, especially its pipe maker, as likely acquisition targets as the company will need cash to make it through what is shaping up to be a pretty lean next few quarters for the sector.
Gov caps meds prices, helps pharma firms
Ukraine’s Cabinet of Ministers signed a deal with pharmaceuticals distributors and pharmacy chains to lower prices to October 1 levels, after it saw between a 40% and 70% rise in the price of medication. In return the government promised to make credit available to manufacturers and importers, allow them to buy dollars at the official central bank rate, and cut taxes. However, the State Tax Administration denied reports of soaring medication costs, instead citing average price markups of 8%. According to government officials 75% of Ukraine’s medications are imports. With the interbank exchange rate at UAH 6/US$, pharmaceuticals importers were forced to increase prices to avoid seeing their margins squeezed. The government’s actions are aimed at lowering costs for the man on the street and ensuring pharmaceutical companies do not suffer at the same time. Although pharma-firms’ sales revenues are now subject to a price ceiling, the losses will likely be offset by tax breaks and ease of access to credit lines.
