Concorde Capital Ukraine Daily Nov. 17, 2017

Ukraine reform progress significant except anti-corruption, EU says

The international community’s patience is getting exhausted with the lack of practical results of Ukraine’s declared fight against corruption, said on Nov. 16 Johannes Hahn, the EU enlargement commissioner. In particular, he pointed to the few reviews performed of electronic assets and income declarations of government employees. “From what I understand, 1.5 million people declared their property,” he told the First National television network. “But if I’m not mistaken, only about 100 have been reviewed. One hundred out of a million and a half is not a result.” He called upon the Ukrainian government to improve its practical results. “The issue is not only in creating institutions or the presence of needed legislation, but in how it’s fulfilled,” he said.

Ukraine is making significant progress with reforms but needs to accelerate them, the European Commission declared in a recent report, as mentioned by the EU Representative to Ukraine on Nov. 15. Structural reforms have led to positive trends in the social and economic spheres, in spite of domestic and foreign challenges, said the report, as reported by the eurointegration.com.ua news site. These reforms include the pension, health and food production systems. Important legislative initiatives were also undertaken this year in the spheres of electricity, energy efficiency and decentralization, said the report, which reviewed Ukraine’s progress in fulfilling the Ukraine-EU Association Agreement since the last Association Council meeting in December.

Ukraine needs to continue to process of creating an independent Anti-Corruption Court, as well as fulfill the requirements of the next IMF tranche, A. Wes Mitchell, the recently appointed U.S. deputy secretary of state for European and Eurasian Affairs, told the Ukrainian president in a visit to Kyiv on Nov. 15. “It was nice for us to see several important reform laws being approved in Ukraine, but a lot more remains to be done,” he said.

Zenon Zawada: These recent statement continue much of the same story that has characterized the Poroshenko administration, which can be summed up as “too little, too slow.” The Ukrainian president has made an art form out of stretching the West’s patience to the extreme by resisting those reforms and anti-corruption efforts that threaten to restrict his power and authority. The artistry lies in knowing what he can get away with, and in which areas he has no choice but to concede to Western demands. The game will continue to succeed if Poroshenko keeps the Ukrainian public satisfied, enough for re-election in March 2019. However, the current “Rada Maidan” protest, and his weak poll standings ahead of elections, both threaten to ruin his political game.

Ferrexpo raises USD 195 mln in new debt

Ukraine’s largest iron ore pellet exporter Ferrexpo (FXPOLN, FXPO LN) attracted a new three-year credit facility of USD 195 mln with final repayment on 2020, the company announced in a Nov. 17 statement. The credit facility “will be used for general corporate purposes,” the company said. Also, CFO Chris Mawe pointed out that “the facility will significantly reduce the group’s average cost of funding and extend its debt maturity profile.”

Andriy Perederey: Ferrexpo has had strong debt metrics (net debt-to-LTM EBITDA was 0.96x at the end of1H17), which creates the ability to raise new debt facilities. The new credit line is positive for the company’s debt sustainability, as it needs to repay about USD 87 mln in 2H17 and USD 253 mln in 1H18 (including USD 173 mln in Eurobond amortization in April).

We expect the company’s total debt at the end of 2017 will be about USD 682 mln, or a 7.1% yoy decrease. But we retain our neutral view on Ferrexpo bonds, seeing both upside and downside risks to their price being balanced.

Metinvest to purchase 1,800 railcars

Ukraine’s largest steelmaker Metinvest (METINV) reported on Nov. 16 that it plans to purchase 800 railcars by the end of 2017 and 1,000 more railcars in 2018. After these purchases, Metinvest’s fleet of own railcars will reach 4,000 units, the company said, emphasizing that the decision to purchase railcars is related to the worsening deficit of rolling stock in Ukraine.

Dmytro Khoroshun: The railcars’ price will be important to consider. We estimate that a new gondola railcar might sell for about USD 34-38K per unit net of VAT, based on our analysis of Ukrzaliznytsia’s tender expectations and actual purchases in 2017, as well as Kryukiv Railcar’s (KVBZ UK) 2016 financial data. It would be negative if Metinvest acquires railcars at significantly higher prices. We are keeping our neutral view on METINV Eurobonds as we see a high refinancing risk for the next twelve months.

IMC reports 24% drop in 9M17 EBITDA

Farming company IMC (IMC PW) generated USD 81.5 mln in net revenue in 9M17 (a 2% yoy rise), according to its Nov. 17 report. As usual, corn remained the key revenue contributor, accounting for 74% of the company’s total revenue, or USD 60.0 mln.

The company’s cost inflation, which exceeded crop price growth, caused a 9% yoy decrease in gross profit to USD 51.1 bln. Furthermore, inflated SG&A costs (a 52% yoy rise to USD 13.3 mln) caused a 24% yoy decline in EBITDA to USD 42.8 mln. Net income declined 8% yoy to USD 27.6 mln in 9M17.

IMC continued to reduce its leverage, repaying net USD 16.4 mln in 9M17. Its total debt decreased 15% YTD and 8% qoq to USD 70.7 mln as of end-September. Its net debt amounted to USD 63.7 mln (-20% YTD), while its net-debt-to LTM EBITDA ratio was 1.4x as of end-September.

Alexander Paraschiy: As we expected, IMC’s EBITDA is worsening this year, and most likely it will be even weaker next year as the company had a weaker harvest of key crops in the current season. Nevertheless, we remain positive about IMC stock’s mid-term growth, taking into account the company’s strong balance sheet and appealing forward EV/EBITDA multiple of 3.6x.

Investors found bargains in Ukrainian equities on Thursday, Nov. 16. The WIG Ukraine Index of Warsaw-traded stocks climbed 1.9%, led by sunflower oil producer Kernel (KER PW, +4.8%). Dairy producer Milkiland (MLK PW) surged 11.3%. KSG Agro (KSG PW) advanced 4.5%, or 22.1% in two sessions. In London, iron ore miner Ferrexpo (FXPO LN) improved 1.3%, snapping a three-session loss streak. Natural gas E&P Regal Petroleum (RPT LN) plunged 20.7%, or 22.0% in two sessions. The Ukrainian Exchange (UX) Index of Kyiv-traded stocks increased 0.6%.