Ukraine Parliamentary Elections Results (party-list vote)
People’s Front (lead by the PM)
23% 22% Petro Poroshenko Bloc
In October the SG Alpha Ukraine and 6% Samopomich (lead by Lviv Mayor) Emerging Europe Fund was down 3.84% net 7% 22% Opposition Bloc (pro-Russian) for the USD class. During the month the 9% Ukrainian Equities Index was up 3.05% in 11% USD and the KP-Dragon USD Index was down Lyashko’s Radical Party 9.12% Batkivschina (lead by Ms. Tymoshenko)
Others not making 5% threshold
This month’s parliamentary elections were taken expected not making the 5% threshold and thus will positively by the investor community as formally not be present in the new parliament. The other half confirming the Ukraine’s population pro-EU of the parliamentary seats were determined by the commitment. However, the investor-friendly winners of the single-mandate districts. As a result, outcome did not get reflected in the equity market when including the single mandate seats, it will be performance, with the more liquid foreign-listed President Poroshenko’s party that will have most stocks de-rating yet again. At the end of the month MPs, earning a total of 132 mandates compared to we attended an investor conference in Kiev 82 for the PM’s party. President Poroshenko already organized by a local investment bank. The called for creation of a broad pro-European conference participants included some key coalition, including all five pro-EU parties of the six Ukrainian politicians, business leaders, parties elected to parliament. He also called for an representatives of international financial institutions entirely renewed Cabinet of Ministers based purely and international portfolio investors. The mood on professionalism and reiterated his party’s among investors was definitely constructive with all support for Arseniy Yatsenyuk keeping his PM post. acknowledging the superior long-term potential of As can be seen, the elections results enable the the Ukrainian equities and some comparing it to formation of a very strong coalition which will ensure Russia in 1998 which was not a matter of if, but support for the President and the government in when to buy it. implementing their ambitious reform agenda, which was not the case in the previous parliament that The October 26th parliamentary elections in Ukraine hindered the approval of some of the most vital showed a landslide victory of pro-Western parties, reforms. For the first time in Ukraine’s history a cementing the country’s new pro-reform vector of strong pro-European parliamentary coalition will be development. In the party list voting, President formed that will help lead the country on its path to Petro Poroshenko's bloc and the party of the PM the West. At the same time, fewer than expected Arseniy Yatsenyuk both got close to 22%, followed votes for the radical parties give hope for a by another pro-reform party lead by the Lviv Mayor, continuation of a constructive dialogue with the pro- the only opposition party, a more populist party and, Russian rebels in Lugansk and Donetsk regions in finally, the party of Ms. Tymoshenko. The strong order to achieve a peaceful resolution to the conflict support for the PM’s party is particularly remarkable, there. In our view, these elections should expedite significantly exceeding expectations which we find the successful implementation of the long-needed very positive, as it will ensure there is no reforms which in turn will secure further support concentration of power in one hands. Another from the West. We are confident this will unlock the extremely encouraging result is that the most radical huge upside of the Ukrainian equity market, now the nationalist parties got much fewer votes than was world’s cheapest.
SG Alpha Ukraine and Emerging Europe Fund - Comparative Performance
2014 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2013** 2012** ITD
Fund (USD class, net)* -4.60% -1.58% -6.20% -1.05% 6.14% 4.68% -5.36% -4.99% -3.06% -3.84% -18.85% -3.89% -4.02% -25.14%
Ukrainian Equities Index $ -6.52% 8.96% -20.30% 6.10% 8.78% 0.90% 3.23% -16.97% -7.04% 3.05% -22.39% -6.47% -33.29% -51.57% (local listing) KP-Dragon $ -9.47% -5.57% -9.84% -4.38% 6.78% 4.28% -8.72% -9.62% -5.04% -9.12% -41.57% -11.24% -18.85% -57.92% (local+foreign listing) * Post 2013 fund closures and redemptions resulted in no meaningful peer group of Ukraine-dedicated funds left ** 2012-2013 Fund performance is that of the SG Alpha Ukraine Fund converted into SG Alpha Ukraine and Emerging Europe Fund on 31 Dec 2013
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Gas deal finally signed! At the end of the month, after a new round of gas talks, Ukraine, Russia and the EU finally signed a trilateral binding protocol setting the terms for resuming Russian gas supplies to Ukraine this winter until the end of March 2015. Based on the agreement, Ukraine will pay USD 378/mcm of Russian gas in 4Q14 and USD 365/mcm in 1Q15. Such prices are derivatives of Naftogaz’s acting contract with Gazprom signed in 2009 (according to which gas prices are pegged to oil prices) and a USD 100/mcm discount to be granted by the Russian government. Ukraine has also committed to repay USD 3.10bn for earlier imported Russian gas by the end of 2014. New supplies of Russian gas will be prepaid by Ukraine and, importantly, the take-or-pay clause will not be applied. On top of that, the EU and the IMF might help Ukraine pay for Russian gas, the EU Energy Commissioner declared at the press conference. The deal is clearly a good development for all three parties involved, ensuring uninterrupted gas deliveries to the EU, lower price for Ukraine and some assurances of the repayment of the significant debt owed to Gazprom.
Anti-corruption laws signed too! This month the parliament approved a package of laws submitted by President Poroshenko aimed at fighting corruption in Ukraine. The measures include creation of a National Anticorruption Bureau (one of the key IMF demands for issuing the next loan tranche), detailed declaration of assets held by public officials (bank accounts, securities, real estate, etc), declaration of income sources, introduction of lifestyle monitoring to compare it to the income declarations of officials, a requirement for legal entities to disclose final beneficiaries and anti-money laundering measures. These bills were being prepared for over five months in cooperation with the EU’s Group of States Against Corruption (GRECO). These anti-corruption measures are unprecedented for Ukraine and are clearly extremely positive given that corruption is the biggest issue for the country since independence and a legal framework for fighting it was required by the western financial institutions providing financial support to Ukraine. Now, implementation is of vital importance, so that these laws do not just exist de jure.
Positive corporate updates This month some of our top portfolio companies reported 3Q14 operating results which were quite strong despite the macro headwinds. This underlines the fundamental value of these companies that will be inevitably rewarded by a sharp multiple re-rating from their current all-time lows once the geopolitical situation in Ukraine stabilizes. Kernel, a leading grain and sunflower oil producer and trader in Ukraine and the Black Sea region, reported very positive trading volumes and harvesting yields for the last quarter. Kernel’s bulk sunflower oil sales more than doubled y-o-y to 203kt and the reported number is the highest ever for this quarter. The strong grain harvest in Ukraine pushed up grain trading volumes 38% y-o-y to 1.2mt, increasing export through company’s ports 56% to 1.2mt. Besides that, Kernel announced a 20-31% yield expansion from its farming division, with a corn yield of 7.2t/ha (vs. just 5.5 a year ago). During a conference call with investors, the company confirmed that the liquidity crunch in the Ukrainian banking system is to push out of business the smaller seed crushers without access to capital, benefitting the larger players like Kernel. Another of our top picks in Ukraine, the country’s largest poultry producer MHP, also reported very strong 3Q14 operating update. The company’s poultry sales of 144.8kt were +21% y-o-y and an average realized price of UAH 22.08/kg was +37% y-o-y. In 9m14, poultry sales reached 396.8kt (+22% y-o-y) and poultry exports stood at 102.1kt (+20% y-o-y). The reported sales volume was higher than expected, showing the company suffered no disruptions to poultry production despite having to shut down its Donetsk-based breeding farm due to military hostilities. Also in positive corporate news, Avangard, Ukraine’s largest producer of eggs and egg products, approved dividend payout at 12.5% of 2013 net income, implying a dividend yield of 6%. The company also announced its intention to buy back a portion of its outstanding USD 200m Eurobond maturing in October 2015. The news is very encouraging as the company delivered on its promise to pay a maiden dividend despite the macro shocks. The intention to buy back Eurobonds is undoubtedly a positive message that underscores the company’s determination to repay the Eurobond on time and in full. With USD 236m in cash and equivalents and with a largely completed investment program Avangard is now fully in position to deleverage and has sufficient cash to start doing so even ahead of the redemption schedule.
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SG Alpha Ukraine Fund (30 Mar'12-31 Dec'13) SG Alpha Ukraine and EE Fund (31 Dec'13 onwards) TOP 10 POSITIONS 110 Company Country Sector Net of NAV 100 Luxoft Ukraine TMT 9.6% 90 Kernel Ukraine Agriculture 7.3%
80 MHP Ukraine Agriculture 6.0% Avangard Ukraine Agriculture 5.9% 70 Astarta Ukraine Agriculture 5.6% 60 Oschadbank Ukraine Financials 4.8%
50 KazMunaiGas Kazakhstan Oil & Gas 4.5% Motor Sich Ukraine Machinery 4.0% 40 Centrenergo Ukraine Utilities 3.8%
Ferrexpo Ukraine Metals & Mining 3.4%
Jul-12 Jul-13 Jul-14
Apr-13 Apr-14 Apr-12 Oct-12 Oct-13 Oct-14
Jun-14 Jun-12 Jan-13 Jun-13 Jan-14
Mar-13 Mar-14
Feb-13 Feb-14
Sep-12 Sep-13 Nov-13 Aug-14 Aug-12 Nov-12 Dec-12 Aug-13 Dec-13 Sep-14
May-12 May-13 May-14
Inception Ukrainian Equities Index $ (local listing) KP-Dragon $ (local+foreign listing)
PORTFOLIO BY COUNTRY PORTFOLIO BY SECTOR
Agriculture
6.7% 4.8% 5.6% TMT 5.8% 6.3% 6.6% 32.3% Other Ukraine 7.0% Financials Kazakhstan 10.0% Oil & Gas Russia
Other Machinery 80.9% 14.4% 19.7% Metals & Mining
Utilities
Key Terms
Fund Structure Sub Fund of LFPartneers Investment Administrator Apex Fund Services Funds SICAV UCITS Auditor PWC ManCo Luxembourg Fund Partners S.A. Legal Advisor LexField – Avocats à la Cour Investment Advisor SG Alpha Ltd. ISIN Shares Class A – EUR: LU1030789975 Liquidity Daily Shares Class B – USD: LU1030799776 Fees 2% management fee; 20% perform- Shares Class C – GBP: LU1030799859 ance fee (subject to high water-mark) WKN Shares Class A – EUR: A1XDTA Custodian RBC Investor Services Bank S.A. Shares Class B – USD: A1XDTC