Focus UKRAINE Scope CAPITAL MARKETS Daily Insight Ukrproduct and XXI Century in the spotlight THURSDAY, 30 APRIL, 2009 RESEARCH INSIGHT Market comment Key rates and indices (as of 29 Apr 2009) Last Daily YTD FX and capital markets yesterday chg1 (%) chg1 (%) The hryvnia weakened towards 8.07/USD as of the end of yesterday after trading Currencies within a thin bound of 8.05-8.07/USD most of the day, according to the Reuters USD/UAH (spot) 8.0700 1.38 3.46 data. The equities shifted broadly higher yesterday, as the PFTS index closed up USD/UAH (1Y NDF) 11.5000 0.00 -14.18 at 333.72 points, up 3.67% compared to the previous session. EUR/USD (spot) 1.3263 0.91 -5.12 Money market Equity market KievPRIME O/N (%) 2.20 20bp -2,078bp KievPRIME 1M (%) 17.10 0bp -668bp XXIC seeks to postpone Eurobond put date to 8 July, 2009 Bond markets As part of its US$175m Eurobond restructuring efforts, XXIC held a conference EMBI+ Ukraine 1,884 0.27 580.14 Equity markets call on 23 April to discuss the proposed restructuring terms. The outcome was PFTS (Ukraine) 333.72 3.67 10.72 twofold: 1) the bondholders representing US$135m in aggregate principal RTS (Russia) 814.78 3.92 28.94 amount have expressed in writing their intention to exercise their put option; and WIG (Poland) 28,273.93 3.50 3.84 2) the bondholders representing the majority of the principal amount have S&P 500 (USA) 873.64 2.16 -3.28 suggested that the company seek a “standstill” to postpone the put exercise date Note: 1) percentage change if not otherwise stated. to 8 July, 2009. XXIC has already launched solicitation for this and has Sources: NBU, PFTS, Thomson Reuters, Cbonds, ICU. scheduled a bondholder meeting for 21 May, 2009 to resolve the proposed standstill. In the meantime, XXIC will seek further discussions of the proposed PFTS Index (3 months to 30 Apr 2009) restructuring terms, with the intention of to finalizing them before the proposed 350.0 standstill is over. 330.0 310.0 290.0 Investment implications: This news changes nothing on our fundamental 270.0 case on the stock: XXIC continues to face difficulties in generating cash to 250.0 230.0 cover its debt obligations falling due in May 2009; its project development 210.0 190.0 plans are beyond consideration at this stage. The stock price is likely to be 170.0 volatile on speculative trading interest, we estimate. Fundamentally, we do 150.0 not see reason for exposure to XXIC before some light is shed on a 29-Jan 1-Mar 1-Apr possible dilution of the minority shareholders as a result of its debt Source: PFTS. restructuring efforts. USD/UAH (3 months to 30 Apr 2009) 9.50 9.30 9.10 8.90 8.70 8.50 8.30 8.10 7.90 7.70 7.50 29-Jan 1-Mar 1-Apr Source: Thomson Reuters. Research team Alexander Valchyshen [email protected] http://www.investcapital.com.ua Bloomberg: ICUA <GO>, Thomson Reuters: <ICUA> Svitlana Drygush [email protected] READ THE DISCLOSURES SECTION FIRST FOR IMPORTANT DISCLOSURES AND Sergiy Byelyayev ANALYST CERTICATION. [email protected] 30 April 2009 Ukraine Capital Markets Daily Insight Ukrproduct reports positive FY08 results Ukrproduct (UKR LN), a large branded dairy producer in Ukraine, reported its FY08 revenues at GBP52.3m (8.7% YoY) and its gross profit at GBP10.8m (3.4% YoY). Branded products were the main contributor – 73% and 84%, correspondingly (52% and 60% in FY07), while the skimmed milk product (SMP) revenues halved to 22% of FY08 net revenues on weak global pricing. UKR’s overheads grew ahead of revenues, at 16-28% YoY, thus contributing to a 13.4% YoY lower EBITDA of GBP4.8m and 30% YoY lower net profit of GBP2.3m. Profitability dropped correspondingly: from 11% in FY07 to 9% in FY09 at the EBITDA level, and from 7% to 4% at the net profit level; ROE dropped from 23% in FY07 to 14.5% in FY08. Ukrproduct has retained its long-term focus on the branded processed and hard cheese products, claiming presence in 8 out of 10 major retail chains across Ukraine by the YE08. This has positively reflected in its reported P&L, which is likely to last beyond FY08, in our view. In 1H08, UKR spent GBP1.4m in capex to expand its cheese and milk collection capacities to support the above strategy; future capex will be limited to maintenance. UKR had GBP0.7m in cash at YE08, its Debt/EBITDA was at a comfortable 0.7x. Investment implications: We believe the reported set of results is positive and exceed the FY06 results, when the company’s operations were hit by the Russian ban on dairy imports. Thanks to the manageable debt levels, most of which are in hryvnia, we believe UKR is better positioned to generate profits in FY09 compared to its FX-debt loaded peers. Ukrproduct’s product mix covers both mass market and premium brands, and it enjoys a 25% plus market share in its key product segments, which we believe provides UKR with sufficient price leverage to ensure positive margins going forward. The stock trades at a 2.0x EV/EBITDA and 2.9x P/E on FY08 actual results, or at a 30-57% discount to the EM peers, which we would only justify by an extremely low liquidity in the stock. 2 30 April 2009 Ukraine Capital Markets Daily Insight Table 1. Ukrproduct: peer trading multiples Price MktCap. EV Bloomberg P/E (x) EV/EBITDA (x) EV/Sales (x) EBITDA margin (%) $ $m $m Ticker 2007 2008E 2009E 2007 2008E 2009E 2007 2008E 2009E 2007 2008 Emerging Markets Vitasoy 0.4 462 443 345 HK 17.0 13.4 12.5 8.9 7.3 6.6 1.4 1.2 1.1 16 16 Inner Mongolia 2.1 1,749 1,640 600887 CH neg -9.8 37.8 25.4 -14.9 12.7 0.6 0.5 0.5 2 -3 Fraser & Neave 1.7 2,391 5,889 FNN SP 8.2 10.6 9.1 9.3 10.4 9.5 1.8 1.9 1.6 19 18 Nestle India 34.0 3,277 3,232 NEST IN 30.8 na na 18.7 na na 3.7 na na 20 Na Tiger Brands 15.4 2,678 2,880 TBS SJ 10.1 10.8 9.6 8.2 7.3 6.6 1.2 1.1 1.0 15 15 WBD 41.5 1,827 2,211 FNH MK 12.4 22.0 12.6 6.1 7.7 6.3 0.8 1.0 0.9 13 13 EM peers- Mcap weighted average 14.4 6.8 11.5 13.3 2.9 6.2 1.9 0.9 0.8 15 9 Developed Markets Morinaga Milk 3.0 760 1,758 2264 JP 35.7 26.3 23.8 6.7 na na 0.3 0.3 0.3 4 Na Yakult Honsha 17.2 3,030 2,917 2267 JP 17.6 27.6 27.1 8.2 7.9 8.0 0.9 1.0 1.0 11 12 Agrana Beteiligungs 64.0 912 1,839 AGR AV 10.7 -65.7 15.8 7.2 10.7 7.7 0.7 0.7 0.7 10 6 Bongrain 49.1 765 1,537 BH FP 20.1 11.5 11.2 8.7 7.9 7.1 0.4 0.4 0.4 5 5 Danone 50.6 26,116 40,816 BN FP na 14.5 13.1 11.4 10.8 10.0 2.0 2.0 1.9 18 19 Dean Foods 19.8 3,050 7,503 DF US 16.6 11.9 10.8 8.6 8.0 7.6 0.6 0.6 0.6 7 8 Greencore Group 1.1 226 588 GNC LN na 6.2 5.0 4.2 4.4 4.3 0.3 0.4 0.3 8 8 Nestle 33.2 124,662 141,205 NESN VX 7.9 13.5 12.7 8.8 8.4 8.1 1.5 1.4 1.4 17 17 Premier Foods 0.5 1,205 3,815 PFD LN neg 6.2 5.1 6.8 6.7 6.4 1.0 1.0 0.9 14 14 Robert Wiseman Dairies 5.0 363 437 RWD LN 12.7 11.7 11.1 5.0 5.2 4.7 0.4 0.4 0.3 8 7 Unilever 19.8 59,925 71,059 ULVR LN 9.0 12.4 11.1 7.9 8.4 7.7 1.3 1.3 1.3 17 16 DM peers- Mcap weighted average (%) 8.8 13.0 12.3 8.7 8.5 8.1 1.5 1.4 1.4 16 17 Ukrproduct 0.21 10 15 UKR LN 2.9 2.9 na 1.8 2.0 na 0.2 0.2 na 11 9 Ukrproduct vs. EM peers -80 -57 na -87 -30 na -90 -79 na Ukrproduct vs. DM peers -68 -78 na -80 -76 na -87 -87 na Sources: Bloomberg 3 30 April 2009 Ukraine Capital Markets Daily Insight Table 2. Ukrproduct: P&L Revenue breakdown FY06 FY 2007 FY 2008 YoY (%) Revenue Branded 25.16 38.20 51.85 SMP 20.41 11.56 -43.36 Other 2.55 2.55 0.35 Gross Profit Branded 6.26 9.14 45.90 SMP 3.80 1.27 -66.51 Other 0.39 0.41 3.84 Income statement 2006 2007 2008 YoY (%) Revenue 35.10 48.11 52.31 8.7 Cost of Sales -27.80 -37.65 -41.49 10.2 Gross profit 7.20 10.46 10.82 3.4 Administrative expenses -2.70 -2.77 -3.22 16.3 Selling and distribution expenses -2.60 -2.92 -3.73 27.7 Other operating expenses 0.00 -0.62 -0.84 35.2 EBITDA 2.80 5.52 4.78 -13.4 Profit from operations 1.40 4.15 3.03 -27.0 Finance expense -0.20 -0.49 -0.59 20.1 Profit before taxation 1.20 3.68 2.44 -33.7 Income tax expense -0.10 -0.42 -0.16 -61.0 Profit for the year 1.10 3.26 2.28 -30.2 Margins (%) Gross 21 22 21 EBITDA 8 11 9 Net 3 7 4 Sources: Company data 4 30 April 2009 Ukraine Capital Markets Daily Insight Foreign exchange market Table 3.