Investing in Ukraine: changing rules of the game

Publication Date	November 2008
Publisher	Concorde Capital
Product Type	Report
Pages	34
ISBN Number	not applicable
Product Code	CNC00005

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Summary

Over at least the next six months, we are going to see extremely low and economically unjustified valuations. The local Ukrainian stock market will lack the fuel for sustainable appreciation, if any, as funds unload their portfolios and some close altogether. By our estimates, the outflow from EM equity funds over November-December will reach USD 10 bln, increasing the total tally for the year to USD 50 bln.

In this report we introduce recommendations for Ukrainian equities from our coverage universe. We set upsides assuming crossing the full spread and expected local currency depreciation of 15-20% next year - Upside Effective. Beta, Liquidity, Leverage, Upside Effective - we see these as keys to trading in the current BLUE market.

Content

Part 1. Changing rules of the game
- Seize volatile market opportunities
- Ukrainian assets are trading at levels unjustified by purely economic reasons.
- Corporate profitability reached a new record high in 1H08
- Yields on Ukrainian fixed income instruments have overshot the earnings yields of Ukrainian stocks by a wide margin
- Our basis for screening stocks in coming months is to shun credit risks, and tend toward more liquid names.
- Stocks vs. Bonds
- Equities
Fixed income
- Fixed income ideas
- 1) Sovereign Eurobonds
- Ukrainian government
- 2) Corporate Eurobonds with high credit quality and strong parent support
- Equity ideas
- Sector-wise
- High dividend yield
- Low P/Net Cash
- Discount to intrinsic P/E
- Corporate solvency
- Warning list
- Early bond redemptions and maturities
Ukrainian equities key valuation metrics
- Ukrainian equities key valuation metrics (continued)
- Ukrainian equities key valuation metrics (continued)
- Corporate profitability at historic high
- 1H08 results of the PFTS' top-150 companies:
- Where will profitability be in 2H08 and 2009?
APPENDIX
- Estimation of market CoE
- Stock performance
- Sector multiples
- Part 2. BLUE market guidelines
- Little chance for market to lift in coming months
- Trading on volatility
- Taking liquidity into account gives discriminative power
- B.L.U.E. mode
- Long-term recommendations
- Models recalibrated
- Next year earnings estimates halved for our coverage universe
- BLUE(1) picks
- BUY list
- SELL list
- Ukrainian equities: recommendations (continued)
- Forecast revision summary by sector
- Key fundamental forecast revisions by company
- Key fundamental forecast revisions by company (continued)
CHARTS
- Stock indices relative performance
- Most oversold stocks YTD
- Spread: equities earnings yield over government bond yield
- Outstanding sovereign Eurobonds
- Ukraines sovereign yield curve
- Cost of default protection, bps
- For those who see reasons to play on the steel rebound, our recommendation is exposure to metals & mining through SCM/Metinvest-related stocks: Azovstal, Avdiyivka Coke, and Enakievo Steel among the few relatively liquid companies with little leverage. Metinvest-controlled producers, backed by the strongest integrated steel group in Ukraine, will stay in business the latest among Ukrainian sector players if global market conditions worsen under the polar negative scenario. At the same time, these stocks could react sharply to improving market fundamentals.
- Capital investment by financing sources, January - June 2008
- In 1H08, corporate profitability made another historic high
TABLES
- Our picks
- Key market data
- Key economic data
- Upside based on franchise value model
- Franchise value model (Approach 1)
- Franchise value model (Approach 2)
- Leverage and interest coverage by industry, as of 1H08
- Key credit metrics by company
- Local bonds with maturities and put options coming due in the next 12 months
- Ukrainian equities key valuation metrics
- Results by sector
- Stock performance
- Sector multiples
- Ukrainian equities: recommendations
- Earnings revisions
- Revenue forecast revisions
- Key fundamental forecast revisions by company