STRONG BUY Rating

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1 CFA UKRAINE WSE Ticker: AST ASTARTA HOLDING N.V. Rating Price target (PLN) STRONG BUY Price (PLN), 06/12/ Upside 71.60% Market Profile 52 Week Price Range Beta Shares Outstanding Market Capitalization 2,097,500 USD EBITDA margin 32.7% EBIT margin 29.6% Debt 112,424 Source: Bloomberg, P&A Estimates Highlights We rate astarta STRONG BUY with a target price of PLN: The current market price as for December 7 is 85.30PLN. The upside equals 71.6%. Such a high upside is a result of growing sugar prices and increasing crop areas of the company. It definitely justifies STRONG BUY recommendation. Besides the the financial outlook for the company according to our forecasts is strongly positive stemming from good stock liquidity and constant growth of market price. At the end of November relative P/E stood at 0,7 and 90-Day Volatility was Earnings per share were approximately Euros, what is a little bit less than at the mid of the fiscal year. Over the past 26 weeks, Astarta's shares have risen 36%, which we think has been driven largely by ever-increasing global and local sugar prices. In comparison, Ukraine s two largest agricultural producers, MHP and Kernel, have gained only 2-3% each over the same period. Sugar market in Ukraine is likely to remain state-protected: Key factors affecting the market are weather and the amount of yields, seasonality of demand and supply, the availability and price of raw materials, biological factors, crop yields and government regulations. Financial outlook is promising: All these financial figures clearly show that the company has good position and has good financial perspectives. We forecast stable increase in gross profit, EBIT, EBITDA, net income and other. This is why, and the results of the DCF model have proven it, we strongly recommend buying the company s shares The equities of Astarta are largerly dependant on market performance: The profitability of the shares traded at Warsaw stock Exchange affects the yield of Astarta s equity. Though the stocks are not influenced by GDP, wages, but feel a significant impact of sugar producer s index. The main factor causing the rise of equity prices is sugar prices, which according to our forecast are going to increase in the forthcoming years. Investment Summary Astarta, being the chief sugar producer in Ukraine and having declared the desire and readiness to increase its capacities, is, to our mind, a good investment target. There still remains a great potential to increase crop areas. Astarta is now investing money to improve the efficiency of all its plants, modernizing them and making them meet all the necessary requirements of sugar/grain production. It is the only agrarian company that enjoys long-term loans of the European Bank for Reconstruction and Development. The trust, granted to Astarta by this influential institution, is a major sign of company s liability in the market. Astarta Holding has recovered from the frustrating crisis of very rapidly, having shown a positive net income in 2009 on the contrary to With the results of 9M10, we conclude that the augmentation in the major financial indicators are very promising what allows us to presume that Astarta will remain on the top of sugar producers in Ukraine with the positive trend. In our view, the supply-demand balance in the 2010/11 marketing year is likely to resemble that of the previous season, which means that Ukraine's internal sugar prices should rise further. The profitability of the sugar business encouraged farmers to increase beet planting area 40-50% YoY in Over the past five years, Astarta has demonstrated impressive growth, with revenue and adjusted EBITDA (calculated as EBITDA net of biological revaluation) increasing at 26% and 40% CAGR respectively (EBITDA has outpaced revenue largely because 2009 was such profitable year for sugar). Overall profitability has been variable, mostly due to volatility in domestic sugar prices. Over the past 26 weeks, Astarta's shares have risen 36%, which we think has been driven largely by ever-increasing global and local sugar prices. In comparison, Ukraine s two largest agricultural producers, MHP and Kernel, have gained only 2-3% each over the same period. We would also like to note that that the Ukrainian sugar market is likely to remain state-protected what significantly decreases risks of Astarta. Especially those connected with lower cost of cane sugar. Our DCF model shows that Astarta s equities are underestimated compared to the current market price. The Fair Value approximately amounts to PLN while the current market price as for December 7 is 85.30PLN. The upside equals 71.6%. That is why we justify STRONG BUY recommendation for investors

2 Valuation Price multiples are ratios of a stock s market price to some measures of value per share. It s quite useful, because we cannot evaluate a stock s price without knowing what a share buys in terms of assets, earnings, sales or other measures of value. Obtained by dividing price by measure of value per share, a price multiple gives the price to purchase one unit of value, however value is measured. In our research we also widely use the method of comparables, which involves using a price multiple to evaluate whether an asset is relatively fairy valued, relatively undervalued, or relatively overvalued when compared to a benchmark value of the multiple. Relative valuation On trading multiples, we compare Astarta to Mriya. We note that on P/E multiples the company still trades at a discount to sugar peers, indicating to us that Astarta is undervalued. We think the market may be valuing Astarta on EV/EBITDA, ignoring the fact that the company pays significantly reduced income taxes (all agricultural producers in Ukraine pay FAT instead of income tax). While we do not think this low-tax situation will be sustained in perpetuity, it still adds to the company s value. Table 1. Competitive Overview and Companie s Value Astarta and Mriya MRIYA (half) Shareholder s USD USD USD USD equity NSO Earnings 0,004 0,02 0,02 0,0310 BV 860, ,63 52,30 82,43 P/E 85, ,93 Price 1,71USD 3,68USD 5,95USD P/BV 0,04 0,07 0,072 ASTARTA (half) 2010 (half) Total assets 172, EUR EUR EUR EUR EUR TOTAL shareholder s equity EUR EUR EUR EUR EUR CASH FLOW EUR EUR EUR EUR NSO SUGAR SALES TONS TONS PRICE 29,55PLN 11PLN 40,50PLN 19,7PLN 58PLN P/E 10,35-8, ,88 8,54 PLN/EUR 3,582 4,16 4,10 4,46 4,14 Earnings per 0,86EUR (0,31)EUR 1,16EUR 0,75EUR 1,64EUR share Year price +87,2% -64,8% +263,6% +79,5% +38,1% change BV 14,195PLN 9,586PLN 18,943PLN 14,34PLN 30,07PLN P/BV 2,08 1,15 2,14 1,37 1,93 Sales/per share 4,04 3,6 Price/Sales 4,88 16,1 Source: Company Database, Bloomberg, P&A Estimates Price to Earnings (trailing P/E) Closing price on the last trading day of financial year/earnings per share Price to Book Value To define book value per share more precisely, we first find shareholder s equity (total assets-total liabilities) and divide it by NSO Price to Sales It s a widespread way of valuation because sales are generally less subject to distortion or manipulation than other fundamentals (EPS or Book Value). Having calculated price multiplies for two holdings, we can conclude that: 1. Astarta, in comparison with Mriya, is a more stable company, because its P/E ratio is relatively lower. Though, it shows that Mriya is a faster growing company, which reinvests most of its earnings. 2. The calculation of the P/BV on the contrary show that equities of Astarta are faster growing than the equities of Mriya. At the end of November relative P/E stood at 0,7 and 90-Day Volatility was Earnings per share were approximately Euros, what is a little bit less than at the mid of the fiscal year. The risk is evaluated by beta. Beta shows how much the price of equity depends upon market (whether it s aggressive or defensive). The most recent calculations of beta dated November,15 show that the equities of Astarta Holding are rather defensive (Beta vs. WIG20= 0.767). On the other hand, equities of Astarta are more dependable on the market than the shares of Mriya. For Astarta there is a strong correlation between its own yield and general market yield, where its shares are being traded. - Page 2 -

3 Figure 1. AST Prices & WIG Index Table 3.1. Regression Source: P&A Estimates Coeffici ent Table Regression Source: P&A Estimates Std. Error t- Statisti c Prob. C(1) C(2) R- squar ed Durbin-Watson stat Coeffici ent Std. Error t- statistic Prob C(2) R- squar ed Durbin-Watson stat 1.80 Peer group analysis (in Euros) Table 2. Competitive Overview and Companie s Value *EUR Astarta Mriya Ukrros Earnings 1,157 0,155 N.A. NSO P/E trailing N.A. Market Capitalization Day Volatility Beta vs.wig20 =0.767 vsdax= 0,312 vsdax= N.A. Source: Bloomberg, P&A Estimates Mriya Agro Holding PLC is an agricultural holding company. The Company cultivates agricultural commodities such as wheat, corn, rapeseed, sugarbeets, buckwheat, potatoes and others crops in parts of the Ukraine. PRICE at Frankfurt Exchsnge: EUR (mid November) UkrRos is a sugar producer company in Ukraine. The Company is a vertically integrated holding company which operates sugar refineries, produces grain crops, sugar by-products such as granulated pulp or molasses, and other agricultural goods. PRICE at Frankfurt Exchange: EUR (mid November) The above given table shows that Astarta Holding has better earning than competitor and lower 90-day volatility. We would like to emphasize that Mriya and Ukrros are considered to be quite profitable companies, though a snap look at the table proves that Astarta s stocks are to be evaluated higher. Comparison with key European sugar producers gives the following results (as of Dec 6): Table 3. Competitive Overview and Companie s Value Company Price P/E(trailing) Suedzucker EUR Agrana Beteiligungs EUR Greencore Group EUR N.A Associated British Foods 1, GBp Danisco DKK Astarta Holding PLN Peer's Mean Figure 2. Change values of GDP & Stock Prices Table 3.2. Regression Source: P&A Estimates Coeffic ient Std. Error t- statistic Prob C(1) C(2) R- squa red Durbin-Watson stat 1.81 Source: Bloomberg, P&A Estimates The cross-sector analysis based on P/E comparison has once again proved that Astarta's stocks are relatively underestimated. We suggest STRONG BUY recommendation. (Change equals 284%). Astarta Holding N.V. largely depends on sugar prices. To see the connection between world sugar prices and the price of Astarta s equity we suggest regressing these indexes. We have taken the official data on monthly sugar prices from FAO, where the prices are measured in cents per pound. And composed a regression, where the monthly price of Astarta s stock had been taken as a dependent variable. By doing this we have clearly seen that there is a definite correlation between these signposts. An increase in world sugar prices leads to increase in equity value: if prices raise 1 cent per pound than the price of equity will increase by 1,95PLN. But it doesn t happen immediately. Some time is required. (Table ) We have counted that the mean monthly income per equity amounts to 4,45%. Even if 2008 is taken into account (though during this period almost all the companies declared losses and the stock market was adversely affected) we still have a positive yield. So an investor, who has been owning Astartas equities for 3 years, earns 4,45% in average. This we consider to be a good signpost. Semiannual calculations of yield show even more promising figures: the yield per share equals 12,20. Annual yield amounts to 7,90%. We took weekly change values of Astarta Holding N.V. stock prices as a dependent variable and weekly change values of WIG index of the Warsaw Stock Exchange as an independent variable. The results show that R-squared indicator is relatively high (0.32), which means that around 32% of change in stock prices is related to the change in WIG index. C(2) coefficient is , which means that if WIG index chages by 1%, the stocks price will change by 1,46%. We can conclude that WIG index has relatively high influence on Astarta Holding N.V. stock prices. (Figure 1.0, Table 3.1) Then we took quarterly change values of GDP of Ukraine as an independent variable and quarterly change values of stock prices as a dependent variable. R-squared indicator is low (0.046), which shows that GDP doesn t have big influence on stock prices. From the graph we can also see that there isn t big correlation between these variables. C(2) coefficient shows that 1% of change of GDP leads to 0.278% of change in stock prices. So we can conclude that GDP has low influence on stock prices. (Figure 2.0, Table 3.2) - Page 3 -

4 Figure 3. Sugar CPI & Stock Prices Table 3.3. Regression Source: P&A Estimates Coefficient Std. t- Prob. Error Statistic C(1) C(2) R- square dd Durbin-Watson stat Figure 4. Dynamics of Monthly Wage & Stock Prices Table 3.4. Regression Coeffi cient Std. Error Source: P&A Estimates t-statistic Prob. C(1) C(2) R- squar ed Durbin-Watson stat 1.75 The third regression includes sugar prices as an independent variable and stock prices as a dependent variable. R-squared indicator is relatively high ( ), so around 30% of change of stock prices is explained by the change of sugar prices. C(2) coefficient shows that 1% change in sugar prices leads to 1,02% change in stock prices. We can conclude that sugar prices have big influence on stock prices. (Figure 3.0, Table 3.3) Finally, we took average monthly wage in Ukraine as an independent variable and stock prices as a dependent variable. R-squared indicator clearly shows that wage has almost no influence on stock prices. C(2) coefficient shows that change of wage by 1% leads to change of stock prices by 0.149, but it seems that in reality there s almost no correlation between these two variables at all. (Figure 4.0, Table 3.4) We have counted that the mean monthly income per equity amounts to 4,45%. Even if 2008 is taken into account (though during this period almost all the companies declared losses and the stock market was adversely affected) we still have a positive yield. So an investor, who has been owning Astartas equities for 3 years, earns 4,45% in average. This we consider to be a good signpost. Semiannual calculations of yield show even more promising figures: the yield per share equals 12,20. Annual yield amounts to 7,90%. Our valuation of Astarta Holding combining DCF and comparative valuations yields a fair value (FV) of PLN/share. We suggest a 71.6% upside to the stock s current market price and justify a Strong Buy 8recommendation. Astarta is ranked highly thanks to its strongly positive financial outlook stemming from growth in sugar prices, good stock liquidity and high corporate governance standards. DCF MODEL Our DCF model for Astarta Holding reflects the improved sugar pricing outlook for Higher cash flows forecast for stem from a larger land bank and thus increased production of sugar beet and sugar as well as grains. We have incorporated the negative impact of this summer s heat wave on sugar beet output in Ukraine, and included many adjustments, such as accounting for the cancellation of gas-price subsidies for agricultural producers in Ukraine (a result of Ukraine s agreement with the IMF). The model yields a fair equity value of $ 1,328,304 equivalent to PLN146.38/share at the 6 Dec exchange rate (we assume the PLN/$ exchange rate will be flat YoY). Our model of the company is based on Astarta s announced development targets: expansion of sugar beet processing capacity and land bank to 40,000 tonnes/day and 300,000 ha by 2015; introduction of a trading division that will handle 500,000 tonnes of grain and oilseed in five years; and capex estimates based on historical investment costs. Currently Ukrainian agricultural producers enjoy two major subsidies: they pay zero VAT tax, and have the option to pay a fixed agricultural tax (FAT) instead of the income tax (the FAT comes out to roughly $2/ha of land under the company s control, which is insignificant for such a large corporation as Astarta. Table 4. Discounted Cash Flow Model DCF model Input Output WACC Calculation Enterprise value Target Capital Structure Present value of Free Cash Flow Debt to Total Capitalization 31,2% Equity to Total Capitalization 68,8% Termina Value Debt to Equity Ratio 45,3% Discount Factor 0,58 Present Value of Terminal Value Cost of Equity % of Enterprise Value 67% Risk-free rate 5,5% Market risk Premium 9,0% Enterprise value Levered Beta 0,60 Less: Total debt Size Premium 0,0% Plus: Cash and Cash Equi Cost of Equity 10,9% Net Debt Cost of Debt Implied Equity Value Cost of Debt 17,5% Outstanding shares Taxes 20,0% Implied share price 48,95 After Tax Cost of Debt 14,0% Implied share price PLN 146,38 Implied multiples WACC 11,8% Enterprise Value SALES Current share price PLN 85,30 EBITDA Current share price USD 28,52 Implied EV/SALES 3,9x Implied EV/EBITDA 11,9x Source: Company Database, P&A Estimates Upside 71,6% - Page 4 -

5 Business Description Astarta Holding N.V is a group of companies with a parent holding company established under the laws of the Netherlands and with all production assets based in Ukraine. These assets are controlled by Ukrainian holding company LLC Firm "Astarta-Kyiv". Astarta Holding is a vertically integrated company engaged in the food processing industry. Astarta covered around 18% of the Ukrainian sugar market in Its main activities comprise the production and trade of sugar from sugar beet, sugar by-products and related services. The Company is also involved in growing and selling various grain crops and oil seeds, as well as in cattle farming. Its product portfolio consists of granulated sugar, white loose sugar, liquid sugar mass used for the production of spirit, syrups, yeasts and food acids. Astarta Holding NV offers seeds of sugar beet; fertilizers and plant protection agents; fuel and lubricants, as well as advisory services. The Company operates mainly on the territory of Ukraine through its subsidiary, Astarta Kyiv TOV. Astarta Holding NV trades on the Warsaw Stock Exchange. The group is organized into three main business segments: production and wholesale distribution of sugar, growing and selling grain and oilseeds crops (agriculture) and dairy cattle farming. While Astart s agriculture and cattle-farming segments together make up 35-50% of gross profit (depending on the year). The group's other operations mainly comprise the production and sales of canned goods, fodder and gas. Cattle farming is their additional, non-core activity. Figure 5. Company s Revenue Figure 6. Shareholder Structure 31% 29% Shareholder Structure 40% Source: Company Database V.Inavchyk V.Korotkov Free float Source: Company Database According to its 5 year growth plan, Astarta will increase its cropland to 300 thousand ha in 2015 and produce a grain and oilseed plant output of 1 mn tonnes. By 2015, the production capacity of the sugar lines are expected to increase to 600 th tonnes and the cattle-farming business will produce 100 th tonnes of milk a year. Positive sugar price trend for the company will remain, Astarta effectively manages costs, having become 90% self-sufficient in sugar beet, #1 sugar producer in 2009 as for the forecasting period we estimate it as the 75-80% self-sufficient company. The Group's financial results demonstrate sustainable growth following efficiency improvements, successful consolidation of assets and positive market movements as for 9M10 report. ASTARTA holds the position of sugar producer No. 1 in Ukraine and we expect it to remain on the same position in the nearest 5 years; land bank increased up to 190 thousand hectares in 2010; yields of main crops down y-o-y due to unfavorable weather conditions but still 15-30% above Ukrainian averages. Decrease in production will be compensated by higher prices for key products; average consumption of natural gas per ton of beet processed down by 10% y-o-y; winter sowing campaign for 2011 harvest finished on the area of 39 thousand ha, including 36 thousand ha of winter wheat or 9% up y-o-y; in full conformity with the technological scheme, cultivation of soil has been finished, mineral fertilizers for the next sugar beet harvest has been applied at over 40,000 ha. The total debt of the company amounts to 85,170 Euro as for June The export sales of 12% of total sales covers interest payments and amortizes a part of principal repayments received in foreign currencies. The export revenue has increased by 46.2% since Historical prices Debut price: ( ) High: ( ) Low: 7.89 ( ) The capitalization of Astarta Holding N.V since August 2006, now stands at about USD 500 million, with a book value of USD 150 million. - Page 5 -

6 Industry Analysis and Competitive Overview Table 5. Competitive Overview and Company s Value Company Current 52 Week range Net Income Market cap EV/EBIT Price DA Astarta 28 USD 8.52/28.92 USD mln 1, mln 7.41 Mriya 9.43 USD 3.57/9.43 USD 128mln mln 9.92 Kernel EUR USD 50mln mln 8.73 Ukrros EUR USD 33.7mln mln 4.5 Dakor EUR N.A ,2 Source: Bloomberg, P&A Estimates Figure 7. Companie s equity prices Source: Company Database, Bloomberg Mriya Agro Holding Mriya Agro Holding is one of the leading Ukrainian agricultural companies, with a big prospective of growth in the next few years. The company is highly self-sufficient and vertically intergrated. Mriya Agro Holding produces its own seed material. The factory processes up to 300 tons of seeds per 24 hours. It has a full production chain. Mriya's primary focus is to cultivate wheat, rapeseed, sugar beets and potatoes, which cover approximately 75-80% of its land. Other crops (corn, buckwheat, barley, other) are introduced to the crop mix as required to sustain a diversified product range. Mriya is one of the most profitable Ukrainian agro companies; 2010E crop yields 60-80% higher than respective domestic averages; low debt, well diversified products, plans to increase its arable land under management and build its first port silo with access to the Black Sea. Mriya should not be considered as a strong competitor to Astarta in the field of sugar production, as it s main focus is not sugar. The further diversification of Astarta s activity is not under threat of losing it s positions from the Mriya s side. Commodity price risk, risks to crops due to unfavorable weather (September 2010 brought decline in expected yield); the imposition of grain export quotas reduces export orientation of the company (wheat exports at 500 kt, barley at 200 kt and corn at 2 Mt (later the government agreed a separate 2 Mt corn shipment to Russia) as these quotas were imposed upon some companies, when some were left is more favorable position). Kernel Holding Kernel is the Ukraine's largest agricultural company with a vertically integrated corporate structure, a leader in the Ukraine's bottled sunflower oil and oil export market, one of the country's largest grain exporters. Kernel is among the top three grain exporters in Ukraine. Main crops exported: Wheat, Barley, Soya Beans, Rapeseed, Corn and Peas. Increased sunflower seed crushing capacity by 510 kt to 2.0 Mt p.a. after launching a new crushing plant in Mykolayiv region in June and expects it to start running at full capacity in January 2011; relatively low leverage with a 2010FY (June-July) Net Debt/Equity of 46%; acquired domestic crusher Allseeds to become Ukraine s No. 1 sunflower seed crusher and second-largest sunflower oil exporter. Raw material supply risk for crushing plants; sunflower seed and grain crop price volatility; imposition of grain export quotas. Creativ Group «Creativ» provides over 70 types of high quality and cost effective fats and a wide range of margarines (over 20 types) for commercial processing and retail market. Industrial group «Creativ» also produces special-purpose margarines, bottled refined oil for consuming purposes and filling for further processing. Significantly undervalued compared to peers; successfully launched two new processing plants; working on silo construction and land expansion; plans to open new oil extraction plant with total processing capacity of 330 kt of sun seed p.a. by September 2011, low stock liquidity; risk of raw material shortages, doesn t have full production chain; heavy leverage. UkrRos Ukrros is a vertically integrated agricultural holding Company, one of the market leaders in the Ukrainian sugar industry. Sugar production. Sugar beet farming, sugar production, trading sugar and processing products.farming business. Farming and marketing of cereals and oil-bearing crops. Significantly undervalued compared to peers; positive sugar price trend; 50% self-sufficient in sugar beet; #4 sugar producer in Ukraine in Low stock liquidity; heavy leverage; sugar price volatility; ongoing management reshuffle. Dakor Agro Holding Is a vertically integrated agricultural company that unites 4 working sugar-refineries, which are situated in three regions of Ukraine, 30 agricultural enterprises, which lease 106 thousand hectares of land, the lime end sand pits, the motor transport enterprise, the biofuel production plant, grain-storage plant and other departments. DakorWest (Dakor) remains the only stock of any Ukrainian sugar producer that failed to react to a 93% growth in sugar prices over the last 12 months. Increased crops of sugar beet v.s. to the shortage of other cultivates cultures. The company is expected to increase it s profits in accordance to the positive sugar price trend. High risk company, low liquidity. Since the crisis the Astarta Holding is the fastest growing company in the sugar production sector. In the field of its specialization none of the listed companies can be named a strong competitor that may threaten the position of #1 sugar producer of Ukraine. We expect further development and company growth of Astrarta and predict it will strengthen its position on the market. As the Ukrainian Sugar Association - Page 6 -

7 announced its projection for domestic sugar production in the 2010/11 marketing year at 1.84mmt, in the middle of its previously announced range of mmt, UkrNews reported. With domestic consumption expected at about 2.0mmt and up to 0.267mmt of duty-free imports of raw cane sugar, UkrSugar expects the sugar market will be balanced in the coming year. According to Ukrstat the sugar beet area under crop has significantly declined in sizes since 1990, when it amounted to ha 1607 ths, and in 2009 to ha 322 ths. This show the positive trend to the rise of the landbank of Astrarta previously announced to increase by 300 ha by Land bank increased up to 190 thousand hectares this year. Other Headings Relevant to Company Other headings relevant to the company Astarta Holding NV plans to increase output 42 percent after prices doubled last year, Chief Executive Officer Viktor Ivanchyk said. Astarta may increase output to 320,000 metric tons after plantings of sugar beet climbed to 40,000 hectares (98,800 acres) from 35,000 hectareslast year, Ivanchyk said in an interview in Kiev. Sugar prices doubled in 2009 after bad weather curbed crops in Brazil and India, the largest producers. Domestic prices are at a fair level and allow profits from growing sugar beet and refining raw sugar. This year, the Agriculture Ministry forecast the sugar beet harvest will be 17 million tons, up 70 percent from last year. The government expects refined sugar output to be as much as 2.2 million tons in the marketing year starting Sept. 1, Agriculture Minister Mykola Prysyazhnyuk said. Sugar Imports Ukraine s production last year fell short of domestic demand of about 1.8 million tons, according to Economy Ministry estimates. At the beginning of April, imports of refined sugar in the current marketing year came to 257,233 tons, according to the Economy Ministry. Ukraine can sharply increase sugar output to 3 million tons a year within five years and easily become a sugar exporter, Ivanchyk said. Astarta wants to be able to export sugar to Russia, Georgia, Azerbaijan and possibly the European Union, he said. After joining the World Trade Organization in 2008, Ukraine agreed to allow up to 260,000 tons of sugar imports at a duty of 2 percent, with shipments above that level carrying a duty of 50 percent. Growing sugar beet in Ukraine was unprofitable in three of the last seven years after bumper crops kept domestic prices low, according to the U.S. Department of Agriculture s Foreign Agricultural Service. Largest Ukrainian agrarian Holding based upon financial reports of July-September 2010 has earned net profit of EUR 35,24, what is 15 times more than in an alike period of In UAH net profit of Astarta has increased 13 times up to UAH360,63 mil. As a result the profitability of EBIT and EBITDA grew respectively from 39% to 62% and from 47% to 72%. ASTARTA Holding N.V. (the Company) informs that Aluxes Holding Limited, one of the two majority shareholders of the Company wholly owned by Mr. Valery Korotkov, Chairman of the Board of ASTARTA Holding N.V. sold on 23 September ,600,000 shares, each share representing one vote, in the Company, bringing the total shareholding of Aluxes Holding Limited from 8,796,883 shares prior to the sale, to 7,196,883 shares following the transaction, such shareholding, post transaction, being equivalent to 28.79% of total shares outstanding. The shareholding of the other majority shareholder of the Company, Albacon Ventures Limited wholly owned by Mr. Viktor Ivanchyk, CEO of ASTARTA Holding N.V., has not changed and represents 40.19% of total shares outstanding. After this transaction, the total freefloat of the Company's shares has been increased from 24.62% to 31.02%. Ukrainian agricultural company Astarta Holding may still this year finalise the purchase of one sugar factory, the firm's CEO and biggest shareholder Viktor Ivanchyk has told the "Parkiet" daily in an interview. Astarta may buy an operating plant or one that has ceased production several years ago, he added, stressing that Astarta was interested in an entity with a large land bank. Ivanchyk said that Astarta Gould not issue Soares to finance the transation as it had enough own resources plus possibilities to draw new credits. Astarta Holding posted consolidated net profit of UAH mn in H1/2010 vs. UAH mn profit a year earlier. Consolidated revenue in this period was UAH mn compared with UAH mn a year earlier Export sales Total export sales in 2009 grew by 46% y-o-y to EUR 14.5 million (UAH 164 million) and constituted approximately 12% of the total sales (EUR 9.9 million or 8% of the total in 2008). The Group exported 38% of dry granulated pulp to foreign consumers as a highquality animal feed. Molasses was mainly exported to EU-27 consumers (57%), with the rest 43% sold in Ukraine (distilleries and yeast producers). Crops were exported more actively than in 2008, resulting in EUR 10.8 million of export revenues (37% of the total of the category) compared to EUR 7.4 million in ASTARTA s policy is to secure sufficient level of the export sales to cover in full the interest and principal part of debt received in foreign currencies with currency proceeds. This policy is well supported by increasing competitiveness of the Group s products on international markets. Astarta ranks first on the sector analyst s ranking scale thanks to its strongly positive financial outlook stemming from growth in sugar prices, good stock liquidity and high corporate governance standards. - Page 7 -

8 Figure 8. Profitability of Agricultural Sector Source: State Statistic Committee Figure 9. Dynamics of CPI & PPI Source: State Statistic Committee Figure 10. Volumes of Agricultural Production Source: State Statistic Committee Figure 11. Agricultural Crops Area Source: State Statistic Committee Ukrainian sugar market remains rather isolated from international markets and has shown very low correlation with international sugar prices such as those quoted on LIFFE and NYBOT. Thus, a possible decline in global sugar prices in 2011 implies little downside price pressure for the Ukrainian market. Ahead of the 2010 sugar processing season (September-December), Astarta boosted its processing capacity by 29% y-o-y to 27 kt of sugar beet per day. In September, the company signed a management agreement with an acquisition option for the Volochyskiy sugar plant (3.4 kt processing capacity) in Khmelnytskiy region, located near one of Astarta s agro divisions and its other sugar plant in the region. Additionally, the company improved energy efficiency at its plants, reducing natural gas usage by 11% y- o-y to 32 m3 per tonne of sugar, implying a cost reduction of $11 per tonne of sugar output or $2.4m annually based on the 2010 sugar production forecast. In 9M10, Astarta sold almost 74% of its sugar stocks to large industrial consumers, with leading domestic confectionery Konti (#2 by volume) being the largest buyer. Other large consumers included AVK (#3 confectionery producer) and two beverage groups, Coca-Cola Ukraine (carbonated drinks) and Sandora (Ukraine s largest juice producer owned by PepsiCo). Industry Overview and Competitive Positioning Ukrainian agro-industry is one of the most perspective sectors, because Ukraine belongs to the biggest wheat, barley, corn and sunflower exporter in the world. Also sugar production grows rapidly. It depends on plant modernization and diminution of gas usage. Sugar production: Sugar beet production is higher than in previous years. The general production is 4,9 mn t that is 2,3 times more than in 2009, medium productivity equals 291 centner per 1 ha. Sugar resources amount to 2300 thousands t, including own production thousand t, and import 445 thousand t on account of year quota and import of white sugar from Belarus. Forecast for 2010/11: Sowing area for sugar beet 400 th ha Productivity 35 t/ha Gross gathering 12 mn t Sugar production 1500 th t (and WTO quota - 267,8 th t) Sugar market potential: Land area could be enlarged to th ha, and later up to 1 mn ha. In 2-3 years productivity could be increased to centner per ha, and in 5 years centner/ha, sugar beet gathering 40 mn t. The implementation of new technologies decreases gas and energy usage. It helps to reduce production costs and to secure the highest work productivity in times. And sugar production could be increased up to mn t. Sugar market problems: A big problem for Ukrainian sugar producers is its high production cost what results from low plant productivity, old technology, high fuel consumption Sugar substitutes: problems or alternative? Sugar substitutes are delivered uncontrolled in Ukraine and they are used in food production. Some part is delivered with coffee and tea pockets or illegally. But Ukraine has a good potential for biological sugar substitutes production on the basis of Stevia. Grain sector in Ukraine Grain sector in Ukraine is a strategic brunch of state economy. The export of Ukrainian grain is growing up. Since 2000 the number of importers increased from 46 to 95. The percentage of export to Europe is 12 %, to CIS 1%, to Asia 60 % and to African countries 25%. Considerable importers of corn are also Iran, Israel, Syria. Barley is exported to Saudi Arabia. Productivity: Land area is decreasing and also productivity. Average productivity is 25,8 centner of grain per 1 ha. It has dropped by 9,2% since Sunflower production: Ukraine is the biggest sunflower exporter in the world. The main importers are countries of the Middle East and EU countries. Volume of production is 1,3 times bigger than in 2009 and amounts to 5,0 mn t, the average productivity is the same. (15,9 centner / 1 ha) Cattle-farming production: Cattle-farming is not the core brunch. Large part is imported and while the volume of cattle is decreasing because of unprofitability. The main problem is low purchasing power of Ukrainian consumers. In January-September 2010 production of milk decreased by 3,6 %, the average yield of milk from one cow increased to 40 kg (by 1,3 %) and amounts to 3158 kg. General milk production decreased in all regions y- o-y. Milk products prices increased rapidly because of the lack of cattle and seasonal price growth, which amounts to 40-55%, other problems are caused by not providing reforms to the sector and ineffective state support. Realization of agricultural production: General number of realized production decreased by 5%, plant production 13%, while the cattle-farming increased by 9% y-o-y. Average prices of agro production increased by 27%, including plant and cattle production correspondingly 38% and 13%. - Page 8 -

9 Figure 12. Net Sales & Gross Profit Figure 13. Pre-Tax Income & Net Income Figure 14. EBITDA & EBIT Net Sales Gross Profit Pre-Tax Income Net Income EBITDA EBIT Financial Analysis During the 9-month period of 2010 the company has shown significant improvement in its financial results. Compared to the same period of 2009, total revenue increased by 74% to EUR130.7 million. Gross profit rose by 180% to EUR63.8 million. Gross margin increased from 30% to 49%. Net profit rose by 262% to EUR76.2 million. Net profit margin increased from 28% is 58%. These figures show that the company has recovered from the crisis rather quickly. Earnings Consolidated return rose by 74% to EUR130.7 million because of huge increase in sales and positive situation on the target markets. Cost of production increased less significantly, by 45% to EUR74 million. The company reported big cut in non-production related costs. As a result, administrative costs fell from 7.9% to 5.7%. Sales costs rose by 68% because of increased amount of sales and rising costs of transportation. Other profits from operational activities increased by 158% to EUR6.9 million, thanks to state subsidies in livestock sector. As a result, EBIT rose by 179% to EUR81.6 million. EBIT margin increased from 39% to 62%. EBITDA rose by 165% to EUR93.9 million. EBITDA margin increased from 47% to 72%. During the period sugar sales increased by 12.5% and profit rose by 114% to EUR93.3 million. Thanks to improvements, the company was able to decrease the amount of gas consumed during the production by 10% compared to the previous year. As a result of difficult situation on sugar beet market due to adverse weather conditions in summer 2010 there is likely to be a deficit of this product on Ukrainian market in short term. So the prices tend to have potential for growth, which will positively reflect on the company financial results. The company also increased the areas of used for industrial crops growing. Area used for sunflower growing increased by 25%, soya by 73%, corn by 12%. Average crop capacity within the company is 15 to 30 percent higher than the Ukrainian average. However, due to export limitations the amount of industrial crops sales drop by 15%, but the income remained stable because of rising prices. We used 6-year DCF model to estimate the future financial results of the company. Net sales are expected to increase by 62.8% in 2010 and by 19% in average every year during the The similar situation is expected to be with EBIT and EBITDA, while EBIT and EBITDA margin are likely to be more or less stable. We expect the gross profit to increase from 16% to 23-26% in the following years. Although pre-tax income and net income tend to be not very good in 2010 compared to 2009, we forecast that it will increase significantly in 2011 already. Cash Flow Increasing sugar prices will definitely lead to rise in company profits. As a result, we expect the profit before tax to reach the number over $100 mil and decrease, but remain stably high during the following years. Increased profits will definitely give the company the possibility to increase the operating cash flow, which, as we expect, will show stable growth after Balance Sheet & Financing In result of crisis in liabilities of the company have increased from 80 mln to 200 mln, but we expect the position of the company will be stable during the next 5 years. We expect liabilities to decrease. We predict that amount of inventories will show stable growth. It will increase from 5 to10% y-o-y. Total assets are expected to double till That shows stable growth of the company and its good financial perspective. Retained earnings are growing y-o-y so that s why we could expect the possibility of dividend s payment in the near future. Although the company has never paid dividends we expect this to happen in the following years. All these financial figures clearly show that the company has good position and has good financial perspectives. We forecast stable increase in gross profit, EBIT, EBITDA, net income and other. This is why, and the results of the DCF model have proven it, we strongly recommend buying the company s shares Investment Risks Market risk The company is sensitive to market-driven pricing in the field of corn and sugar. Selling prices for sugar and grain products are volatile and determined by conditions on the domestic and world markets. Since poor crops in India for 2 years have made prices skyrocket, this year s poor yield in Brazil will make the trend become stronger, so the prices still will go up both on the international and domestic markets. After these insufficiently high prices the market may fall causing big complications for Astarta, as the profits will decline rapidly, the repayments will make a burden and after supposed dividends pay off, the company shall probably reinvest all money to repay the debt. Among the key factors affecting the markets are weather and the amount of yields, seasonality of demand and supply, the availability and price of raw materials, biological factors, crop yields and government regulations. If any or all of these factors depress prices or increase operating costs, Astarta s business and financial condition may be adversely affected. Production cost growth Costs related to energy, including gas, inputs and labor constitute a significant portion of Astarta s operating costs. As the gas prices went up by 50% and still will increase next year with the remaining potential of growth, the companies' revenues might be sensible to this factor. Government statistics confirm wages and energy prices in Ukraine have been rising. It is expected that these costs will rise further in the coming years too. Although the company is currently working to reduce energy consumption and manual labor, panning to introduce the methanization as an alternative, the current and expected results in the upcoming years can affect the returns rates negatively. - Page 9 -

10 Regulatory risk Agricultural markets and agricultural production generally are subject to prevailing political and social policies. As the quotas have already been introduces and reversely affected the exports of some agricultural companies, Astarta may have become sensitive to currencies volatility, as to the foreign debt return rates. At times, governments impose production and selling restrictions in the form of quotas, tariffs and other mechanisms to protect national producers and the risk will continue with the political instability in the country (the investments into Ukrainian economy have already dramatically dropped in 2010). These restrictions can affect volumes and prices in national, regional and world markets. There is no guarantee that the Ukrainian government will not impose protectionism measures. But with the introduction of new tax law the taxation will diminish for the big businesses in Ukraine. The land lease and quotas or restrictions of it to Astarta should have severely influenced its activity. Potential cancellation of tax preferences With the Ukrainian government facing a challenging fiscal situation and IMF requirements to cut the budget deficit, we do not rule out tax benefits earlier awarded to agricultural producers (VAT retention, fixed agricultural tax, etc.) may be revoked. The abolition of the preferential tax regime could have an adverse effect on Astarta s financial results. Contracts non-prolongation In 9M10, Astarta sold almost 74% of its sugar stocks to large industrial consumers, with leading domestic confectionery Konti (#2 by volume) being the largest buyer, other large consumers included AVK (#3 confectionery producer) and two beverage groups, Coca-Cola Ukraine (carbonated drinks) and Sandora (Ukraine s largest juice producer owned by PepsiCo). The non-prolongation means loose of revenues and until the chain of consumer consumption is not yet established, the risk exists. Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company s securities. Ratings guide: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security s weight in the WIG 20, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Investment Research Challenge and Global Investment Research Challenge Acknowledgement: CFA UKRAINE Investment Research Challenge as part of the CFA Institute Global Investment Research Challenge is based on the Investment Research Challenge originally developed by the New York Society of Security Analysts. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA UKRAINE, CFA Institute or the Global Investment Research Challenge with regard to this company s stock.. - Page 10 -

11 APPENDIX APPENDIX A Income statement Income statement, USD 2010E 2011E 2012E 2013E 2014E 2015E 2016E ('000) Net Sales , , , , , , ,4 % growth 62,80% 8,70% 27,80% 22,80% 17,00% 18,40% 19,70% COGS , , , , , , ,9 % sales 84,00% 78,00% 74,00% 75,00% 76,00% 77,00% 77,00% Gross Profit % sales 16,00% 22,00% 26,00% 25,00% 24,00% 23,00% 23,00% Other Operating Income/Costs, net % sales -13,60% -13,00% -9,40% -9,30% -9,20% -9,00% -8,90% EBITDA EBITDA margin 32,70% 38,40% 38,80% 37,70% 36,60% 35,40% 35,30% Depreciation % sales 3,10% 3,40% 3,40% 3,40% 3,40% 3,40% 3,40% EBIT % margin 29,60% 35,00% 35,40% 34,30% 33,20% 32,00% 31,90% Financial 15910, , , , , , ,43 Income/(Expense) 5,80% 8,00% 8,00% 8,00% 8,00% 8,00% 8,00% Other Income/(Expense) -7,20% -18,00% -17,00% -16,00% -15,00% -15,00% -15,00% Pre-tax Income Tax -8447, , , , , , ,4 Net Income % margin 12,20% 19,30% 20,90% 21,30% 22,00% 21,00% 20,90% - Page 11 -

12 APPENDIX B Balance sheet Balance sheet, USD ('000) E 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E Current Assets Cash & Equivalents Receivables Inventories Other Current Assets Fixed Assets Bioligical assets 31530, PP&E, net Other Fixed Assets Total Assets Shareholders' Equity Par Capital Additional paid-in capital , , Retained Earnings Total equity attributable to equity holders of parent company Minority interests 5206, Dividends Current Liabilities ST Interest Bearing Debt Payables Other Current Liabilities LT Liabilities LT Interest Bearing Debt Other LT Liabilities Total Liab. & Equity Source: Company Database, P&A Estimates - Page 12 -