AGRO-INDUSTRIAL HOLDING ASTARTA-KYIV TERNOPIL NATIONAL ECONOMIC UNIVERSITY

Transcription

1 AGRO-INDUSTRIAL HOLDING ASTARTA-KYIV TERNOPIL NATIONAL ECONOMIC UNIVERSITY 1

2 Introduction Report date: Rating Target price (comm), UAH 61,88 Current price (comm), UAH 226,22 Downside to fair value 72,65% MktCap, UAHmn 5655,55 EV, UAHmn 6585,18 Reuters Bloomberg HOLD ASTH.WA AST PW Equity Common shares outstanding, mn 25 Change from 52 week high: -8,7% Date of 52 week high: Change from 52 week low: 129,0% Date of 52 week low: Web: Free float in UAHmn 1463,28 Major shareholder V. Ivanchyk with shareholding 40,19% Share price performance over the last 1 month 10,32% 3 month 14,80% 12 month 84,67% Vertical Integration Astarta-Kyiv is a vertically integrated Agro-Industrial Holding, acting within the frames of one enterprise (appendixes A). The products got on the first stage are used as a production factor on the other. It guarantees the sustained provision of the raw materials, creation of powerful mechanism for avoiding the price regulation through performing the internal Company s operations, and ensures the consolidation of its positions on the market. All above noted, produces a positive effect on the value of manufactured goods, since it enables to significantly reduce the production costs. In particular, 60% of the costs for sugar production accounts for the raw. Decrease of the cost amount eventually increases the Company s profits (appendix B). Social Responsibility Social business responsibility is the principle of Astarta-Kyiv. The noted approach meets the UNO Global Agreement, which the Company joined in January Astarta considers the participation in the development of Ukrainian community and a state, as a whole, to be very important and critical, also it pays significant attention and supports those who need it, including orphanage homes, hospitals, war and military veteran board and care facilities, churches, and schools. Specifically, the Holding is concerned with the future of children, thus it issues grants to the advanced students for their education, shares the spiritual values of the nation, supports churches and monasteries (Mharskyi monastery, Svyato-Mykhailivska church), contributes much to improve employment through creating jobs in the areas where the problem is extremely urgent. Responsible Management Ivanchyk, Viktor is a Chief Manager (General Director) of the Holding, he is holding 40.19% of its shares. The founder of Astarta-Kyiv is an executive manager who has been controlling all the processes within the Company from the day of its establishment to now. Victor Ivanchyk is a competent manager characterized with the quality of a leader and ability of an organizer. Resource Potential and Climate Conditions of Ukraine Ukraine is a country where the development of agro-industrial business is very perspective due to its resource potential, i.e. fertile soil. The climate conditions play an important role, since they are favorable for growing agricultural products. Hence, the agro-industrial sector is considered to be one of the most attractive for investment. 2

3 The Description of the Company Astarta-Kyiv is a vertically integrated Agro-Industrial Holding, a leader of sugar and agricultural industries in Ukraine, covering five regional subdivisions. The Company mainly produces highly quality sugar and allied products (molasses, dried beet chips), it grows and realizes cereals and oil plants, as well as meet and milk. The Agro-Industrial Holding Astarta-Kyiv was founded in In the funds were invested into agriculture. In 1999 the controlling block of shares of the first sugar refinery was purchased. On 17 August 2006 the initial public offering (IPO) of the Astarta Holding N.V. was made and listing started on the Warsaw Stock Exchange. At the moment the Agro-Industrial Holding business encompasses six sugar refineries, eighty agro-firms cultivating 185 thousand of arable lands, and a feed factory. According to the results of 2009 production season, the Holding is rated the biggest producer of sugar in Ukraine. Due to the implemented strategy of vertical integration, a complete production cycle has been created beginning with the sugar beetroot growing (raw material), sugar production and up to its realization. The synergetic segment of Agro-Industrial Holding business is an animal production. The regional branches produce daily over 150 tons of milk. Analysis of Agro-Industrial Sector Prospects for further functioning on the market of agricultural products On account of permanent increase of the population on the planet and threat of climate change, as well as of resources limits and urbanization of the society, the global community is concerned with the production preserve of high quality products from natural raw materials. Milk, meet, grain and sugar pertain to the priority foodstuffs. For example, the sugar itself satisfies about 16-20% of calories need for many processing industries (e.g. breadmaking, confectionary, etc.), ethyl alcohol or formulated feed used as the feed for cattle. In addition, grain and sugar make the basis of state reserves. Though the initial capital allocations needed for getting high quality raw materials are substantial, the expenditures for realization of ready made products are rather low. In future the role of the global agro-industrial sector will increase. Availability of underemployed potential Ukraine has the best conditions for the development of the industry (fertile soil, favorable climate and location).its role is growing as the exporting country of raw materials and final products on the world market. Though its share there is minor so far, nevertheless, in our opinion, Ukraine has a great potential to develop that segment of the economy. After the experts estimation, Ukraine can be rated the fifth in the world in the production of agricultural products. Economic Factors Determining the State of the Holding It is observed that for the last years the process of scanty consuming of agricultural products stopped. The exception is the financial destabilization of the global economy resulted by economic crisis. In 2009 the price for sugar cane plant increased twice as much. Ukraine is rated the third after the USA and the EU countries in grain export. Deficit of agricultural products in certain countries In certain world countries the imbalances are observed in sugar supply on the world market in connection with the worsening of weather conditions (Brazil, Australia), shrinkage of high quality raw materials, and restrictive policy of the government (India, EU). The increased demand, deficit of supply, and high prices for sugar are expected to be more urgent. Accordingly, the increase of production capacities will become a critical mission. Initiatives of the Government in the Context of Creation of Favorable Conditions for the Development of the Industry In 2011 the state budget will be planned to fund about UHA 100 mln. for the subsidy renovation of the agrarian sector of economy, since grain and its products make the basis of food security of the country. 3

4 Analysis of the Company The practice of the Holding s sixteen year activity in the area of production of agricultural products ensures the competitive advantages, which are enforced by permanent demand and favorable law. Like other world leaders in this industry including Nestle, Kraft, Dairy Farmers of America, Danon, Friesland Coberco Dairy Foods, Tereos, Acucar Guarani, Suedzucker and Nordzucker, Astarta-Kyiv owns the vertical integration of its operations, which makes a barrier for other companies to enter the market (appendix C). Operation Efficiency Increase in Connection with the Increase of the Demand Expansion of production capacities, and accordingly, the increase of the share on the modernization market, likewise the increase of the efficiency of the available production base and its harmonization with the EU standards, which will enable to lessen (decrease) the consummation of a natural gas; deepening of vertical integration and logistics optimization; expansion of the areas of agricultural lands, and increase of the yielding capacity, which will enable to increase the production volumes of cereals and oil plants (mainly wheat, soybean, and corn); export-biased growth due to: - the EU temporary abolishment of import tax on sugar in the price of 98 per ton (import of raw cane sugar) from 1 December 2010 till 31 August 2011; - introduction of export quotas in India in amount of 2.5 mln. tons will enable the price increase for sugar; - unfavorable and natural weather conditions in Brazil which will bring about the cut (decrease) of production volumes, and decrease of sugar supply; - shrinkage of subsidies (twice) to the sugar producers in the EU countries; - increase of the EU quota for 2010/2011 MP from 350 tons to 1 mln. tons; - Russia s introduction of quota for tax-free sugar imported from Ukraine in amount of 300 thousand tons. In addition, Astarta-Kyiv ensures the production of white sugar, and in perspective it is worth expansion of products manufacturing (i.e. breeding of new breeds of cattle) to improve the production capacities. Financial stability The Company restored its positions on the Warsaw Stock Exchange after its slump resulted by the financial crisis. From 2010 its shares increased by 9% up to US $ (EV/EBITDA under the term that EBITDA for 2009 makes mln) (for now EBITDA grew by 104% up to 51.7mln). The AAA prognosticated ratings for sugar consuming and getting credit of 10 mln. from the EBRD manifest a strong confidence of investors in the Company. In general, the circulation of the Astarta-Kyiv Holding shares on the Warsaw Stock Exchange for the first half of January 2010 made more than thousand units totaling US$ 12.8 mln, which enabled the growth of statutory capital up to US$ (appendix D). Participation in Social Projects Agro-Industrial Holding Astarta-Kyiv takes an active part in social projects to increase the social responsibility of the Holding. In particular, the Company created ten thousand jobs and it supplied 25 thousand landholders with arable soil. In 2009 UHA 12 mln. was allocated for beneficial purposes and community needs. The Agro-Industrial Holding supports ten Principles of UNO Global Agreement on the global improvement of social, economic and ecologic environment, since the decrease of carbon emission by 500 thousand tons contributed much to ensure the ecological protection. In this context it developed the Program of energy efficiency increase of sugar refineries, which will be in effect for

5 Financial Analysis Growth of Holding income is expected to be 9.6% during the next five years. Stable increase of revenue is provided my means of own production capabilities and the excess of product demand over the supply inside the country (appendixes E, F). Operation expenses remain stable, gross profit margin for the expected period amounts to 31, 3%. Plans of sustained Holding growth are ensured through the increase of the share of qualitative cash flow and financial independence. Current ratio is preserved at a fairly high level, i.e. 2.5, which is enough to cover the short-term indebtedness. Quick ratio will be at a level of meeting the requirements of liquidity. It is expected that the share of debt for the period of five years will reduce from 28.4 % tо 16.8%, and the shаre of net debt from 27.2% tо 0%. The reduction of the debt value will bring about the decline in efficiency of assets utilization and he owned capital use (appendixes G, H, I). Valuation We have predicted the Holding income up to 2015, inasmuch as it is inappropriately to predict something in the long term (seasonality of production, considerable dependence of production on the state policy, the contracts are concluded for not more than one year period). We predict the Holding income, using the Discount Cash Flow Model (DCF model), PFTS data, WSE Main Market, data of the Ministry of Agrarian Policy (appendix J). In accordance with our predictions, the operational cash flow up to 2015 will increase by 10%, or UAH mln., an account of stable Holding production distribution. The result of the given calculation is the definition and ascertainment of the fair value of share at a level of UAH The current value of share considerably exceeds the fair one, indicating about the share revaluation. The potential of share price reduction is 72.6 %. But the coefficient level P/E will reach its maximum in 2012 (F2012E; this is significantly lower concerning the middle-level of the industry (37.63) (Source: Bloomberg), that is why, in case of simple shares of the Holding Astarta-Kyiv we recommend HOLD rating (appendix K). 5

6 Risks, which influence on the Company functioning 1. Political risk Frequent change of government and adoption of unexpected entrepreneurial strategic decisions (for example, opening of borders for cheap import products) does not encourage the development of the branch and Agro-Industrial Holding on the whole. Besides it, the opaque schemes of privatization in the sphere of sugar production stop the receipt of foreign investors. However, the development of sugar and dairy products market is one of the nation-wide priorities and export-oriented branches. This is precisely why the country will support them comprehensively. 2. Market risk In case of Company s products falling-off in sales by volume or value terms, the noted loss risk of market segment emerges. Nevertheless, taking into consideration that Astarta-Kyiv is the monopolist at the agricultural products market (rates one of the first in milk and sugar production), the yielding capacity, product quality and crop acreage increases annually, the coming of new workers at the market is a quite complex process, consequently, in the near term the Company will preserve its share in the market segment as well as production facilities. 3. Credit risk Nearly 50% of Astarta-Kyiv financial capacities are short-term and long-term debt liabilities, giving evidence of the Company s dependence on countries financial system, interest rate level on credit resources, as well as state policy of native agriculture producers support. At that, the Company successfully conducts the restructurisation of credit portfolio; thereby the share of long-term liabilities increases. Besides it, the Company directs the foreign currency, received from export operations on the redemption of debts in the mentioned currency. 4. Exchange risk Taking into consideration the fact that Company s indebtedness is expressed in foreign exchange with unstable rate, the cheapening of hryvnia, concerning currency lending and ultimately the cash outflow is defined. Besides it, the government policy concerning devaluation or revaluation of national currency also influences on the noted process. In such a way, the cheapening of hryvnia towards the US dollar and euro considerably augments the value of hryvnia equivalent of the noted liabilities. In order to preserve or reduce the free costs inside Astarta-Kyiv, it is expedient to use prices and exchange risks hedging for limitation of exchange rates influence on the Company s current state, giving the preference to the credits in national currency. 5. Operation risk 1. Natural phenomena and weather environment: the past experience shows that natural phenomena and weather environment influences on the agriculture development and producers activity of the noted branch of economy. Thanks to the production diversification, using of rotation cropping schemes, suitable location of agro-industrial firms, fertile soils of Ukraine and mild climate, Astarta-Kyiv is ahead among the analogical producers from other countries (Brazil, Australia, and India). 2. Unsuccessful projects: the majority of the Company s projects were successful up to now. At the same time, there is no guarantee that in future, everything will be the same. Nevertheless, in the medium term, they are not put in jeopardy. 3. Operation failures and down-times: seasonality and technological disorders course the workplace issues and reduce the amounts of manufactured goods, increasing the amount of damages. At that, Astarta-Kyiv tries to consider the noted factors in its economic activity. 4. Epidemiologic animal diseases: Company s activization in the sphere of livestock production is connected with the high risk of infection, and cattle die-off. For this purpose, the Company uses permanent veterinary checks, concerning the epidemiologic situation in the regions of animal breeding. 6. Investment risk Repeal of benefits on VAT payments while exporting sugar products, opening of borders for cheap import products, as well as impossibility of risk insurance because of the absence of risk controlling mechanism in the end of 2009 does nor create the favorable investment environment in the country. Nevertheless, annually, the deficit of sugar as well as other agricultural products, produced by Astarta-Kyiv increases, speaking for the attractiveness of this market segment for the potential investors (appendix L). 6

7 Scenario analysis There is dependence between the oscillations of the amount of Holding fixed and capitalized expenses. As a result of their five-year increase over the period of , the gradual assets earnings dilution occurs: 2010E 2011E 2012E 2013E 2014E 2015E ROA 22,6% 18,1% 15,7% 16,9% 17,3% 18,0% The potential share price reduction, concerning fair price is 61, 88 UAH. As a consequence of undesired events, the crumbling of current share price is 72, 65%. In case of favorable developments, the growth of the cash flows amount, by virtue of stable growth throughout the availability of discontented demand for product is probable. The coefficient level P/E can considerably increase, inasmuch as the average level of the noted coefficient is 37, 63%. There are no exchange risks, because practically all the enterprise operation is in Ukraine. 7

8 Appendix Appendix A Company s profits 2010E 2011E 2012E 2013E 2014E 2015E Revenue 2170,7 2410,2 2368,3 2765,8 3046,3 3431,6 EBITDA 974,38 892,04 829,46 937, , ,9 Net profit ,4 Return on Assets (%) 22,60% 18,13% 15,66% 16,93% 17,25% 18,05% Return on Equity (%) 44,50% 32,18% 26,48% 26,43% 25,75% 24,33% Appendix B Classification of Holding Competitors by the Segments of their Activity Competitors Livestock breeding Sugar production Agri-cultures Milk production Internal Sugar Association External Westphalia Serge HmbX Ykrros,Ltd. Investagroproduct Rize, Mriya, Dakor Tereos (France), Acucar Guarani (Brazil), Suedzucker Nordzucker (Germany) and Hermes-Trading. Ukragrokom Kremenchuk dairy factory, Unimilk- Ukraine, Halakton Corp.Exhibitions BV Nestle (Switzerland), Kraft (USA), Dairy Farmers of America (USA), Danon (France), Friesland Coberco Dairy Foods (Netherlands) Appendix C Dynamics of Astarta-Kyiv net profit Source: Company figures 8

9 Appendix D Revenues, UAHmn Appendix E Profit Margins, UAHmn 9

10 Appendix F Astarta income statement (2010E-2015E), UAH mn Figure : Astarta income statement (2010E-2015E), UAHmn 2010E 2011E 2012E 2013E 2014E 2015E Revenue 2170,7 2410,2 2368,3 2765,8 3046,3 3431,6 COGS (1318,2) (1610,5) (1633,6) (1911,9) (2109,1) (2377,9) Gross profit 852,5 799,7 734,7 853,9 937,2 1053,7 EBIT 842,51 748,92 675,09 771,21 836,88 935,88 Depreciation 131,9 143,1 154,4 166,6 168,4 181,0 EBITDA 974,38 892,04 829,46 937, , ,9 Financial expense (94) (81) (50) (30) (4) 8,4 Other 48,0 expenses/income 32,60 34,00 36,00 39,00 43,00 Profit before tax 781,5 701,7 661,2 780,5 875,9 992,3 Income tax (9) (8) (8) (14) (21) (29,8) Net profit ,4 Margins Gross profit 39,3% 33,2% 31,0% 30,9% 30,8% 30,7% EBIT 38,8% 31,1% 28,5% 27,9% 27,5% 27,3% EBITDA 44,9% 37,0% 35,0% 33,9% 33,0% 32,5% Net margin 35,6% 28,8% 27,6% 27,7% 28,1% 28,0% Effective tax rate 25% 25% 25% 25% 25% 25% Growth Rates Revenues 60,2% 11,0% -1,7% 16,8% 10,1% 12,6% Gross profit 91,1% -6,2% -8,1% 16,2% 9,8% 12,4% EBIT 84,2% -11,1% -9,9% 14,2% 8,5% 11,8% EBITDA 77,0% -8,4% -7,0% 13,1% 7,2% 11,1% Profit before tax 137,7% -10,2% -5,8% 18,0% 12,2% 13,3% Net profit 138,8% -10,2% -5,8% 17,3% 11,5% 12,6% Ratios ROE 44,5% 32,2% 26,5% 26,4% 25,7% 24,3% ROA 22,6% 18,1% 15,7% 16,9% 17,3% 18,0% 10

11 Appendix G Astarta balance sheet, UAH mn Figure : Astarta balance sheet, UAHmn 2010E 2011E 2012E 2013E 2014E 2015E PP&E 1 248, , , , , ,2 Other fixed assets 258,5 277,7 283,8 336,9 391,2 458,8 Total fixed assets 1 507, , , , , ,9 Inventories 1 105, , , , , ,5 Biological assets 355,2 403,3 409,2 477,8 468,0 461,0 Accounts receivable 148,7 165,1 162,2 189,4 208,7 235,0 Other current assets 260,5 289,2 284,2 331,9 365,6 411,8 Cash & equivalents 40,7 84,2 318,7 225,0 537,9 519,7 Total current assets 1 909, , , , , ,1 Total assets 3 417, , , , , ,0 Equity 1 735, , , , , ,8 LT debt 437,3 359,6 477,9 391,1 298,4 200,0 Other LT liabilities 307,9 251,9 247,5 289,0 318,4 358,6 Total LT liabilities 745,2 611,5 725,4 680,2 616,8 558,6 ST debt 533,0 690,6 606,5 512,8 532,9 264,2 Accounts payable 155,3 176,5 179,2 208,6 235,9 273,2 Other current liabilities 248,6 191,5 194,4 226,4 249,3 281,2 Total current liabilities 936, ,5 980,2 947, ,1 818,6 Total Equity & liabilities 3 417, , , , , ,0 Other ratios Net debt 929,6 966,0 765,7 679,0 293,3-55,5 Gross debt 970, , ,4 903,9 831,3 464,2 Debt/equity 0,56 0,49 0,44 0,31 0,25 0,12 Debt/EBITDA 1,00 1,18 1,31 0,96 0,83 0,42 Current ratio 2,04 2,07 2,50 2,86 2,99 4,00 Quick ratio 0,48 0,51 0,78 0,79 1,09 1,43 11

12 Appendix H Key financial ratios Figure : Key financial ratios E 2011E 2012E 2013E 2014E 2015E Turnover Current assets (X) 0,95 0,96 1,12 1,14 1,10 0,97 1,02 1,00 1,05 Fixed Assets (X) 0,97 1,03 0,95 1,44 1,48 1,37 1,52 1,59 1,67 Total Assets (X) 0,48 0,50 0,51 0,64 0,63 0,57 0,61 0,61 0,64 Profitability EBITDA Margin (%) 34,74% 23,02% 40,63% 44,89% 37,01% 35,02% 33,91% 33,00% 32,55% EBIT Margin (%) 29,07% 15,53% 33,77% 38,81% 31,07% 28,51% 27,88% 27,47% 27,27% Net Profit Margin (%) 24,22% -9,19% 23,86% 35,57% 28,76% 27,58% 27,71% 28,06% 28,05% Return on Assets (%) 11,63% -4,57% 12,25% 22,60% 18,13% 15,66% 16,93% 17,25% 18,05% Return on Equity (%) 20,27% -13,77% 24,21% 44,50% 32,18% 26,48% 26,43% 25,75% 24,33% Solvency Total Debt Ratio (%) 42,63% 66,83% 49,41% 49,23% 43,67% 40,88% 35,96% 32,99% 25,82% Long-term Debt Ratio (%) 4,91% 15,60% 29,18% 17,63% 13,00% 14,97% 10,93% 7,58% 4,43% Liquidity Current Ratio (X) 1,51 0,92 2,15 2,04 2,07 2,50 2,86 2,99 4,00 Acid Test Ratio (X) 0,27 0,21 0,45 0,47 0,42 0,69 0,68 0,98 1,27 Per share Data Total Earnings 5,96-3,57 12,93 30,88 27,73 26,13 30,65 34,19 38,50 Dividents 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Book Value 29,40 25,92 53,41 69,40 86,18 98,68 115,97 132,80 158,23 12

13 Appendix I WACC calculation Figure : WACC calculation Effective tax rate 25,0% Asset Beta 1,88 Debt to Equity 56% Levered beta 2,67 Risk free rate (Eurobonds) 6,88 Debt Premium 5% Equity risk premium 5% Cost of equity 20,2% Cost of debt (after tax) 8,9% WACC 16,2% Appendix J Astarta DCF valuation, UAHmn Figure : Astarta DCF valuation, UAHmn 2010E 2011E 2012E 2013E 2014E 2015E EBITDA 974,38 892,04 829,46 937, , ,9 Less taxation (9) (8) (8) (14) (21) (29,8) Less Capex 167,49 264,18 251,12 258,11 264,35 327,54 Changes in working capital 303,96 188,42 247,50 117,49 280,68 155,05 Unleveraged free cash flow 512,30 447,86 338,80 576,40 481,39 664,11 WACC 16,17 Discounted cash flow 512,30 385,54 291,65 496,19 414,40 571,70 Future cash flow growth rate 3% Terminal value 5195,77 Discounted terminal value 2799,53 Enterprice value, UAHmn 6585,18 PV of 2014E fair enterprise value 2479,12 Net debt + Minorities 2010E 932,23 Fair market capitalisation 1546,88 Market capitalisation, UAHmn 5655,55 Number of shares, mn 25 Fair value per share, UAH 61,88 Current price, UAH 226,22 Downside to fair value 72,6% EPS, UAH 30,88 27,73 26,13 30,65 34,19 38,50 P/E 7,32 8,16 8,66 7,38 6,62 5,88 EV/EBIDA 6,76 7,38 7,94 7,02 6,55 5,90 EV/Sales 3,03 2,73 2,78 2,38 2,16 1,92 13

14 Appendix K Risks peculiarities and factors of mitigate impact isks Peculiarities of development Factors of mitigate impact Political Market Credit Currency Operation Investment - Political instability in the country; - Frequent changes of legislative environment; - Adoption of unexpected entrepreneurial decisions - increase of the number of producers of agricultural products; - appearance of the cheap analogues of company s products at the market - in case of rapid increase of foreign exchange rate, the default on debt risk can emerge; - creditor s change of interest extent on crediting or terms of credit % of company s credits are in foreign currency; - losses, because of up-valuation of exchange rate - natural phenomena and weather environment; - unsuccessful projects; - operation failures and down-times; - epidemiologic animal diseases - repeal of benefits on VAT payments while exporting the products; - opening of borders for cheap import products; - impossibility of risk insurance because of the absence of risk controlling mechanism - new government policy, directed on the cooperation with Russia; - company s development of strategic export-oriented branches of national economy; - access limitation, concerning the sugar market of cheap Belorussian products; - the company is a monopolist at the market; - permanent share increase at the market; - increase of grain crops planting acreage; - using of crop rotation for the improvement of yield effectiveness - the majority of credits were got from EBRD, it is evidence about the highness of creditor s reliability; - restructurisation of credit portfolio, in particular, share of long-term credit share - hedging of exchange risks and prices - automated control system of quality and production; - gradual introduction of innovation technologies and equipment; - breeding of new cattle species; - mild continental climate; - diversification of production; - insurance system - annual increase of sugar deficit as well as other agricultural products. 14