UKRAINE FIXED INCOME RESEARCH November 29 Weekly Digest Ukraine s CA deficit increased by $228mln YoY to $408mln in October Foreign currency reserves of the NBU increased by 1% MoM to $18.9bln at the end of November Avangardco reported 3Q17 results: EBITDA fell by $3mln YoY to - $1mln DTEK 3Q17 EBITDA increased by 18% YoY and 10% QoQ to $189mln Ukraine s CA deficit increased by $228mln YoY to $408mln in October. The country s trade balance (of goods and services) deteriorated by $328mln. The FA demonstrated $563mln worth of inflows (up by $306mln from last year), leading to a BoP surplus of $155mln (up $64mln YoY). Our view: This month s CA deficit came in somewhat above expectations, as the spread between YoY import and export growth widened significantly. Imports in October were up 20% YoY (vs 15% in September) on the back of larger coal, fertilizer, and equipment (agricultural and nuclear power related) shipments, as well as services received (possibly travel related). Exports volumes decelerated from being up 17% YoY in September to 14% on the back of smaller agricultural (caused by a decrease in harvest volumes) and iron ore (less of a price spread) sales, as well as fewer services rendered (partly due to no as much gas going through transit). That said, the 10m17 CA deficit figure amounted to $3.2bln (up by $0.6bln YoY) and is generally in line with our annual forecast of $4.0bln (also up $0.6bln YoY). We thus refrain from changing our outlook at this time, especially given that decreased volumes of agricultural output may have less of an effect going forward (impact should be higher at the end of the season). The FA was able to fully cover the deficit of the current account via asset outflows of the banking sector (close to $1.0bln in total, out of which $170mln were provided to the Ministry of Finance through FX bond placements), despite the fact that retail FX currency sales (a traditional source of funding this year) were practically nonexistent. BoP summary for October and 10m17, $mln Oct-17 Sep-17 10m17 10m16 Exports: 4,694 4,672 43,770 36,957 MoM 0% -1% YoY 14% 17% 18% -7% Imports: 5,440 5,310 48,768 41,319 MoM 2% 1% YoY 20% 15% 18% 0% TB: -746-638 -4,998-4,362 MoM -108-105 YoY -328-12 -636-2,843 CA: -408-901 -3,275-2,879 MoM 493-754 YoY -228 42-396 -2,570 FA 1 : -563-1,537-5,338-3,853 MoM 974-873 YoY -306-157 -1,485-3,769 BoP: 155 637 2,074 1,067 MoM -482 119 YoY 64 194 1,007 840 PS financing 2-253 362 2,115 1,294 (1) Inflows reported as negative values in accordance with the current reporting methodology (2) Private sector financing: an estimated amount of capital flowing into the private sector (including banks) via lending and investment, Adamant Capital estimates Konstantin Fastovets fks@adamant-capital.com
Foreign currency reserves of the NBU increased by 1% MoM to $18.9bln at the end of November. Inflows came largely on the back of local FX bond placements totaling $664mln and net purchases on the interbank market of $139mln. Outflows were caused primarily by $805mln worth of state debt interest and amortization payments (including $447mln to the IMF) as well as the redemption the $100mln FX swap deal with a local bank (originally conducted in October). Our view: Although state interest payments in November increased by some $300mln MoM (excluding the IMF), we think that the fact that the NBU was able to purchase FX currency from the interbank market despite low retail sales (just $43mln, according to official data), suggests that the CA deficit for the month was actually relatively narrow. Taking into account the surprise $664mln bond placement by the Ministry of Finance (and the fact that there is just one month left until the end of the year), we increase our end-of-december reserves forecast to $19.0bln from $18.5bln previously. Our outlook for 2018 remains largely the same: in our base-case scenario Ukraine will continue to implement reforms (albeit slowly), which should unlock the next $2.0bln tranche from the IMF, $0.5bln from the World Bank and allow for a $1.5bln eurobond fund raise. Taking into account the upcoming payments this should place reserves at close to $21.0bln. Avangardco reported 3Q17 results: EBITDA fell by $3mln YoY to - $1mln, with the margin landing at -5%. Revenues decreased by 37% to $29mln. Operating and free cash flow were both up $8mln QoQ to $4mln. As LTM EBITDA amounted to -$2.4mln, leverage ratios lost their significance. According to the press release the company is still in the process negotiating a restructuring with its 2018 eurobond holders. Our view: Though in 3Q17 Avangardco was able to improve profitability compared to 2Q17 (the EBITDA margin moved from -51% to just -5% and EBITDA per egg equivalent increased to -0.24 cents from -2.38 earlier), the business still remained lossmaking without a clear path towards recovery. Though we do calculate that average cost per egg equivalent decreased in 3Q17 by close to 16% QoQ, we are at a loss to explain this this phenomenon, especially given that an opposite cost shift occurred in the previous quarter (up 16% QoQ). As usual, any comparisons drawn between Avangardco and Ovostar look unfavorable for the former, given an inexplicably large spread in profitability (a 26pps in EBITDA margin this quarter). All in all, we continue to believe that issuer lack solid fundamentals and reiterate our Sell recommendation on its notes. Reserves import coverage vs UAH/$ rate 5.0 4.0 3.0 2.0 1.0 1 Nov-14 Aug-15 May-16 Feb-17 Nov-17 IMF loan import coverage, months (lhs) Net reserves import coverage, months (lhs) UAH/$ rate (rhs), Adamant Capital estimates Avangard 3Q17 financial results, $mln 3 25.0 2 15.0 3Q17 3Q16 YoY 2Q17 QoQ Revenue 29 46-37% 21 41% Grain trading 0 15-99% 2-93% Government grants 6 1 505% 1 375% EBITDA 1-1 2-173% -11 nm EBITDA margin -5% 4% -9pps -51% 46pps Net income -9-6 nm -6 nm Net income margin -31% -13% nm -31% nm Operating cash flow 4-4 nm -3 nm Free cash flow 4-4 nm -3 nm Gross debt 365 344 6% 360 1% Net debt 348 332 5% 347 0% Net debt/ebitda nm 12 nm 354 nm Egg production, mnt 700 646 8% 531 32% Shell egg sales, mnt 568 342 66% 403 41% Egg product sales, t 490 2,251-78% 532-8% Shell egg price, UAH 0.97 1.11-13% 0.79 23% Shell egg price, 3.74 4.37-14% 2.99 25% Egg prod. price, $/kg 2.72 5.69-52% 4.61-41% Avg price/egg eq 2, 3.72 5.32-30% 3.25 14% EBITDA/egg eq 3, -0.24 0.37-163% -2.38-90% Note: represent US dollar cents (1) Excludes impairments and provisions for doubtful debts (2) Average realized price per egg sold, including egg products in egg equivalent. (3) EBITDA per shell egg sold, including egg products in egg equivalent Source: Company data, Adamant Capital estimates 2
DTEK 3Q17 EBITDA increased by 18% YoY and 10% QoQ to $189mln, according to condensed unaudited results. Revenues were up by 9% YoY and 10% QoQ to $1.2bln. Net income came in at just $1mln, recoiling from last quarter on the back of FX gains turning into losses (mostly revaluation of FX debt based on the EOP exchange rate). The average wholesale electricity price for all of the country s TPPs has increased by 29% YoY to UAH1,469/MWh. DTEK s generation volumes contracted by 13% YoY to 9.6 TWh. The company s net debt to LTM EBITDA fell some 60% YoY to 2.4x. In a separate announcement, DTEK noted that it plans to pay its next 10.75% coupon fully in cash (due January 1) and that it has acquired a suppliers of coal mining machinery and equipment for an undisclosed amount. Our view: DTEK s 3Q17 EBITDA came in slightly above expectations, as the company s costs per MWh did not increase materially from the previous quarter despite a 44% bump to coal imports (currently represent c. 15% of the total supply by volume). Taking into consideration the current level of tariffs for TPPs, we expect 4Q17 EBITDA to land north of $200mln, which should bring the full year figure to c. $800mln instead of the $750mln we projected earlier. By the end of December, we expect leverage to stand at a similar level to 3Q17 (at c. 2.5x EBITDA) and liquidity risks to remain low (a total of just $51mln in amortizations is due over 2H17). Earnings in 2018 will, as before, depend heavily on the regulatory environment, but since DTEK produces c. 75% of all thermal power in the country, we find any scenarios that lead to that company s bankruptcy (or, equivalently, default) to be unlikely. All in all, we retain our Buy recommendation on 2024 notes given that a substantial (290bps) yield premium to the sovereign curve is still present. DTEK 3Q17 financial results, $mln 3Q17 3Q16 YoY 2Q17 QoQ Revenues 1,231 1,131 9% 1,116 10% EBITDA 1 189 161 18% 164 15% EBITDA margin 15% 14% 1pps 15% 1pps Net income 1-101 nm 147 nm Net income margin 0% -9% 9pps 13% -13pps Operating cash flow 137 157-13% 208-34% CAPEX 62 83-26% 120-49% Free cash flow 75 74 2% 88-15% Elec. price 2, UAH/MWh 1,469 1,143 29% 1,823-19% Elec. price, $/MWh 56.7 44.1 28% 70.1-19% Elec. generation, TWh 9.6 11.0-13% 7.0 37% Coal mining (ROM), kt 6.2 8.4-26% 6.4-3% EBITDA/MWh output, $ 19.7 14.5 35% 23.4-16% Net debt 2,100 2,259-7% 2,067 2% Net debt/ltm EBITDA 2.4 5.9-60% 2.3 4% (1) Excludes impairments (2) The average for all Ukrainian TPPs disclosed by the state regulator Energoryok Source: Company data, Energorynok, Adamant Capital estimates 3
Appendix Banking system 6m liquidity (lhs, UAHmln) vs NBU CD rates (%) 120,000 15 110,000 100,000 90,000 14 80,000 70,000 13 60,000 50,000 12 40,000 30,000 20,000 11 10,000 0 10 2-Jun 3-Jul 3-Aug 3-Sep 4-Oct 4-Nov 5-Dec Accounts at NBU Reserve requirements NBU 14d CD rate, Adamant Capital estimates NBU CDs + Intraday NBU o/n rate Local market yield curve: yield (lhs, %) and maturity (rhs, days) 16.5 15.5 14.5 13.5 12.5 11.5 10.5 0 80 160 240 320 400 480 560 NBU CDs Minfin UAH bonds UIRD, Bloomberg, Adamant Capital estimates Local market liquidity (as measured by the aggregate amount of NBU correspondent accounts, investment CDs, and other intraday changes) has decreased slightly by UAH 0.47bln to UAH 72.42bln over the last week. On December 5 the Ministry of Finance conducted local grivna denominated placements maturing in February and October of 2018 with yields of 16% and 15.3%, respectively. There were also held euro and dollar denominated placements maturing in June and May 2019, respectively, with yields of 3.95% and 3.85%. A total of UAH 4.11bln was raised as a result. The UAH/USD interbank rate has depreciated by 1% over the week, starting out with 26.87 and closing at 27.16. Government 12m FX debt (1) repayment schedule, $bln 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Government 12m local debt repayment schedule 28.0 24.0 2 16.0 12.0 8.0 4.0 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 IMF Local FX bonds Quasi-Sovereign bonds Foreign FX Bonds Local UAH bonds, UAHbln Local FX bonds, UAHbln (1) Quasi-sovereign debt includes body and interest of state banks, Ukrzalizynytsya, and municipal bonds Note: UAH/$ exchange rate set at 27.16; EUR/USD exchange rate set at 1.18 Source: Ministry of Finance, Adamant Capital estimates 4
FX interbank trade volume (lhs) and FX rate (rhs), past 12 months 330 280 230 180 130 80 24.5 Dec-16 Apr-17 Aug-17 Dec-17 Trade volumes, $mln Note: Exchange rate figures are from official interbank data UAH/USD exchange rate 28.0 27.5 27.0 26.5 26.0 25.5 25.0 Eurobonds: yield (lhs, %) vs duration (years) 1 9.0 Ukrzaliznutsya 2021 8.0 FIUB 2018 Oschadbank 2023 7.0 Ukreximbank 2022 Ferrexpo 2019 6.0 5.0 Oschadbank 2025 Metinvest 2021 Ukreximbank 2025 Kernel 2022 DTEK 2024 MHP 2024 MHP 2020 4.0 0.8 1.8 2.8 3.8 4.8 5.8 6.8 Corporate Eurobonds Government Eurobonds Global commodity price indices, past 12 months 1.2 1.0 0.8 0.7 Dec-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Steel Iron Ore Wheat WTI Brent Corn Ukraine 24m trailing trade (lhs) and CA balance (rhs) 5.6 5.3 0.4 5.0 0.2 4.7 4.4 4.1-0.2 3.8-0.4 3.5-0.6 3.2 2.9-0.8 2.6-1.0 2.3-1.2 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Current account, $bln Exports, $bln Imports, $bln Ukraine 12m trailing monthly export breakdown, $mln 3,500 2,800 2,100 1,400 700 Ukraine 12m trailing monthly import breakdown, $mln 4,500 3,600 2,700 1,800 900 0 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Consumer goods Machinery Mining & Energy Metals Other 0 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Consumer goods Machinery Mining & Energy Chemicals Other 5
Key macroeconomic indicators 2Q16 3Q16 4Q16 2016 1Q17 2Q17 3Q17E 2017E Real GDP growth, YoY 1.5% 2.3% 4.8% 2.3% 2.4% 2.4% 2.0% 2.0% Nominal GDP, UAHbln 535 669 723 2,383 584 657 806 2,825 Nominal GDP, $bln 21 26 28 93 22 25 31 105 GDP deflator growth YoY 1, % 15.6% 15.7% 19.2% 17.1% 25.1% 2% 17.0% 16.0% Period average CPI YoY, % 8.1% 8.1% 12.3% 14.9% 14.0% 13.8% 16.1% 14.0% End of period CPI YoY,% 6.9% 7.9% 12.4% 12.4% 15.1% 15.6% 16.4% 11.5% Consolidated budget deficit, % of nominal GDP 1,2,6 2.9% 3.0% 3.4% 2.3% -0.8% -7.7% 1.2% 3.7% Broad public sector deficit, % of GDP 3 2.9% 3.0% 22.6% 8.8% 4.2% -7.7% 3.7% 6.1% Public debt as % of nominal GDP, UAH 78.0% 79.2% 80.8% 80.8% 77.7% 75.3% na 68.2% Public external debt as % of nominal GDP, $ 4 49.3% 51.2% 49.0% 49.0% 47.1% 47.7% na 43.6% Total external debt, $bln 115.0 116.1 113.5 113.5 113.6 114.8 na 116.5 Export of goods and services, $bln 11.3 11.7 13.1 46.0 12.7 12.8 13.5 49.4 Import of goods and services, $bln 11.4 13.6 14.7 51.8 13.9 14.2 15.6 56.0 Trade balance, $bln -0.1-1.9-1.6-5.8-1.2-1.4-2.1-6.3 Current account, $bln 0.6-1.7-0.7-3.8-1.2-0.8-1.6-4.0 Financial account, $bln 5-0.3-2.2-1.0-5.0-0.6-2.4-2.5-6.7 End of period NBU reserves, $bln 14.0 15.6 15.5 15.5 15.1 18.0 18.6 19.0 Average interbank exchange rate, UAH/$ 7 25.2 25.4 25.9 25.6 27.1 26.0 25.9 27.0 (1) Quarterly figures use 12m trailing data (2) Excludes any deficit not included in the official figure, but includes net budget loans given to state enterprises (3) Estimated figures. Includes such below the line budget expenditures as recapitalization of Naftogaz and state banks, state guarantees given, etc (4) GDP calculated in $ according to the average UAH/$ exchange rate for the year (5) As per the 6 th edition of the IMF s Balance of payments and international investment position manual (6) Proceeds from 3G implementation are excluded from 2015 consolidated budget revenues, as per IMF standards (7) Based on official NBU data of average monthly interbank rates. Not weighted by volume traded, SSSU, Minfin, IMF, Adamant Capital estimates Indicative Eurobond prices, yields, and recommendations Bond name Recommendation Rec date Coupon Maturity Bid Yield Bid Price 1 week Δ Dur, yrs Out, $mln Ukraine 2019 Hold 1-Dec-16 7.8 Sep-19 4.7 105.0-0.3 1.6 661 Ukraine 2023 Hold 1-Dec-16 7.8 Sep-23 6.4 106.3 4.7 1,355 Ukraine 2027 Hold 1-Dec-16 7.8 Sep-27 7.2 103.5 6.9 1,307 Ukraine 2032 Hold 1-Dec-16 7.4 Sep-32 7.5 98.5 8.8 3,000 MHP 2020 Hold 21-Nov-17 8.3 Apr-20 4.3 108.6 0.2 2.1 505 MHP 2024 Hold 21-Nov-17 7.8 May-24 6.1 108.5-0.1 5.2 500 DTEK 2024 Buy 5-Dec-17 10.8 Dec-24 9.7 106.9 0.8 5.3 1,309 Ferrexpo 2019 Buy 21-Nov-17 10.4 Apr-19 6.4 105.0-0.1 0.8 161 Metinvest 2021 Buy 28-Nov-17 9.4 Dec-21 8.7 105.5 0.1 3.6 1,187 Ukrlandfarming 2018 Sell 17-Jun-17 10.9 Mar-18 1090.3 23.3-0.6 nm 543 Avangard 2018 Sell 5-Dec-17 1 Oct-18 307.9 21.9 0.9 214 FUIB 2018 Buy 7-Nov-17 11.0 Dec-18 7.6 103.5-0.3 0.9 103 Privatbank 2018 (10.250) Sell 21-Nov-17 10.3 Jan-18 2012.1 28.0 2.0 0.1 200 Privatbank 2018 (10.875) Sell 21-Nov-17 10.9 Feb-21 1033.9 30.1-0.2 0.2 175 Oschadbank 2023 Buy 7-Nov-17 9.4 Mar-23 7.7 107.2 2.0 700 Oschadbank 2025 Buy 7-Nov-17 9.6 Mar-25 8.1 108.1 0.1 3.1 500 Ukreximbank 2022 Buy 7-Nov-17 9.6 Apr-22 7.5 107.7 0.1 2.1 750 Ukreximbank 2025 Buy 7-Nov-17 9.8 Jan-25 8.1 108.7-0.1 3.5 600 Ukrainian Railway 2021 Buy 24-Oct-17 9.9 Sep-21 7.8 106.5-0.3 1.9 500 Mriya 2018 Hold 14-Nov-17 9.5 Apr-18 4686.0 5.5 0.4 400 Kernel 2022 Hold 28-Nov-17 8.8 Jan-22 5.9 110.2-0.1 3.5 500 Fixed Income 2 week event calendar Event Type Date Metinvest - Trading update for 9M 2017 Indicative 8-Dec SSSU - Monthly inflation Exact 8-Dec NBU - Decision on the key policy rate Exact 14-Dec SSSU - Agricultural production monthly data Exact 14-Dec SSSU - Preliminary estimate of Q3 2017 GDP growth Exact 19-Dec SSSU - Wholesale and retail turnover monthly data Exact 19-Dec 6
Contacts Adamant Capital 5-B Volodymyrska Street, 2nd floor 01001 Kyiv, Ukraine +380 44 585 52 36 Portfolio Management Yuriy Sozinov urs@adamant-capital.com Research Konstantin Fastovets fks@adamant-capital.com PR Inna Zvyagintseva zin@adamant-capital.com Disclaimer This report has been prepared solely for information purposes and is not intended to be an offer, or a solicitation of an offer, to buy or sell any securities. Descriptions of any company or companies or/and their securities, or markets, or developments mentioned herein are not represented to be complete. There is no responsibility on our part to revise or update any information or correct any inaccuracies contained in this report on an on-going basis. Although the information in this material has been obtained from sources that Adamant Capital believes to be reliable, we do not guarantee its completeness or accuracy. In making their investment decisions investors are expected to rely on their own analysis of all risks associated with investing in securities. Adamant Capital, its top executives, representatives and employees accept no liability whatsoever for any direct or consequential loss arising from the use of the material or its contents. Adamant Capital, third parties related to it, its directors and/or employees, and/or any persons connected with them, may have interests in the companies or provide services to one or more companies discussed herein and/or intend to acquire such interests and/or to provide any such services in the future. All estimates and opinions expressed in this report reflect the judgment of each research analyst, who is fully or partially responsible for the contents of the document, and may differ from the opinions of Adamant Capital. This document, or any part hereof, may not be reproduced or copies circulated without the prior express consent of Adamant Capital. 7