Headline news

News: Fitch Ratings has changed Ukraine’s outlook to Stable from Negative. The agency has also affirmed its long-term foreign and local currency Issuer Default ratings (IDRs) at a non-investment grade ‘B-’, and its short-term foreign currency IDR at ‘B’.

The risks of macroeconomic and financial instability have lessened after the presidential elections and the formation of the new government, the agency said in its press release Wednesday (Mar 17). However, major challenges, including re-starting Ukraine’s IMF lending program and reducing the large budget deficit, are facing the new government.

Commentary: Fitch’s decision to raise Ukraine’s sovereign outlook followed S&P’s upgrade of Ukraine’s ratings last week. The upgrade of Ukraine’s creditworthiness may help the country to resume co-operation with international lending institutions and, therefore, to fill a huge gap in public finances.

News: Ukraine’s industrial sector continued its recovery in February on strong growth in the chemicals, machinery and utilities sectors. The State Statistics Committee reported Tuesday (Mar 16) that its industrial production index rose 5.6% YoY in February, putting 2M10 industrial sector growth at 8.8% YoY.

Steel output rose 3% YoY in February after 26.6% growth in the first month of the year. Chemicals production jumped 18.1% YoY, while the machinery sector lifted production by 19.2%. A colder-than-average winter increased demand for heating energy, boosting utilities’ output by 19.2% YoY. The main drag on the otherwise strong recovery of Ukraine’s industry was the construction materials sector, which cut production by 20.1% YoY in February.

Commentary: Although the recovery’s pace decelerated in February to 5.6% from 11.8% in January, we believe that the industrial sector will be one of the main growth drivers for the economy in 2010, since domestic consumer spending is still showing a drop YoY. Export-oriented sectors, such as steel and chemicals, have led Ukraine’s economic rebound on reviving global demand.

News: Mariupol Illicha Steel (MMKI), one of Ukraine’s three largest steelmakers, has re-opened its open hearth furnace #3 after a major overhaul, according to the company’s press-service. The #3 furnace had been shut down since March 2008.

Commentary: The news is positive for the stock as it suggests MMKI is on track to expand its steel output. We expect the company to increase its crude steel production by 18% YoY to 5.1 mn tones in 2010E.

News: Yasynivsky Coke (YASK) posted FY09 net income of UAH 82.6mn (68.4% YoY drop), Interfax reported. The company will disclose its full FY09 financial results at an AGM scheduled for Apr 28.

Commentary: The company managed to return to profitability in 4Q09 (UAH 16.7 mn) following its 3Q09 net loss of UAH 1.9 mn. An upward trend in coke prices (+30% YTD) along with resilient demand for coke from major customers (MMK Illicha Steel and parent Donetskstal) reinforce our positive outlook for Yasynivsky Coke.

News: Standard & Poor’s has raised Ukraine’s foreign currency sovereign credit ratings by one level, to B-/C from CCC+/C, with a positive outlook. The local currency ratings were raised to B/B from B-/C. The agency cited a reduction in the country’s political risk as well improving prospects for external funding.

Commentary: We believe that the main reason for the rating increase was yesterday’s formation of a new coalition and government. This development may pave the way for Ukraine to receive the next tranche of a USD 16.4bn loan from the International Monetary Fund, and make Ukrainian economic policy more predictable.

News: SUN InBev Ukraine, the country’s largest national brewer by sales, reported a net profit of UAH 389mn (USD 49.9mn) in 2009, 4.8x higher than a year earlier in USD terms. Full financial results under Ukrainian accounting standards will be released by the end of April.

Commentary: The bottom line came in slightly better than we expected. As AB InBev previously reported an increase in market share in Ukraine, we expect the company’s 2009 revenue to rise in hryvnia terms.

Story: Sumy Frunze reported that its FY09 sales increased by 44% YoY, to UAH 3.1bn. The sales growth was mainly due to higher demand for the company’s main production staples, including gas transmission and turbocompressor units, and chemical, oil and gas refining equipment. The majority of the company’s orders came from Russia and the Middle East.

At present, Sumy Frunze is considering revision and modernization of its product line, and is also actively searching for new markets.

Commentary: Sumy Frunze’s FY09 sales were in line with our forecasts. We confirm our BUY recommendation, with a target price of $12.0 (UAH 96) per share.

Story: Krukiv Wagon increased its production of freight railcars by 2.5x YoY to 593 units in January, according to the company’s press service. In terms of its secondary operation of building passenger rail cars, the company manufactured two units in January, comparable with five units in the same month the year before.

Commentary: The news is positive for Krukiv Wagon, which proved its capability to hit operational targets. Earlier, the company announced a plan to nearly double production of freight railcars to 6,000 units in 2010. In 2009, the company delivered 3,300 freight railcars and 21 passenger railcars.