High-growth sectors are destinations for the bold
Despite the devastating fallout of the 2008 financial crisis and ongoing problems with corruption, Ukraine still has a number of promising sectors offering a range of investment options, though the country’s political intrigues remains a risk.
Deloitte’s 2011 ranking of Central and Eastern Europe’s Top 500 companies shows that many Ukrainian businesses have improved their positions relative to regional peers.
Among the various sectors represented in the ranking, energy production and distribution is set to see the most action in the short to medium term, with multiple privatizations in store and a number of big players eyeing initial public offerings.
At the top of the list comes DTEK, Ukraine’s largest private energy company, which is controlled by President Viktor Yanukovych’s longtime backer Rinat Akhmetov, through his System Capital Management holding.
The vast and potentially highly profitable energy producer, whose operational chain runs from coal extraction to electricity distribution, was assessed by Dragon Capital, a Kyiv-based investment bank, as “one of the best prepared Ukrainian companies to go public” through an IPO on a major foreign stock exchange, such as the New York Stock Exchange.
Chances of a public placement are further boosted by DTEK’s anticipated purchase through upcoming privatizations of state shares in several energy companies in which it hold minority stakes, allowing the energy giant to dominate on Ukraine’s electricity market and become a big exporter of power to Europe.
But questions remain about the standards in upcoming privatization tenders, with some recalling the infamous Dniproenergo privatization, which then-US Ambassador William Taylor desribed as a paragon of non-transparency, according to Wikileaks, a whistleblower website.
As with other large privatizations in Ukraine, the energy company tenders will likely lack transparency and favor well-connected companies, with the government uninterested in maximizing revenue from the sale, said Ildar Gazizullin, senior analyst at the Kyiv-based International Center Policy Studies, a think tank. He added, however, that the privatization would nonetheless have a positive impact on Ukraine’s energy market, given the government’s inefficient management of the sector.
Investors are also keeping an eye on state-owned oil and gas company Naftogaz, which the government recently scheduled for restructuring, with possible privatizations and IPOs down the line.
A further candidate is Ukraine’s leading oil-producer Ukrnafta, whose reshuffled management has been charged with preparing an IPO in the medium term, according to Dragon Capital.
Yet equity investors should look beyond energy, as Ukraine’s famed chernozem black earth has produced some of the world’s most competitive publicly-traded agribusiness and food sector companies.
These include London-listed poultry giant MHP, whose 40 percent earnings before interest, taxes, depreciation, and amortization margin made it the world’s most profitable meat producer in 2009, according to a report released by BG Capital, a Kyiv-based investment bank.
Sunflower-producer Kernel, one of the Warsaw Stock Exchange’s top 20 companies by market capitalization, is a further example of the growing number of Ukrainian companies reaching out to foreign stock exchanges, whose higher trading volumes and better regulatory standards constitute a bridge to international capital markets.
Investors seeking exposure to Ukraine’s high-growth sectors, however, are by no means limited to equity, with more companies opting to raise capital via Eurobonds.
Among these is Akhmetov’s steel and mining giant Metinvest, which over the past two years placed Eurobonds worth $1.25 billion in two issues offering annual interests of 8.75 and 10.25 percent.
A further bond issuer is PrivatBank, one of Ukraine’s leading banks, which has $850 million of outstanding debt maturing in 2012-2016. Moreover, both companies are candidates for IPOs, according to Dragon Capital, with PrivatBank currently weighing an IPO for a 25 percent stake on the London Stock Exchange in late 2011 or early 2012.
Political risk, however, remains a bogeyman for many foreign investors, particularly those eyeing companies operating in Ukraine’s traditional heavy-industries from whence most of the country’s oligarchs hail.
Markets have been especially jittery when it comes to the business empire of Kostyantin Zhevago, a lawmaker from the opposition Batkivshchyna party and long-time supporter of jailed former Prime Minister Yulia Tymoshenko.
Last month rumors of an environmental inspection at Poltavskiy Ore Mining, a production asset of Zhevago’s London-listed Ferrexpo, widened the spread between the latter’s Eurobonds and those of Akhmetov’s Metinvest by 73 basis points and sent its stock price down 18 percent in subsequent days.
The problems are not just limited to pure market fears either. Indeed, railcar-producer Stakhaniv Wagon has experienced value added tax refund problems and a production halt that Vitaly Gorovoy, industrial machinery analyst at Concorde Capital, an investment bank, tied to “attempts by the authorities to pressure Stakhaniv Wagon’s majority shareholder – Konstantin Zhevago, who is linked to the Ukrainian opposition.”
Only too predictably, a Sept. 21 flash note to investors from Concorde Capital recommended “caution toward businesses listed on the Ukrainian Exchange that are linked to political opposition parties.”
The note also added that Warsaw-listed agricultural holding Agroton, whose co-owner Yuriy Zhuravlev was expelled from the ruling Party of Regions, could be a target of official pressure.
With Ukraine’s image already tarnished by the Tymoshenko trial, the authorities should do everything possible to assuage investor fears and boost economic growth in exceptionally hard times. However, it seems they have a penchant for risky bets, and expect no less from foreign investors.