Investors increasingly bypass Ukraine for easier opportunities
Few foreigners rush to this frontier anymore.
While giant state-owned enterprises and private conglomerates usually top Ukraine’s company rankings in revenue and profit, they are not necessarily the ones that dominate investor attention.
Indeed, international investors have increasingly looked toward smaller, but up-and-coming public Ukrainian names in their search to get exposure to high-growth sectors in the nation’s economy, such as agriculture.
Indeed, shares in a handful of Ukrainian agribusinesses have become quite popular abroad. Take, for example, London Stock Exchange traded poultry giant MHP and Warsaw Stock Exchange listed sunflower oil producer Kernel.
Despite the solid long-term potential, 2011 has been a tough year for stocks across the globe and particularly for shares in Ukrainian companies.
Moreover, investing in Ukrainian companies remains more complicated and riskier compared to peers from developed economies.
The recent market turmoil has seen Ukrainian stocks plummet as risk-averse investors moved toward safer positions in Europe and the US.
The local UX exchange was hit particularly hard, dropping 39 percent since the beginning of the year to become the world’s third-worst performer among emerging markets.
In addition, frontier market investors are shifting their money to places like Mongolia and Africa where the upside trumps Ukraine, which comes with more corruption and investor protection baggage, says Nick Piazza, chief executive officer of BG Capital, a Kyiv-based investment bank.
“Why buy a mid-class car when you could get a luxury car for the same price?” Piazza asked rhetorically.
In order to avoid the domestic stock market’s low liquidity and regulatory standards, the last two years have seen a growing number of Ukrainian companies opt for initial public offerings in London and Warsaw.
The latter stock exhange even witnessed the creation of a new index, the WIG Ukraine, in May this year.
“Poland has been Ukraine’s life support system in recent years,” observed Piazza.
Ukraine still boasts solid offerings for investors willing to pay a premium and betting on long term macro-trends, notably growing global demand for agricultural products fueled by demographics and rising standards in developing economies.
Thus, eight out of Kyiv-based Dragon Capital’s 15 hot stock picks are in food and agriculture, Ukraine’s historical specialty.
Other hot picks include two promising machine builders: the railcar-producer Stakhaniv Wagon and Motor Sich, which makes aircraft and helicopter engines.
Ukraine and Russia’s need to replace their crumbling Soviet-era fleets should keep the former working at full capacity for years to come, while the latter is set to benefit from increased military spending in Russia, India and China.
“Investing in machine builders makes sense,” said Piazza.
But a look at company multiples, ratios used to determine the value of an enterprise after taking debt in account, shows that Ukrainian companies often continue to lag behind foreign peers.
Because of this, foreign stock investors in Ukraine have been pulling out for the last six months, said Piazza.
The investment banker said rules in Ukraine are complicated, with most publicly listed stocks being unsponsored and no new issues on the horizon.
“We need more reforms to get the European investors back. Things are cheaper elsewhere when you look at multiples. Politically, things need to improve to protect investors and improve corporate governance. Plus, it’s a complicated process to get money out of Ukraine,” said Piazza.