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Volyn-Cement: Fortified Enough to Withstand Crisis

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We decided to review our forecasts for Volyn-Cement [VOLC] as the factory is highly dependent on local real estate developers, that face significant problems in terms of financing existing and new construction projects. We also expect increased pressure due to gas prices increase in 2009. Under current financial crisis conditions, we have revised WACC components, the risk free rate and market risk premium for Ukrainian equities. However, we maintain our BUY recommendation for VOLC shares with a target price of USD 11.2 and an upside of 117%.

Executive Summary
• Cement output revision. Cement output is highly dependent on the construction and real estate business. Real estate development companies have frozen a number of projects all over Ukraine (20% of construction projects in Kyiv have been frozen). Cement producers slightly decreased their output by 6-8% in the period Jul-Sep 2008, as demand for construction materials and cement fell. However, we believe that the annual output results for 2008 won’t be lower than those for 2007, which constitute 1,500 thsd metric tons. VOLC has a number of long-term projects that will help the plant to survive and secure its sales level.
• Stable cement prices. The level of cement prices have skyrocketed by 70% in 1H2008 YoY. We believe that cement prices won’t get lower due to the new gas price, to be determined in November, and increases in transportation costs. Expenses on energy resources amount to about 60% of production costs. We expect that gas prices will rise from USD 179.5 to USD 280-300 and even USD 400 on a board.
• Modernization. We think that VOLC’s parent company Dyckerhoff will spend nearly USD 310 mln on VOLC's technology modernization from the wet to dry method of cement production. It will allow VOLC to increase net sales by 43.3% to 2.2 mln metric tons. Dyckerhoff announced a USD 30 mln CapEX program for the transition from gas to coal. We believe the switch from gas to coal will give VOLC significant competitive advantages in terms of lower production costs, by about 25-30%, taking into consideration the new gas price.
• WACC Revision. Under the current conditions of the liquidity crisis, we revise the WACC components to come up with more objective forecasts in DCF valuation. The WACC has been increased from 14% in 2008 to 23% in 2009. We expect the cost of equity and the cost of debt to slightly decrease after the crisis to the 15% level in 2013.
• Outstanding operational results. Volyn-Cement demonstrated good operational results in 3Q2008, producing about 1.200 mln metric tons of cement, of the total 12 mln metric tons produced in Ukraine, and utilizing 74% of its total capacity that is higher than 72% market average in 2007.
• The company demonstrated strong financial results in 1H2008. Gross profit increased by 67% to USD 40 mln and net income increased by 108% to USD 29 mln, compared to 1H2007. Financial growth was supported by a fantastic annual average cement price growth of 70%.

Список таблиц, диаграмм, графиков:

1.  Volyn - Cement’s Key Indicators
2.  Comparative Valuation
3.  DCF Valuation
4.  Balance Sheet
5.  Income statement


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