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Ukrros — Sugar price is the key

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Executive summary

Sugar price is the key in the long run. The main product of the Company is white sugar. We expect that 74% of net sales in 2010 will be generated by sugar (65% in 2009). The average local sugar price rose by 27% from USD 700 in 2009 to USD 890 per tonne in 2010 and we are not likely to see any growth in 2011. However, Ukrros’s revenues are very sensitive to fluctuations in sugar prices, and should they increase further, the stock will provide additional upside, which is included in our optimistic scenario. Ukrros’s sugar sales will increase by 42% YoY in 2010 and by 10% in 2011 to USD 113.8 mln and USD 125.2 mln respectively.

Grain crops sales will account for a bigger share of the Company’s revenues. Along with sugar production, Ukrros also grows grain crops, which represented about 24% of net sales in 2010 (18% in 2009) and it will increase this share to 51% by 2018. So far, in 2010, local grain prices grew by 56% YoY to their all time highs, on the back of poor weather conditions and number of protective measures from Russia and Ukraine. We believe that grain prices will remain at these high levels until the end of 2011 and that the Company will cover the reduction in its crop yields and will boost grain sales by 61%, to USD 36.2 mln this year.

Ukrros will successfully manage its debt burden. We expect that Ukrros will have about USD 92 mln of total debt by the end of the year. The Company’s EBITDA will be twice bigger than its interest expense over the next four years. Ukrros’s net debt to EBITDA ratio will grow from 2.1 in 2009 to 3.2 in 2010 and its total debt to equity ratio from 0.7 to 1.2. However, Ukrros’s debt outstanding is mostly short term and 78% is denominated in UAH, so the Company is not exposed to currency risk.

Ukrros will gain from selling its subsidiaries in 2010. The Company sold its Savinskiy and Kypyanskiy sugar plants and one agro company, Savintsy-Agro, in mid-2010. We expect that Ukrros will receive USD 7 mln as a result of these deals. This will support Ukrros’s net income growth by 18% this year. However, we do not expect any other additional gains on selling or buying of subsidiaries in 2011 and beyond.

Valuation. The stock trades just 3.5 times to its net profit in 2010, which implies a significant discount to its developed and emerging market peers. Although its P/E will increase in 2011, the stock will still imply a 60% upside to the aforementioned peer groups. Our DCF method implies a 58% upside potential, and we see a total weighted upside of 59%. We recommend to BUY DRs of Ukrros with the target price of USD 6.51 per DR, with potentially bigger upside should the optimistic scenario unfold.




Figure 1. Key indicators

Figure 2. Commodity prices

Figure 3. Company’s 2010E crop yields versus Ukraine’s average

Figure 4. Company’s grain crops harvest

Figure 5. Company’s revenue structure

Figure 6. Ukrros’s debt structure as of October 1, 2010

Figure 7. Ukrros’s sugar plants

Figure 8. The sugar market in MY 2009/2010

Figure 9. Company’s crop mix in 2010

Figure 10. Company’s share of its own sugar beets

Figure 11. Company’s beet sugar costs breakdown

Figure 12. Valuation summary

Figure 13. DCF model

Figure 14. Comparative valuation

Figure 15. Income statement\

Figure 16. Balance sheet

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