Sanguine expansion plans look slightly exaggerated. The Company plans to increase its sunflower and soybean processing capacities to 900 thsd tonnes and 255 thsd tonnes per annum, respectively, in the next two years and also to launch a pig-breeding farm with output of 7.2 thsd tonnes of pork per annum. Being more conservative, we expect expansion only in sunflower and soy capacities by the end of 2011, with an average utilization rate of 75-80%, as competition in Kirovograd region becomes tougher. This expansion might boost the Company’s total output by 54% in 2012 and its sales by 73%, to USD 434.1 mln. Thus far, the Company has indicated intentions to increase its land bank by 70 thsd to 100 thsd ha, but has suspended this development, which keeps Creativ dependent on external supplies of raw materials.
Creativ failed to restructure its debt in 2010. One of the main risks of the Company is its high debt burden, with an average interest rate of 13.1%. Moreover, 95% of the outstanding debt is denominated in foreign currency, so that Creativ is exposed to a FX risk. Net debt will grow from USD 190 mln in 2010 to USD 240 mln in 2011, a 26% increase. Net debt to EBITDA will be close to 3.3 in 2011, which still indicates a high leverage. Due to the debt repayment schedule, as of June 2010, the Company has to pay about USD 50 mln in 2010, which will put great pressure on the Company’s bottom line for 2010. However, we are optimistic about the Company’s ability to restructure its debt in the beginning of 2011, which will enable it to realize all of its development plans.
The stock liquidity will remain low. After the stock was listed on the local Ukrainian Exchange in July 2010, it failed to find large liquidity, contrary to our expectations. It has traded around 250 thsd shares since July, and the turnover totaled about USD 3.3 mln. The Company’s DRs, traded on the Frankfurt stock exchange, are also relatively illiquid. The Company failed our expectations of a full scale IPO in 2010, and is not likely to conduct an IPO in 2011; thus, we expect that the stock’s liquidity will remain low in the next one-to-two year span.
Valuation. We used two different valuation methods—comparative valuation and the DCF method. The stock looks significantly underpriced based on its ‘10-11 EV/EBITDA and P/E multiples, which implies a significant discount to its developed and emerging market peers, suggesting an upside of 42%. Our DCF method implies only a 5% upside potential, as the stock is too risky with its high leverage. We recommend HOLDing Creativ’s stocks with the target price of USD 18.36 per share, with a potentially bigger upside after its debt restructuring.
Figure 1. Key indicators
Figure 2. Creativ’s plan for expansion of its production capacities
Figure 3. Creativ’s debt structure as of July 2010
Figure 4. Valuation summary
Figure 5. DCF model
Figure 6. Comparative valuation
Figure 7. Income statement
Figure 8. Balance sheet