Abstract
After showing its first signs of recovery since the 1990s over the last three
years, the Ukrainian coal machinery sector risks a sharp slowdown. While in
2003-2007, the industry' s domestic state and private customers almost tripled
expenditures on coal mining equipment, they too will succumb to the slumping
tide of the economy: we forecast Ukrainian real GDP growth to fall to 5.3% in
2008 and -1% in 2009.
Although short-term concerns are mounting, we see fundamental drivers for the
domestic coal industry in the next 5-10 years: (1) Ukraine' s strong need to
cut its gas dependence on Russia to improve energy security; (2) and rising
Ukrainian demand for coking coal from steelmakers, backed by rebounding demand
for steel. Ukrainian steel producers, over the last month, have been
confirming expansion programs, though they acknowledge 1-2 year delays.
We value four public companies in the market - Dongirmash, Druzhkivka
Machinery, Svitlo Shakhtarya, Yasynuvatsky Machinery, - using DCF model and
peer valuation. When assigning target price recommendations, we took into
account P&L quality, liquidity and parent group support.
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