Fixed Income Analysis /

Ukraine corporates to underperform sovereign in 2020

    Tellimer Research
    17 December 2019
    Published byTellimer Research

    We upgrade KERPW 22s, KERPW 24s, MHPSA 24s, MHPSA 26s and RAILUA 24s to Buy and reiterate Hold on DTEKUA 24s, METINV 21s, METINV 23s, METINV 26s, METINV 29s, MHPSA 29s and RAILUA 21s. 

    Strong momentum is building for the sovereign bonds, with the first months of Zelensky’s presidency producing a number of long-awaited laws, a staff-level agreement on a new IMF facility and resumption of peace talks with Russia. 

    Corporates, on the other hand, are seeing headwinds. Weak commodity markets, high accumulated cost bases in past periods of high inflation and an appreciating UAH are eroding exporter’s profit margins and taking a toll on their cash flows. The evolution of the regulatory environment, with a number of long-delayed reforms having entered the implementation phase (eg a new electricity market), or passed into law (farmland laws, unbundling of the gas transportation system) challenges the status quo, with negative credit implications for the heavily regulated issuers. 

    We expect the financial performance of most Ukrainian corporate issuers to deteriorate in 2020 and their bonds to underperform the sovereign. However, strong starting positions in most cases in terms of leverage, profitability and cash flows, coupled with attractive absolute spread levels, do not justify any Sell recommendations, in our view.

    Buy MHPSA 23s and 26s, Hold on MHPSA 29s on expectations that the company will weather the challenges of 2020 better than many other Ukrainian issuers. New production capacity added in 2019 and planned for commissioning in Q1 20 should support volumes and help partially mitigate the negative effect of soft poultry prices and UAH appreciation.

    Buy KERPW 22s and KERPW 24s on our expectation that capacity added in 2019 will support the company’s cash generation amid margin-diluting UAH appreciation and weak grain prices. Kernel will continue investing heavily in 2020, have negative free cash flows and see its leverage increase, before investments boost EBITDA in 2021.

    Buy RAILUA 24s, Hold RAILUA 21s. Ukrainian Railway has had at least three years of tariff increases and is better positioned to deal with UAH appreciation than its peers. As a fully state-owned company, which has addressed its short term-refinancing needs in 2019, we expect RAILUA 24s to closely follow the sovereign and outperform most Ukrainian corporate bonds.

    Hold METINV. Weak steel prices in Europe, normalisation in the iron ore market and the margin-diluting effect of UAH appreciation will keep Metinvest’s profitability, cash flows and leverage under pressure in 2020. But a strong starting position in terms of leverage and liquidity will support the bonds. We expect METINV to underperform the sovereign, MHPSA and KERPW.

    Hold DTEKUA 24s. Weakening credit metrics on the back of low electricity prices are reflected in DTEKUA’s wide spreads. The seasonal increase in demand in winter could support prices and help the company adjust to the new market environment. Better visibility on electricity prices is needed for DTEKUA 24s to start closing the spread gap to UKRAIN and METINV.