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Wednesday, August 25, 2010
Fixed Income Weekly
Moderate activity was observed on the Ukrainian Eurobond market over the past week. Investors were hesitant to increase their positions in sovereigns. Negative global market sentiments fueled by downbeat US economic data pushed Ukraine’s government Eurobonds down 1.4 p.p. on the long-end. Among corporate issues, MHP 15 enjoyed good demand on solid 1H2010 financial results. The company increased net income 14% Y-o-Y to $102 mln and seized half of Ukraine’s poultry market in the process. The increase in grain prices will not have a significant impact on MHP’s financials since the company utilizes corn predominantly in poultry production. In the banking Eurobond segment, Privatbank posted gains during the past week on impressive financial results in 1H2010.
The Ukrainian Eurobond market is currently driven by global sentiment towards EM debt. The spike in demand was driven by record-low interest rates in developed countries and suppressed fears over Europe’s sovereign debt crisis. As a result, yields on Ukrainian sovereign issues bottomed out below the pre-crisis level. Among the events expected to spur action on the domestic market this week, the Ukrainian government has promised to place the second tranche of VAT bonds with a total amount exceeding UAH 10 bln. However, given previous delays we do not rule out the possibility of a postponement of the second tranche until September.
Sovereign issues still look overvalued given current fundamentals. NAFTO appears overpriced taking into account the recent decision by a Kiev court obliging Naftogaz to return 12.1 bln m3 of natural gas to RosUkrEnergo – the total cost is estimated around $2.8 bln. We issue a SELL recommendation on Naftogaz given that NAFTO yields below UKRAIN 16. Among CIS sovereigns, the debut Belarusian Eurobond is an attractive investment opportunity with YTM of 8.36% and priced at 101.55%. Belarus has comparable fundamentals to Ukraine; however, BELRUS trades with a 175 bps premium to UKRAIN, which we view as too wide. Additionally, we see value in second-tier banking names. In our view, ALFAUA and FIUKR will gain on the heels of the strengthening of Ukraine’s banking industry. FIUKR, however, is more suitable for risk-prone investors.