We estimate spending on bridge construction in Ukraine will total USD 4 bln over 2008-12, triggered by preparation for the Euro 2012 Football Championship. We initiate coverage of two companies that will benefit most from this trend:
• Mostobud - a near-monopoly bridge construction company
• Dnipropetrovsk Babushkin Steelwork Plant (DZMK) – the largest Ukrainian manufacturer of structured steelwork
The Ukrainian government is planning to build ~30 km of new bridges, reconstruct ~10 km of existing bridges, and construct ~200 new overpasses and viaducts as part of a mass road infrastructure program over 2008-2012, in the runup to co-hosting the UEFA Euro 2012 football championship. Currently, about half of Ukraine’s bridges are out of date and significant part of them require immediate overhaul. At the same time, domestic transportation is constantly rising, resulting in increased load on bridges; passenger and cargo transportation have increased by 66% and 32% since 2000.
Overall spending on road and bridge infrastructure development will require USD ~10 bln over 2008-12, according to our estimates. This represents ~2% of GDP, a fairly achievable amount, in our view. The Ukrainian government is set to attract private investments to cover two thirds of the necessary amount.
With its near-monopoly standing on the local market, bridge builder Mostobud is the only publicly traded Ukrainian company with direct exposure to the infrastructure segment. In our most likely scenario, Mostobud will receive about third of overall orders over 2008-12.
Forthcoming bridge and overpass construction projects will require significant supply of structured steelwork to complete. This, coupled with the logistics and retail sectors' fast development and industrial premise renovation, should trigger growth in the structured steelwork market until 2012.
We project that Dnipropetrovsk Babushkin Steelwork Plant (DZMK), the largest Ukrainian manufacturer of structured steelwork, will increase sales significantly over the next five years, driven by the boom on the steelwork market. DZMK’s parent company, Fercon Holding, is likely to go public in 2009, which we expect to be a stock price catalyst.
We applied DCF and peer comparison approaches to value Mostobud and the Dnipropetrovsk Babushkin Steelwork Plant.
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