Report title: Ukrainian Railway Machinery
from Concorde Capital
59 page report published Jan 28, 2008

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Mid-term outlook: High demand & low competition The five domestic railcar producers continued to benefit from excess demand in the insulated CIS market, posting 48% yoy higher aggregated sales in 9M07. Demand is being stimulated by a rise in freight transportation (up 4-8% CAGR over the last three years), high replacement needs, and the emergence of new financing channels such as leasing. We estimate demand for railcars will remain robust until 2011 and forecast significant increase in the aggregated revenues of the five Ukrainian railcar producers over 2007-2010. Long-term outlook: Diversification is an issue Having a broad product mix will gain additional importance in 3-4 years when new railcar production capacities come on-stream in the CIS. Mariupol Heavy Machinery is best protected from volatility in demand for railcars, while the revenues of pure wagon producer Dniprovahonmash are likely to decline after 2010. Corporate activity will keep the sector hot We expect to see share offerings by Ukrainian railcar producers in the next 12-18 months. All five stocks in our coverage are to be watched closely. Consolidation will become more visible, both domestically and cross-border. Ukrainian wagon manufacturers' growing importance on the CIS market makes them attractive takeover targets for Russian players – the main candidates are Azovmash (Azovzahalmash and Mariupol Heavy Machinery) and Dniprovahonmash. High margins deserve premium valuations After triple digit performance in 2007, Ukrainian railcar makers trade close to their emerging market peers at around 1.2x EV/Sales '07. With low price-elasticity of CIS demand for railcars in the midterm, Ukrainian producers will keep their EBITDA margins 1.2-1.4x above the EM peer average, justifying premium valuations by EV/Sales.

Source: Concorde Consulting
Document ID: cc40
Country: Ukraine
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