UZ plans to spend UAH 120-150 bln for investments by 2021

The management of Ukrainian Railway (UZ, RAILUA) approved a modernization strategy till 2021 with a total investment plan of UAH 130-150 bln, according to the company’s April 26 press release. The plan, which aims at making UZ “a leader in the transportation and logistics market not only in Ukraine, but also in Europe,” will be presented to the Ukrainian government later this year, the release said.

Its key proposed changes include creating separate divisions based on business activity, not based on regions, as it is now. The company aims to improve the quality of freight and passenger services, capture more market share of container transportation in Ukraine and increase revenue from passenger segment. It also plans to purchase 250 locomotives in five years. The release offers few other details of the plan.

Alexander Paraschiy: Despite UZ’s inability to fulfill previous plans, the new plan has a chance for at least partial success given UZ’s significant changes in the last two years. It has tranformed itself from a ministerial department to a joint stock company, and it has hired new experienced management. The key factor that may prevent UZ from modernizing heavily is a deficit of financing. Ukrainian regulators are not hurrying to boost freight railway rates as they seem to face resistance from powerful UZ clients.

Without a revision of freight rates, it will be not possible for UZ to spend UAH 30 bln for CapEx annually (in 2016, it estimated its CapEx at UAH 11.2 bln). Thus far, we continue to expect the company will face CapEx needs that exceed its ability to generate money, meaning it will be over-leveraged and face a constant risk of missing debt repayments. Our view on RAILUA bonds remains neutral.