Ukrnafta Sales Grow 38.1%, Net Income Rises 47.5% In 1H05, YoY

Ukrnafta’s (UNAF: HOLD) sales totaled USD 482.2 mln in 1H05, while the company’s net margin amounted to 29% (on a net income of USD 144.2 mln) for the same period. On a quarterly basis, Ukrnafta?s sales declined by 7% in 2Q05 and net income fell by 25% QoQ. Concorde Capital: If this tendency continues, Ukrnafta will not meet our sales projections of USD 1,475.6 mln and net income forecast of USD 334.0 mln in 2005. However, chances are the company will improve its financials in 2H05, as in 1H05 it apparently overpaid dues to the state budget several months in advance. (The company?s gross sales in 1H05 were USD 700.1 mln, up 50.5% yoy and 45% higher than net revenue for the same period, although Ukraine?s VAT rate is 20%, and oil and gas extraction royalties, in addition to other top line deductions, will not exceed 15% of net sales). In addition to budget payments, failure of Ukrnafta?s financials to meet not only the management forecast, but also our more conservative projections, should be ascribed to a slowdown in the company’s downstream expansion in 1H05 and an absence of a clear strategy by the state with regard to the creation of VIOC. Our HOLD recommendation seems quite justified now.