State Property Fund Sets Kryvorizhstal Tender Date

Kryvorizhstal’s (KRST: HOLD) tender date has been set for October 25. The starting price for a 93.02% stake in KRST was set at USD 1.98 bln, implying MCap of USD 2.12 bln (P/S?05 = 1.14, EV/EBITDA?05 = 4.61, P/E = 10.34). The tender’s conditions estimate annual gross sales of not less than USD 1.9 bln over the next 5 years. The investor will be required to ensure KRST is self-sufficient in its raw materials and conduct a fundamental reconstruction of the company?s existing capacity. Also, the SPFU announced Kryvorizhstal 1H05 operating results. Kryvorizhstal decreased its net income for 1H05 by 23% YoY to USD 156.5 mln (net margin of 14.3%), while sales grew by 24% to USD 1 093.6 mln. Concorde Capital: The starting price for the tender is reasonable, given KRST?s vertically integrated production chain. The requirement that the buyer maintain sales of more than USD 1.9 bln is feasible, given an output level of 6 mln mt of rolled steel, implying an average price of USD 300 per ton. Currently, rebar, KRST?s core product, trades at ~$400 per ton. The tender requirement contains a safety margin, in case the market cools down. In order to be fully self-sufficient in raw materials, KRST must increase its coke capacity and construct a pelletizing plant for the production of iron ore pellets. The construction of an additional coke battery may be economically feasible, due to the ability of cheap coke gas, which could be used as a substitute for natural gas. As the company?s main iron ore feedstock is agglomerate, we believe KRST has no need to construct pelletizing capacities. The company’s 1H05 financial results are in line with our expectations and we maintain our EBITDA and Net margins for 2005 at 25% and 11% respectively. The top line was flat in 2005E, due to a 20-30% price slump over the summer.