Cabinet approves Ukrzaliznytsia 2018 financial plan

Ukraine’s Cabinet of Ministers approved the 2018 financial
plan of Ukrainian Railway (Ukrzaliznytsia, RAILUA) at its Feb. 14 meeting, the
company reported on its website the same day. The plan assumes a 20% yoy
increase in net revenue to UAH 88.4 bln. Revenue growth of 20% yoy to UAH 72.0
bln is projected for its cargo segment, which will be prompted by a 15% rise in
average freight rates as of November 2017, a 3.4% yoy increase in freight
turnover and by this month’s expected deregulation of the railcar component of
national freight rates, which will add UAH 1.3 bln to revenue.

The company also plans to boost labor efficiency by
26% yoy to UAH 349K per employee in 2018, implying it is aiming to reduce its
average headcount by 5% yoy this year. The company’s EBITDA is planned at UAH
20.2 bln, implying its growth will be slower than for revenue (only 6.6% yoy)
as some cost components will grow fast (raw materials rising 50% yoy, labor
costs 22% yoy). The company’s net profit is planned at UAH 0.7 bln, or 6.8x
higher yoy.

The company is planning an ambitious CapEx program of
UAH 26.9 bln (rising 2.5x yoy) of which UAH 11.5 bln will be used to finance
the purchase and construction of locomotives and railcars (namely, the company
plans to construct 3,600 freight railcars, purchase 3,450 freight railcars, 60
passenger railcars and 25 diesel locomotives) and UAH 6.4 bln will be used to
reconstruct railcars and locomotives.

Ukrzaliznytsia plans to boost its total debt 13% yoy
to UAH 44.2 bln as of end-2018. In such case, its end-2018 Net debt-to-EBITDA
ratio will be 2.1x, or below its Eurobond covenant of 2.5x.

Alexander Paraschiy: It’s a good
sign that the company’s annual plan was approved at the year’s start (usually
it’s approved in the second half) as this indicates the company managed to find
common ground with the Ukrainian government. So far, we believe that the
company’s P&L plan is realistic and it has the potential to report a
higher-than-planned EBITDA in 2018. In particular, we believe the company has
set conservative projections for its additional revenue from its ability to set
railcar rent prices (just UAH 1.3 bln, while we estimated the effect could be about UAH 3.5 bln).

Also we remain skeptical about the company’s
ability to meet its CapEx plan for the year: the company never spent that much,
and its much less ambitious CapEx plan for the previous year (UAH 16 bln) was
fulfilled by just two-thirds. But if the company is able to catch up with its
investments, it will likely be able to finance its CapEx and stay within its
debt covenants. We confirm our neutral view on RAILUA bonds.