DTEK EBITDA up 80% y-o-y, with EBITDA margin at 25% in 1H10

Yesterday DTEK reported unaudited 1H10 IFRS results and held a conference call. Revenues rose by 58% y-o-y to UAH 10.6 bln (USD 1.3 bln) for 1H10, while EBITDA came in at UAH 2.6 bln (USD 333 mln, +80% y-o-y), implying a 25% EBITDA margin (22% in 2009). Mykyta Mykhaylychenko: Around half of the revenue increase came from the coal division as DTEK initiated coal trading activities. A 20% increase in real production was registered across all divisions (coal, electricity generation, distribution). CAPEX was approximately USD 100 mln in 1H10 and the management targeted the same figure for 2H10.DTEK remains Ukraine’s largest coal producer with 26.3% of total output and also the largest thermal power generating company (48.9% market share).DTEK reported USD 700 mln in debt, 86% of which is long-term as USD 500 mln of 5Y Eurobonds (placed in April) were effectively used to replace short-term debt.Importantly, DTEK increased coal exports 2.4x to UAH 630 mln (USD 80 mln) in 1H10. FX denominated export revenues reduce DTEK forex risks and will be sufficient to cover Eurobond coupon payments of USD 47.5 mln p.a. (in 2009 98% of revenues were UAH-denominated).1H10 results were broadly in line with our expectations. We see the revenue increase coming from Ukraine’s economy recovery (industrial production up 12% y-o-y in 1H10), price increases (the avg. electricity  price was up 54%) and business diversification into coal trading. We expect revenues to be some 42% up to USD 4.3 bln for the full-year 2010 with EBITDA margin around 26%-27% (22% in 2009 and 26% in 2008).The management confirmed the additional debt accumulation (incl. the Eurobond issuance) will depend on how the government will proceed with privatization of Dneproenergo and Zakhidenergo – DTEK’s principal targets.We foresee gross Debt / EBITDA at 1.1x (or 1.7x should the company attract another USD 500 mln of debt),and  EBIT interest coverage of 9x (4.5x) in 2010F. The management expects growth in coal trading  to continue and to contribute to business diversification, while we see upcoming privatization as likely further increasing DTEK’s market share.All in all, we remain bullish on the company and recommend buying DTEK’15 Notes, which now trade at an 8.8% YTM, ~218 bps spread over the sovereign curve. However, we don’t see significant price upside potential now (no more than 2%-3%).