Ukraine approves preliminary railway rate hike as of March

Ukraine’s government approved the 2016 financial plan of the state railway monopoly Ukrzaliznytsia (UZ, RAILUA) that calls for a 15% hike in railway rates as of March 1, Interfax Ukraine reported on March 2. The rate hike’s implementation is still subject to approval by a number of state authorities. At the same time, rate hikes will be deferred for the transport of coal and other industrial cargo which bring low profitability for producers (e.g. stone, sand), acting UZ CEO Oleksandr Zavhorodniy said.

The 2016 financial plan foresees revenue of UAH 77 bln, EBITDA of UAH 27.5 bln and CapEx of UAH 14 bln, Interfax-Ukraine reported. The company has yet to disclose its 2015 financials, but its financial plan expected revenue of UAH 57 bln, EBITDA of UAH 13 bln and CapEx of UAH 2 bln.

Roman Topolyuk: This event is neutral to positive for Ukrzaliznytsa as it managed to pass the bulk of this year’s 18% hryvnia devaluation onto its customers. Such ability of UZ, a state company, to get the government to approve rate hikes to defend its operating margin is among the strong sides of UZ’s business model currently. Once the hryvnia devalues further by the year end, we believe the company could approach the government with another request to hike rates.

The tariff hikes partially outweighs positive effect of the hryvnia devaluation on producton costs of Metinvest (METINV) and Ferrexpo (FXPOLN). Certain iron ore mines of Metinvest operate at a very thin margin currently and might require special treatment from the government in terms of railway rates, once iron ore prices return to the lows of November-December.