Ukrainian Railway guides 10% EBITDA drop in 2018, 54% growth in 2019

Ukrainian Railway (RAILUA) expects that its revenue
will increase 16% yoy to UAH 85.5 bln in 2018 (3% below plan), while its EBITDA
will decline 10% yoy to UAH 18.1 bln (9% below plan), according to its draft
financial plan for 2019 published on its website. The key factor of the
company’s revenue underperformance is its smaller-than-budgeted freight
turnover (-5% compared to plan). The key factor of its EBITDA under-performance
is higher-than-budgeted increase of its salary and social expenditures (UAH
40.0 bln, up 29% yoy and 8% higher than plan).

In 2019, the company’s management plans to boost its
net revenue 28% yoy (to UAH 109.2 bln), mostly relying on a 31% yoy increase of
revenue from freight transportation (to UAH 89.2 bln) amid an expected increase
of average freight rates (by 28% yoy), as well as higher freight turnover (+2%
yoy). Ukrainian Railway expects that its key cost component, salary and social
expenditures, will increase only 13% yoy, while the average salary hike will
amount to 19% yoy in 2019. The company’s 2019 EBITDA is planned at UAH 27.8
bln, or 54% more yoy.

Ukrainian Railway expects its capital expenditures to
be UAH 16.4 bln in 2018 (35% below plan, but 50% higher yoy). In 2019, the
company plans to invest UAH 24.5 bln (50% more yoy).

The company’s 2019 financial plan outlines a careful
approach to new borrowings, planning to attract UAH 3.5 bln from the EBRD (for
ongoing infrastructure and railcar projects), as well as net UAH 7.6 bln in
loans on the local market. Among its key repayments are UAH 9.1 bln for the
amortization of its Eurobonds (USD 300 mln due in 2019). Its total debt is
planned to increase from UAH 43.0 bln at the beginning of 2019 to UAH 48.4 bln
as of the year’s end.

Alexander Paraschiy: The
company’s approach to financial planning looks conservative in terms of debt
raising, which is logical given the limited ability of any Ukrainian state
company to borrow in the election-intensive year of 2019. Its plan to boost
freight rates by 28% yoy in 2019, on average, looks too optimistic in our view.
A likely underperformance in revenue, however, will be offset by
smaller-than-planned CapEx, so that the company will be able to smoothly
service its debt even if its ability to borrow won’t be better than planned.

All in all, we see Ukrainian Railway’s draft
financial plan as realistic, in the meaning that there are expenditure items
that can be adjusted downward in case its revenue/profit will under-perform.
That said, we remain neutral about RAILUA Eurobonds, as well as remain
comfortable about the company’s ability to repay on time Eurobond amortization
amounts next year.