Ukrlandfarming revenue falls 31%, EBITDA 44% in 2017

Net revenue of Ukraine’s leading agricultural holding
Ukrlandfarming (ULF, UKRLAN) fell 31% yoy to USD 658 mln in 2017, according to
its audited financial report. It was driven mostly by a 45% yoy decline in
revenue from its “distribution” segment (distribution of machinery and
agricultural raw materials) to USD 157 mln. In its core segment, crop
production, revenue decreased 20% yoy to USD 278 mln. The company’s land bank
under operation decreased 5.8% yoy to 570,000 ha as of end-2017.

The company’s gross profit dropped 67% yoy to USD 62.6
mln and EBITDA slid 44% yoy to USD 91.0 mln. Its bottom line improved slightly
to negative USD 158.6 mln.

Ukrlandfarming’s operating cash flow before working
capital changes fell 58% yoy to USD 81.6 mln and net cash generated from
operations (before payment of coupons on bonds) plummeted 80% yoy to USD 11.0
mln. Its net cash outflow for investment plunged 81% yoy to just USD 3.8 mln.
The company had no significant borrowings or repayment during the year and paid
just 12.5 mln in interest on its debt (down 48% yoy) in 2017.

Its total debt increased 5.3% yoy to USD 1,756 mln and
net debt rose 5.9% yoy to USD 1,682 mln as of end-2017, implying a net
debt-to-EBITDA ratio of 18.5x (up from 9.8x a year before).

Alexander Paraschiy: The
company’s 2017 results turned out to be weaker than in its financial model
confirmed by auditors and presented in late 2017 to some
creditors. Therefore, things seem to be getting worse than the
company was expecting just a year before. That means the company’s creditors
are unlikely to count any more on debt restructuring conditions offered last December (including
on the bonds of ULF and Avangardco: a 50% haircut, extension to 2027 and
coupons of 2.5%-4.0%).

Bondholders should also consider an intention of the
company’s owner Oleg Bakhmatyuk to resolve its outstanding debt issues with Ukraine’s central bankand Deposit Guarantee Fund – some of such debts are not consolidated by ULF,
but will likely be repaid from its cash flow. Moreover, resolving of debt
issues to state bodies might be Bakhmatyuk’s top priority.

We estimate that additional debt of Bakhmatyuk to
state bodies (outside ULF balance) is USD 500-600 mln, which brings total
Bakhmatyuk’s debt obligation to ULF creditors and Ukrainian governmental bodies
at about USD 2.3 bln. This is about three times more than fair value of
Bakhmatyuk’s business, as we estimated it in our August 2016 report. All in
all, we remain on the position that we see no value in the Eurobonds of ULF or
Avangardco.