Ukrzaliznytsia downgrades its P&L and CapEx plan for 2017

Ukraine’s railway monopoly Ukrzaliznytsia (UZ, RAILUA)
updated its financial plan with a downgrade of all P&L forecasts, according
to its Aug. 16 press release. The key factor for the downgrade is the
postponement of an expected upgrade of freight railcar rates (by 22.5%) to
October from mid-June. The company cut its revenue forecast by 4.4% from the
previous plan to UAH 76.1 bln, its EBITDA forecast by 21.9% to UAH 18.3 bln,
and its net income outlook by 95% to UAH 0.06 bln. Also, the company reduced
its CapEx plan by 29.6% to UAH 16.0 bln.

Alexander Paraschiy:
Ukrzaliznytsia failed to secure a freight rate hike in June, which we attribute
to a conflict between its former CEO and the infrastructure minister, who is
responsible for revising freight rates. Now that the new acting CEO has good
ties with the minister, we see it’s realistic that the freight rate hike will
be approved and take effect as of Oct. 1. Therefore, the downgrade of the
company’s P&L figures is just aligning the company’s 2017 plan to the new
reality, with realistic assumption of the rate hike.

Now we can see how painful the personality conflict
was for the company as it lost an additional UAH 3.5 bln in revenue and UAH 1.1
bln in net profit due to the postponed rate hike. This clearly indicates that
the company’s welfare should not depend on the relationship between company’s
top management and the ministry. Decisions on freight rates should be based on
clear, fundamental rules and market conditions.

We maintain our skeptical, neutral view on RAILUA
notes.