Ukrzaliznytsia expects higher freight rates, 11% yoy sales growth in 2017

Ukraine’s railway monopoly Ukrzaliznytsia (RAILUA) plans to boost its revenue 10.9% yoy in 2017, according to its financial plan, as cited by Interfax-Ukraine. The company expects to transport 348.8 mln of goods in 2017, which should be 1.7% more compared to the estimate for 2016 (this year, its freight turnover will have decreased 2.1% yoy).

Ukrzaliznytsia’s CEO also told journalists on Dec. 27 that the Infrastructure Ministry agreed to boost cargo and passenger freight rates in 2017, providing no details on the size of a possible increase. In its December presentation to investors, Ukrzaliznytsia revealed its expectations that cargo rates will grow by 25% in early 2017 and passenger rates will grow by 35% in the course of 2017.

Alexander Paraschiy: An increase in cargo railway rates by a quarter does not look realistic, in our view, as it should be heavily resisted by Ukrzaliznytsia clients (iron ore, steel, coal and agro companies), who definitely have some lobbying power in the country. If such growth will happen, it could become a short-term catalyst for a RAILUA bond price increase, in our view.

In which case, Ukrzaliznytsia will significantly boost its CapEx to the planned level of UAH 27.4 bln in 2017 (from UAH 11.2 bln planned in 2016). At the same time, constant risk remains that the company’s high CapEx appetite will lead to a further increase of its debts and its financial leverage. This grounds our neutral view on RAILUA bonds.

The possible increase of the Ukrzaliznytsia investment program will be beneficial for Ukrainian railway machinery producers, which will get a chance to receive large orders for the first time since the crisis started for them in 2013. Since then, these companies have suffered from an absence of orders from Russia, where they traditionally sold about 90% of their products in the past.