Motor Sich revenue falls 31% yoy in 1Q16

Ukraine’s leading aerospace engine producer Motor Sich (MSICH UK) reported a 31% yoy decrease in net revenue to UAH 2,100 mln in 1Q16, according to its April 25 filing. The company’s EBITDA decreased 52% yoy to UAH 703 mln and its bottom line fell 71% yoy to UAH 305 mln in 1Q16.

In the quarter, Motor Sich reported a 53% yoy decline in production of new aerospace engines and 3.4x yoy increase in production of repaired engines, in value terms, to UAH 952 mln and UAH 516 mln, respectively. Its advances received decreased 22% yoy to UAH 1,876 mln and cash proceeds from sales of finished goods fell 31% yoy to UAH 952 mln in 1Q16.

With such cash flows, Motor Sich generated negative cash flow from operations at UAH 489 mln in 1Q16 (vs. positive UAH 741 mln a year before). Negative cash from operations, as well as increased investments to UAH 405 mln, prompted a decrease in the company’s cash balance by 52% YTD to UAH 582 mln and increase of its debt by 35% YTD to UAH 891 mln. This way, Motor Sich’s long history of negative net debt has come to an end.

Alexander Paraschiy: The decline in Motor Sich’s P&L numbers is cause for worry, especially given that the company is exposed to geopolitical factors. Namely, it’s dependent on demand for helicopter engines from Russian aviation plants.

However, we believe it’s too early to draw any conclusions from first quarter financials since it’s traditionally weak for the company, except for 1Q15. That said, the weak 1Q16 performance could be attributed to the high comparison base of 1Q15.

In any case, it’s becoming increasingly hard for the company to sell its aviation products. Last year, it reported a 12% yoy decline in output in comparable prices. This year, it expects a 23% yoy decline.

However, due to devaluation of the local currency (Motor Sich sells most of its products in hard currency), we estimate the company’s hryvnia-denominated revenue rose in 2015 (the company has yet to report its final number for the year). It will likely show positive revenue performance for this year as well.

All in all, we expect few positives in Motor Sich’s mid-term future, as we expect geopolitical factors should affect the company’s business negatively, sooner or later.