Naftogaz net profit advances 82% yoy in 1H19

Ukraine’s leading natural gas company Naftogaz (NAFTO)
generated UAH 130.9 bln in net revenue in 1H19, or 1% less yoy, according to
its interim report released on Sept. 24. Its revenue declined in most segments
except gas transit, where the top line gained 15% yoy (to UAH 38.3 bln) on
increased volumes (up% 6% yoy to 45.1 bcm) and a higher effective transit rate.
Its gross profit increased 22% yoy to UAH 46.6 bln, which was mostly a result
of a reduced price for natural gas purchase (down 27% yoy to UAH 27.5 bln) and
decreased D&A charges in COGS (down 24% yoy to UAH 16.3 bln).

The company’s EBITDA increased 1% yoy to UAH 50.6 bln,
mostly driven by its gas transit segment (up 14% yoy to UAH 20.0 bln). Reduced
D&A charges and less one-off expenses caused the company’s bottom line to
advance 82% yoy to UAH 24.7 bln.

The company’s total debt dropped 34% YTD to UAH 36.5
bln, while its net debt shrunk 67% YTD to UAH 13.9 bln as of end-1H19. Recall,
Naftogaz raised EUR 600 mln and USD 335 mln from its July placement of
Eurobonds.

Alexander Paraschiy: The
company’s improved operating profit is largely a result of higher transit rates
that the company applied in 2019 (about 7% higher yoy, in USD terms). Without
such an increase, the company’s EBITDA would have been 5% less yoy, we
estimate. In any case, the company’s results look strong and it remains
underleveraged: even accounting for the newly raised debt, Naftogaz’ estimated
total debt to LTM EBITDA ratio is about 0.7x as of July 2019.

The hypothetical total debt to LTM EBITDA – without
the operating results of its gas transit segment – is 1.2x as of July 2019 (far
less than the standard threshold of 3.0x), which suggests Naftogaz would remain
solvent even with the worst outcome in the approaching gas supply conflict with
Gazprom. We continue to believe NAFTO Eurobonds bear the same risk as sovereign
paper.