Ukrainian Railways generates UAH 9 bln in losses in 1H20

Net revenue at Ukrainian Railways (RAILUA) dropped 19%
yoy in 1H20 to UAH 35.62 bln, according to its financial report released on
Oct. 21. Its freight segment revenue declined 16% yoy to UAH 30.65 bln (as
freight turnover fell 20% yoy) and its passenger segment revenue plummeted 57%
yoy to UAH 1.91 bln (on a 56% plunge in turnover). The company’s EBITDA fell
54% yoy to UAH 3.24 bln, based on our estimates. In particular, EBITDA in its
freight segment decreased 41% yoy to UAH 8.33 bln, while operating losses in
its passenger segment slid 13% yoy to UAH 5.11 bln.

The company’s bottom line was negative at UAH 8.79 bln
in 1H20 (vs. positive UAH 1.07 bln a year before), which was a result of lower
EBITDA, as well as foreign currency losses of UAH 3.41 bln (vs. gains of UAH
1.68 bln a year before). 

Ukrainian Railways’ operating cash flow before working
capital changes plunged 69% yoy to UAH 2.65 bln and net cash from operations
plummeted 84% yoy to UAH 1.45 bln. At the same time, the company reduced its
purchase of new PP&E by just 11% yoy to UAH 3.43 bln in 1H20.

The company’s total debt increased 5% YTD to UAH 36.73
bln as of end-June 2020, while its net debt advanced 18% YTD to UAH 33.18 bln.
Its ratio of net debt-to-LTM EBITDA reached 2.46x as of end-June, we estimate,
up from 1.62x at the end of December.

Alexander Paraschiy: The
company’s net losses are in the range provided by its former
acting CEO Željko Marček in late March and much weaker
than our estimates. Its EBITDA is also weaker than we expected in April (a
decline by no more than 50%), which is a result of smaller cost cutting efforts
than we expected. At the same time, the positive news is that the company
managed to significantly reduce its costs in its passenger segment so that its
heavy operating losses cool down there despite plunged revenues.

While the company’s 2H20 results are going to be
somewhat better, on the partial recovery of freight traffic, it is very likely
that its ratio of net debt-to-EBITDA will exceed 3x as of end-2020, which will
limit the company’s flexibility in debt financing, and possibly will lead to
breaches of some debt covenants. Meanwhile, Ukrainian Railways has a solid
chance to boost its P&L in the mid-term, providing the government approves
some of the company’s many regulatory initiatives. All in all, we remain
neutral on RAILUA bonds.