Ukrzaliznytsia revenue rises 15%, EBITDA jumps 17% in 1H17

Ukraine’s state railway monopoly Ukrzaliznytsia
generated UAH 35.3 bln in net revenue in 1H17, a 15% yoy increase, according to
its abridged unaudited interim report. Its EBITDA (not adjusted for possible
one-off items) increased 17% yoy to UAH 10.3 bln in 1H17, which is mostly the
result of increased net other operating income.

The company’s financial costs dropped 41% yoy to UAH
1.8 bln, which helped it generate a positive bottom line of UAH 0.61 bln in
1H17 (up from a UAH 3.6 bln net loss a year ago). It was able to improve cash
flow from operations 10% yoy to UAH 7.6 bln, which enabled it to boost cash
used for investment by 60% yoy to UAH 4.9 bln, as well as repay UAH 2.2 bln in
debt.

Its total debt and net debt decreased 7% YTD to UAH
39.0 bln and UAH 32.4 bln, respectively, as of end-June. Its net debt-to-LTM
EBITDA ratio stood at 1.50x as of end-June, down from 1.78x as of the year’s
start.

Alexander Paraschiy: It is good
to know again that the company’s P&L was not adversely impacted by the
trade blockade of Donbas. Its rising revenue is the result of a 15% freight rate hike in mid-May 2016,
as well as higher freight turnover, which climbed 6% yoy to 94.9 bln t/km in
1H17, according to an Interfax-Ukraine report. We see its improved bottom line
is mostly thanks to the stability of the Ukrainian currency, which should have
allowed it to generate some ForEx gains during the first half. The company
might have also gained from its fight for cost optimization as well.

Ukrzaliznytsia’s reduced leverage in the year’s first
half is also partially the result of the strengthened hryvnia, as 85% of its
debt is denominated in dollars and euro. If the hryvnia devalues in 2H17, the
company’s leverage may slightly worsen, but it seems like it will remain rather
healthy as of the year end.

Provided the company’s new acting CEO is able to secure
his promised 22.5% increase in freight rates since 4Q17, the company will be
able to outperform its UAH 18.3 bln EBITDA guidance for the full year. We
remain skeptical about the long-term growth of RAILUA bond prices, but we now
expect that the bond market will react positively on such strong results.