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Norvik Research 02.09.2016

02/09/2016 16:00

Global developments

Markets are awaiting today’s US labor market report. The data are due at 12.30 GMT. The dollar index is marginally higher today after falling 0.4% yesterday on weak US manufacturing data. US 10Y Treasuries yields are up 3 bp to 1.595%. S&P futures are flat; Euro Stoxx 600 is up 0.4%.

Oil prices touched a 3-week low yesterday after a 5-day losing streak, before recovering on hopes for Russia’s participation in price-stabilization efforts of largest producers. President Putin in his Bloomberg interview earlier today expressed support for coordination between Russia and OPEC in capping output. Brent prices are at $46.0/bbl today after falling 3.4% yesterday.

Russia and CIS area developments and market colour

In a detailed interview to Bloomberg, President Putin argued that Russia’s comfortable FX reserves position and strong demand for local currency debt allows it not to rush with repeated Eurobond issuance. In other notable comments, Putin said that the sale of Bashneft may still take place later this year, with the state aiming to maximize the value of this asset (an indication that Rosneft is likely to be allowed to bid and possibly win this auction).

The IMF is expected to conclude the latest review of its program for Ukraine in September. According to yesterday’s comments by the IMF spokesman Gerry Rice, the current review is “very close” to completion, with some technical issues relating to timing of some future policy actions still outstanding. The IMF official said that an IMF Board meeting to consider the outcome of the review is now expected to take place in the second half of September.

The rouble is 0.3% stronger today at 65.8 against the dollar after depreciating 1% yesterday. OFZ yields closed broadly unchanged yesterday despite lower oil prices and are rallying across the board today. Ukraine’s sovereign Eurobond yields are 1-2 bp tighter today, while Russian a Kazahstan’s yields are 1-2 bp wider.

Corporate news

Industrial Metallurgical Holding (formerly Koks Group) has reported weak results for H1 2016. Revenue declined by 4% YoY to RUB 28.3 bn on the back of weak steel prices. At the same time, EBITDA slumped by 42% YoY to RUB 4.7 bn as a result of lower revenue and higher production costs. EBITDA margin was just 16% (H1 2015: 28%), although net income showed growth of 7% to RUB 4.5 bn, mainly due to a positive effect of the rouble’s appreciation.

Net debt totaled RUB 48.2 bn (end-2015: RUB 52.0 bn), as the company repaid around RUB 3bn of debt in H1. We note further deterioration of the situation with liquidity, which remains exceptionally weak. First, as of end-H1 current liabilities exceeded current assets by RUB 28.1 bn. Second, cash and equivalents covered just 2% of short term debt, a very low level. Third, IMH had only RUB 2.3 bn in available credit lines at the end of H1 (this amount was subsequently increased in July and August to around RUB 8.0 bn). The company’s auditors have included a remark in the H1 2016 financial statement expressing doubt in IMH’s ability to continue operations as a going concern.

Furthermore, we note certain corporate governance issues of the company. In 2015 IMH issued a RUB 1.5 bn loan to a related party, subsequently used to finance acquisition of a hotel. In June 2016 the company controlling this hotel was acquired by IMH’s subsidiaries. We continue to believe that risks related to IMH remain elevated so recommend avoiding exposure to this issuer.

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