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Norvik Research 16.03.2017

16/03/2017 16:58

Global developments

Markets rallied on a dovish outcome of the Fed meeting and a defeat for populists in the Dutch general elections. With most votes counted, Prime Minister Rutte’s People's Party is getting 33 seats (out of 150) against 20 seats for the anti-immigration and eurosceptic Freedom Party. Rutte is now best positioned to form a cabinet but coalition talks may take several months.

The Fed delivered the widely expected quarter-point rate hike yesterday while investors cheered the lack of a hawkish tilt. Median projections did not change from December, including two more 25 bps rate hikes in 2017 and three in 2018. Chair Yellen reiterated the intention to raise interest rates gradually. The broadly dovish outcome of the meeting sank the dollar while equities and other risk assets rallied. The dollar index weakened 1.0% yesterday and is 0.3% lower today. US 10-year Treasury yields fell 11 bps yesterday and are 3 bps higher today at 2.52%. S&P 500 futures are 0.2% higher, after the benchmark advanced 0.8% yesterday. Eurostoxx 600 is 0.7% up.

Oil prices rose against an unexpected fall in crude stockpiles. Crude oil inventories declined 0.2 mn bbl in the previous week against the forecast of 10th consecutive weekly increase. Brent prices are up 0.2% at $51.9/bbl after rising 1.8% yesterday.

Russia and CIS area developments and market colour

Russia’s central bank directors will consider a possible key rate cut at the meeting on 24 March. According to comments by head of CBR monetary policy department Dmitriev, the declines in seasonally adjusted inflation to 0.1% MoM SA in February from 0.3% in January is an argument for a rate cut, provided low inflation can be sustained in the longer run and there is no shortage of dollar liquidity in the local market. This was the first indication from a CBR official that a rate cut may happen already in March. Clearly, the continuing disinflation (headline inflation is estimated to have declined to 4.4% YoY in the week to 13 March) has forced CBR officials to review its hawkish stance.

The rouble is 0.9% stronger today at 58.0 versus USD, reflecting oil prices dynamics. OFZ yields are 2-7 bps tighter today, supported by record-high demand for yesterday’s auctions and continuing inflows on the back of strengthening expectations for near-term policy easing.

Corporate news

Gazprom is placing 10-year USD-denominated Eurobonds today. Coupon guidance is in 5.25% area.

Uralkali’s net income rose 7.8 times in 2016. Net income rising to $1.427 billion compared to 2015 was possible as there was no foreign exchange loss, which amounted to $1.058 billion during the previous reporting period. Sales went down 27% to $2.278 billion. EBITDA also sharply declined compared to 2015 standing at $1.183 billion (-38%).

The weak financial result last year was mainly due to tough market conditions for potash. The average export price fell 30% YoY to $172 per ton reaching the bottom in fall 2016. Apart from that sales volumes contracted by 2% YoY to 11.0 million tons. An increase in operational expenses from $33 to $35 during the year as well as an emergency situation at one of the mines was the main reason for a sharp decline in EBITDA.

Debt burden remains at high levels. Factors negatively affecting company’s profitability have impacted the quality of Uralkali’s balance sheet. Net Debt reached $5.517 billion, while Net Debt/EBITDA stood at 4.67 in 2016, compared to 2.80 in 2015. This level of Net Debt/EBITDA could cause the revision of company’s credit ratings as the current debt burden has already exceeded outlooks of the rating agencies.

The outlook for 2017 is moderately positive. Despite challenges in potash industry in 2016, this year it is expected to recover largely based on a pick-up in demand in China and India. Also, it is unlikely for any issues with liquidity to arise. Uralkali’s cash and equivalents reach $1.485 billion and Sberbank approved a credit facility of $3.9 billion. Uralkali’s bonds maturing in April 2018 with a coupon of 3.723% trade with YTM of 2.575%.

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Norvik Banka Research
+44 207 259 8854
research@norvikuk.com

Brokerage department
+371 6701 1561
broker@norvik.eu

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