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Norvik Research 01.09.2016

01/09/2016 15:13

Global developments

Strong manufacturing activity data in China have supported both equity and commodity markets. China’s officially measured manufacturing PMI came out at 50.4, compared to consensus of 49.8, the highest level since October 2014. (The Caixin / Markit PMI reading was 50.0, marginally below consensus). The data boosted commodities, particularly metals, and mining stocks in Europe. Manufacturing PMI in the UK was very strong (53.3 versus 49.0 consensus) boosting GBPUSD 0.8% to 1.325. S&P futures are 0.3% higher today; Euro Stoxx 600 is up 0.9%. Brent prices fell 2.8% yesterday to $47.0/bbl and are at $46.8 today, after the EIA data indicated that US crude oil inventories expanded 2.3 mn bbl, stronger than the API estimate of a 0.9 mn bbl increase.

Russia and CIS area developments and market colour

Russia’s manufacturing PMI data point to a rebound in August. Headline PMI was 50.8, above 49.5 in July and consensus forecast of 50.1. This was only the second positive reading this year. The upturn was due to increases in new orders and output components while employment continued to decline.

Weekly inflation in Russia decelerated in late August. Inflation in the week to 29 August was 0.0% WoW, after 0.1% in the previous week. On our estimates, headline inflation declined to 6.9% YoY from 7.1% in the previous week. Together with the latest assessment by the CBR that inflation expectations have declined “noticeably” in August, the latest inflation dynamics are supportive of a policy rate cut at the 16 September meeting, in our view.

The rouble is 0.2% stronger today at 65.3 against the dollar staying remarkably resilient to declines in oil prices. This could be in part attributed to high demand for OFZ: yields closed 4-8 bps tighter in the belly (reaching fresh lows) and 5-7 bp lower in the longer end. Yesterday MinFin’s auction for RUB 15bn of the fixed-coupon September 2031 OFZ was strong: demand RUB 35.9bn, whole size sold, cut-off yield of 8.34% with no premium to the market.

Corporate news

Uralkali has reported weak financial results for H1 2016. A slump in demand for potash fertilizers since the beginning of the year had a strongly negative impact on Uralkali’s financials. First, production and sales fell by 10% YoY and 13% YoY respectively amid global overproduction, high stocks and weak demand. On top of this, potash prices were down 22% YoY in H1 to $188 per tonne. As a result, revenue fell 31% YoY to $1,075 mn, EBITDA followed suit falling to $610 mn (-36% YoY) with EBITDA margin at 56.8% (H1 2015: 61.1%).

We note a significant weakening of cash flow from operations (to just $377 mn versus $850 mn in H1 2015). This was largely due to lower EBITDA, but also investment in working capital and higher interest expenses. Capex increased to $202 mn on the back of ongoing capacity expansion, including construction of a new mine at Ust-Yayva and expansion of Solikamsk-3. Free cash flow declined to $175 mn (H1 2015: $742 mn) limiting company’s ability to deleverage.

Uralkali continued to accumulate debt during H1 2016. Total debt was up to $7.8 bn, net debt rose to $6.2 bn (end-2015: $7.1 bn and $5.8 bn, respectively). Increases in total debt were driven by a new $3.9 bn credit line from Sberbank and a $1.2 bn credit facility with 16 international banks. Debt accumulation was also due to continuing share buyback (for a further $280 mn). In May the company announced a new buyback for 4% of share capital. As of end-August, Uralkali bought 1.2% of its shares, another 7.7% remain in free float. In addition, the company plans to issue a $800 mn bond to replace shares pledged in REPO deal with VTB Capital. Thus in H2 2016 credit profile will likely continue to deteriorate; a downgrade by one or more rating agencies seems likely.

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