Infrastructure. Bridge construction in Ukraine

Abstract

We estimate spending on bridge construction in Ukraine will total USD 4 bln over 2008-12, triggered by preparation for the Euro 2012 Football Championship. We initiate coverage of two companies that will benefit most from this trend:
* Mostobud - a near-monopoly bridge construction company
* Dnipropetrovsk Babushkin Steelwork Plant (DZMK) - the largest Ukrainian manufacturer of structured steelwork

The Ukrainian government is planning to build ~30 km of new bridges, reconstruct ~10 km of existing bridges, and construct ~200 new overpasses and viaducts as part of a mass road infrastructure program over 2008-2012, in the runup to co-hosting the UEFA Euro 2012 football championship. Currently, about half of Ukraine' s bridges are out of date and significant part of them require immediate overhaul. At the same time, domestic transportation is constantly rising, resulting in increased load on bridges; passenger and cargo transportation have increased by 66% and 32% since 2000.

Overall spending on road and bridge infrastructure development will require USD ~10 bln over 2008-12, according to our estimates. This represents ~2% of GDP, a fairly achievable amount, in our view. The Ukrainian government is set to attract private investments to cover two thirds of the necessary amount.

With its near-monopoly standing on the local market, bridge builder Mostobud is the only publicly traded Ukrainian company with direct exposure to the infrastructure segment. In our most likely scenario, Mostobud will receive about third of overall orders over 2008-12.

Forthcoming bridge and overpass construction projects will require significant supply of structured steelwork to complete. This, coupled with the logistics and retail sectors' fast development and industrial premise renovation, should trigger growth in the structured steelwork market until 2012.

We project that Dnipropetrovsk Babushkin Steelwork Plant (DZMK), the largest Ukrainian manufacturer of structured steelwork, will increase sales significantly over the next five years, driven by the boom on the steelwork market. DZMK' s parent company, Fercon Holding, is likely to go public in 2009, which we expect to be a stock price catalyst.

We applied DCF and peer comparison approaches to value Mostobud and the Dnipropetrovsk Babushkin Steelwork Plant.

Table of Contents

TABLE OF CONTENTS

1. Investment thesis

1.1 Investment summary
Bridge construction in Ukraine is poised for renewal
USD __ bln will be spent on road infrastructure by 2012
Mostobud is set to receive USD 3.4 bln worth in orders over 2008-12
We expect an upsurge of demand for steelwork over the next 5 yrs
DZMK sales will grow at __% CAGR until 2012
Sector performance, 12M - chart
Stock performance, USD - chart
Trading volumes, USD mln - chart

1.2 Investment cases
Mostobud Valuation summary, USD/share - chart
Dnipropetrovsk Babushkin Steelwork Plant (DZMK) Valuation summary, USD/share

2. Industry overview

Infrastructure on the radar
Massive investment in road infrastructure
Euro 2012 preparation budget - chart
Sources of financing for bridge and overpass projects
Major highway development projects for 2008-12 - chart
Highway network density, km/km2 - chart
Bridges by type of material - chart
Motorway transportation dynamics - chart

3. Company profiles

3.1 Mostobud (MTBD UZ)

Investment case
Market information
Stock ownership
Corporate governance
Key financials, USD mln
Net sales, USD mln
Share price performance*
Business overview
Mostobud' s completed projects
Valuation
Valuation summary, USD/share
DCF Valuation
Scenario analysis for Mostobud
Key assumptions
DCF output (Base case), as of May 1, UAH mln
Comparative valuation
Peer valuation
Mostobud Income Statement Summary, USD mln
Mostobud Balance Sheet Summary, USD mln
Mostobud Cash Flow Statement Summary, USD mln
UAH/USD Exchange Rates

3.2 Dnipropetrovsk Babushkin Steelwork Plant

Investment case
Market information
Stock ownership
Corporate governance
Key financials, USD mln
Net sales, USD mln
Business overview
Steelwork in high demand
Ukrainian construction steelwork market, USD mln
Import/export of construction steelwork, USD mln
Demand drivers
Logistics market
Retail market
Steelwork assembly for bridge in Zaporizhya, 2006
Alchevsk Iron & Steel reconstruction project, 2006
Fercon Holding ownership structure
Valuation
Valuation summary, USD/share
DCF valuation
Key assumptions
DCF output, as of May 1,
UAH mln
Comparative valuation
Peer valuation
DZMK Income Statement Summary, USD mln
DZMK Balance Sheet Summary, USD mln
DZMK Cash Flow Statement Summary, USD mln
UAH/USD Exchange Rates

4. Appendices

Appendix A: Road and bridge reconstruction projects for 2008-12
Budget of major bridge and overpass construction projects, USD mln
Budget of major road construction and reconstruction projects, USD mln

Appendix B: Major transit motorways

Appendix C: Mostobud current projects
Podil bridge, Kyiv
Overpass on Trukhaniv island, Kyiv
Bridge across the entrance of Gavan, Kyiv
Bridge across Desenka bay, Kyiv
Motor highway across the Dnipro river

Appendix D: DZMK completed projects

5. Investment Ratings
6. Disclaimer