Nicholas Watson in Prague -

Ukraine's banks and its traditional heavy industries have certainly received the lion's share of attention from international investors since the country appeared on people's radar screens. However, with valuations in these sectors having risen fast, perhaps it's time for investors to pay more attention to the country's smaller, less well-known companies.

A good place to start would be the consumer sector, which is benefiting from Ukraine's rapidly growing middle-class. The statistics tell the full story: the 7.4% GDP growth expected for this year should continue in the years ahead, with the government forecasting growth of 6.8% in 2009, and 6.5% in 2010 and 2011. This is helping company profits (in total up 50% on year in the January-July period) and average salaries (up 30.3% on year in August), while reducing unemployment (ignoring the derided "official rate," the labour minister said in September the rate is nevertheless now down at EU levels of around 7.8%).

With more money in their pockets, Ukrainians are spending. New car sales grew by 53% in August from the year before to 52,000 cars, with the official dealer for BMW reporting sales in the first eight months of this year up 13.4%, while Renault Ukraine said its nine-month sales were up 19.9%. To fund this, Ukrainians are borrowing record amounts; bank credit growth was 76% in the first half of the year.

People probably think of their stomachs first and foremost, so food producers are expected to enjoy a boom in business. The dairy sector in Ukraine grew at an average of 19% per year during 2001-2005. But given that domestic per capita consumption at under 50 kilograms is still substantially below the 140-kg level seen in 1990, "with proper marketing efforts by major dairy producers, consumption has the potential to double over the next decade," predicts Faig Bayramov, an analyst at Renaissance Capital.

Furthermore, the European Commission recently permitted the import of Ukrainian milk and eggs into the EU following extensive investigations, which should result in more investment into the industry in order to bring produce up to EU standards and open up huge potential sales opportunities.

Listed-dairy producers include Galakton, Zhytomir Butter Plant and Ukrproduct Group.

The bread industry in Ukraine is worth about $2.5bn annually, but has until now been largely overlooked by the investment community, say analysts. Current monthly consumption is estimated at 10.2 kg per person, with most of the sales still concentrated in the budget segment. However the value of the market is expected to grow 4-5% per annum due to a growing share of premium products in total consumption. For example bread producers like Odessa Karavai have been expanding their product lines to take advantage of people's deeper products and changing tastes. "While the risk of regulated pricing remains quite strong, it is limited to low-priced products," says Bayramov.

Bayramov expects regional consolidation of bread producers to continue, as the largest regional players like Khlibprom in western Ukraine attempt to gain a monopoly position in their respective regions.

Finally, the beer industry in Ukraine, like those in the rest of Central and Eastern Europe, is seeing a big rise in consumption, which will inevitably attract the attention of major Western brewers. In 2006, domestic beer consumption grew 13% on year to 23.3m hectolitres. Ukrainian per capita beer consumption is expected to grow to 70-80 litres by 2010 from the current 49 litres, accompanied by a rise in the amount of premium beer being bought and a rise in the average price paid. The average price of beer is expected to increase 50% to $1.05 per litre in 2009 from $0.7 per litre in 2006, though that will include a 26% increase in taxes.

This year, analysts expect a large global brewer to enter the Ukrainian market via the acquisition of a local player. Among the most likely candidates are SAB Miller, Heineken and Efes, while Sarmat Group is the most likely acquisition target.

Building the future

Outside the consumer sector, Ukraine's construction sector is expected to continue growing strongly over the next few years, not least because of the immense opportunities brought by the Euro 2012 football championships, which will be co-hosted by Ukraine and Poland.

In its somewhat surprising announcement that Ukraine and Poland had been chosen to host the tournament, the European football governing body UEFA admitted that both Poland and Ukraine, particularly the latter, have a long way to go in order to bring their stadiums, hotels and roads up to standard. According to Ukrainian government estimates, construction of new highways, hotels, soccer-related facilities and other infrastructure will require at least $5bn.

For example, Ukraine lacks top-notch hotels to cater for the flood of teams, officials and tourists who will visit during the month-long football competition. UEFA stipulates that host countries must provide visiting fans with European-standard accommodation within a 50-kilometre radius of sporting venues. Yet even the capital Kyiv only has 13 four- and five-star hotels, and 30 three-star hotels; the situation is even worse in the other host cities of of Dnipropetrovsk, Donetsk, Lviv and Odessa. As such, analysts say Ukraine may need to spend at least $200m to build the necessary hotels over the next five years.

"Additionally, the tight deadlines related to the tournament, which the government will now have no excuse to miss, should stimulate more efficient operation of state bureaucracy, namely removal, at least partial, of the existing cumbersome regulations and procedures faced by private business," say analysts at Dragon Capital.

The construction industry - which even without the football championships is growing strongly, with the value of construction services rising 9.8% to $7.5bn in 2006 - is generating demand for construction materials and supplies, such as metal hardware products for angles and beams. Domestic steel consumption grew 19% last year to 7.5m tonnes.

Listed domestic producers of construction materials expected to do well from this boom include Dniprovsky Metallurgical Plant of Dzerzhinsky, Enakiev Metallurgical Plant, Dnipropetrovsk Metallurgical Plant of Petrovsky, Donetsk Metal Rolling Plant, Dnipropetrovsk Metallurgical Plant of Komintern, Dniprometiz and Silur.

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