COMMENT: Ukrainian IPOs - size matters

By bne IntelliNews February 25, 2008

Dragon Capital -

The flurry of new IPOs and new transparent privatization tenders will inject fresh liquidity into the equity market in 2008, meeting strong demand from both foreign and domestic investors.

The total value of Ukrainian IPOs and private placements reached approximately $1.7bn in 2007, up 267% from the year before, and we expect it to top $2.4bn in 2008. According to our preliminary estimates, metallurgical companies are set to lead the market in terms of new equity capital raised in 2008, while food & beverage and real estate companies should also be able to raise about $0.5bn each in their respective sectors. We also expect this year's privatizations to bring in $1.7bn, with some of these funds likely to enter the stock market.

Viewed by Ukrainian companies as no more than an exotic option to attract financing back in 2005, IPOs and private placements have since become a hot topic for local companies and investment banks, serving as a major catalyst of domestic stock market activity. In 2006, the market for Ukrainian IPOs and placements was estimated at $464m, up 116% on year, and last year it surged by 267% to $1.7bn (this amount does not include non-listed private placements).

The number of deals rose by 19% on year to 19, while the average deal size tripled to $90m from $29m in 2006, thanks to eight $100m-plus placements (by comparison, the largest placement in 2006 was for $58m). The largest of those were a $420m IPO by iron ore miner Ferrexpo, which also marked the first floatation of a Ukrainian company on the main floor of the London Stock Exchange; a $218m placement by food company Kernel Group on the Warsaw Stock Exchange; and a $208m flotation of real estate company Dragon-Ukrainian Properties & Development on London's AIM.

Notably, the average size of floated stakes reached 36.2% last year, an increase from 28.0% in 2006 and 27.4% in 2005, which indicates that domestic companies are ready to part with fairly large stakes in order to attract cheaper financing and gain exposure to a wider circle of investors so as to support their stocks' liquidity.

Despite the continued volatility in global stock markets caused by the US sub-prime crisis, we do not expect it to deter domestic companies from coming to the market with new placements this year. Foreign and now also domestic investors increasingly appreciate Ukraine's strong economic growth, improving corporate transparency and profitability, and we expect solid demand for most of the new listings.

The Ukrainian IPO/private placement market should be very broad this year, ranging from small-cap companies to market heavyweights such as pipe holding Interpipe or specialty steel producer Dniprospetsstal, which both announced plans to go public in 2008.

Overall, the total volume of Ukrainian placements, based on announced intentions, could reach $4.6bn in 2008, which would be up 170% on year. However, correcting this number for the probability of each placement taking place, we think that realistically Ukrainian companies should be able to attract at least $2.4bn in new equity capital in 2008. According to our preliminary estimates, metallurgical companies are set to lead the market in terms of new equity capital raised in 2008. Food & beverage and real estate companies (including land acquisition, property development and hotel companies) should also be able to raise about $0.5bn each for their respective sectors.

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