Dragon Capital Agribook Nov 19 2012

November 2012

Agriculture in Ukraine: Leading Player in World Corn Trade 3

Table of Contents

Executive Summary 5 Valuation Summary 6 Agricultural Land Market in Ukraine 8

Land Resources 8

Land Cultivation Technologies 10

Land Reform: History and Outlook 12

Land Reform: Neighbors Experience 16

Major Players 18

Lease Payments 20

Market Price of Agricultural Land 23

Weather Impact 25 Historical Weather Conditions Across Regions 25

Weather Impact on 2012 Harvest, Outlook for 2013 28

Agricultural Production in Ukraine 31 Crop Production and Yields 31

Global Grain Market and Ukraine 33

Agricultural Production Costs 39

Fertilizer Usage 40

Domestic and Export Prices 42

From Field to Port: Ukraine’s Agricultural Infrastructure 44 Grain Storage Capacities 44

Railroad – The Key Transport 50

Ports 53

Grain Handling Costs 57

Russian Ports: Kernel First Ukrainian Operator in Taman 59

Reform of Ukrainian Sea Ports 61

Ukrainian Agricultural Exports 63 Exports Dynamics 63

Export Destinations 65

Russia — Ukraine’s Closest Competitor 66

Grain and Sunflower Oil Exporters in Ukraine 67

CBOT Black Sea Wheat Futures 68

FOB, CPT and CIF Export Terms and Price Formation 69

Sugar Market: Supply to Cover Demand in 2012/13 MY 70 Poultry Market: Leader Boosts Capacity 73 Egg Market: Listed Players Continue Expansion 77 Dairy Market: Russian Import Ban Lifted 82 Sunflower Oil Market: Top Exporter Globally 86

November 2012

4 Agriculture in Ukraine: Leading Player in World Corn Trade

Table of Contents (cont’d)

State Regulation 91 Governmental Support for Agriculture in Ukraine 91

State Support to Individual Agricultural Companies 92

Capital Raising and M&A Deals 94 Bank Loans for Agriculture 96 International Accounting Standards: IAS 41 Agriculture 98 Biofuel Production Potential 102 Risks 108 Company Profiles 109

Agroton 110

Astarta Holding 118

Avangard 126

Creativ Group 134

IMC 140

Kernel Holding 146

MHP 152

Milkiland 158

Mriya Agro Holding 164

Ovostar Union 174

Sintal Agriculture 182

Alpcot Agro 188

KSG Agro 194

AgroGeneration 200

November 2012


Executive Summary Ñ Most extensive coverage of Ukrainian agricultural sector continues

This updated version of the Dragon Capital Agribook expands our coverage to virtually all listed Ukrainian food and agriculture companies, supplementing it with in-depth analysis of the sector and its outlook. Agriculture, historically one of the most important economic sectors in Ukraine, has for years remained one the most dynamic segments of listed Ukrainian universe, encouraging more sector companies to go public when conditions are ripe.

Ñ Ukraine — leading player in global corn trade Ukraine is projected to become the third largest coarse grain exporter and eighth largest wheat exporter globally in 2012/13 MY. The country, boasting some of the world’s most fertile soil, has enjoyed record corn harvests in the past two years and has significant potential to strengthen its position in the global grain trade by improving yields. Meanwhile, global coarse grain demand is being fueled by big importers such as China, Saudi Arabia and Japan, with changing diets towards higher meat consumption increasing demand for feed.

Ñ Potentially higher 2013/14 MYF balances may put pressure on prices 2H12 signaled a new upward trend in soft commodities markets, with grain stocks in major exporting countries remaining low. However, downside risk to our 2012/13 MY grain price forecast exists as higher global plantings for 2013/14 MY may put pressure on prices when new projected global crop balances are published towards end-1H13. We expect global corn and wheat prices to fluctuate around $300-320/t in 2012/13 MY, with downward pressure possible in 1Q13. We expect a 10% y-o-y decline in wheat and corn prices in 2013/14 MY.

Ñ Updated valuations suggest 7-97% upsides Based on revised valuations for our entire food and agriculture universe, we recommend MHP, Mriya, IMC, Avangard, Milkiland and Creativ Group as our top picks, their main drivers being strong market outlook, expansion strategies and solid operating and financial performance. Astarta, Agroton, Ovostar and Kernel look close to fairly valued. The whole Ukrainian agricultural complex is currently trading at a 2012E EV/EBITDA of 4.8x, which represents discounts of 4% to Russian peers, 25% to developed market peers and 51% to other EM peers.

Ñ Agricultural stock price drivers in 2012/13 MY Going forward, we see the following key drivers for Ukrainian agricultural stocks: price volatility on the grain, vegetable oil and sugar markets, globally and domestically; potential state regulation of the grain market, including exports; and prospects for the 2013 harvest based on actual winter crop survival rates next spring. Domestic land reform, allowing for transactions with agricultural land and its use as collateral, will serve as another strong driver if completed in the nearest future.

Recommendations

PT ($)

Upside (%) Recommendation

Agroton 4.20 23% Hold Astarta Holding 22.32 18% Hold Avangard 13.50 32% Buy Creativ Group 16.77 97% Buy IMC 6.80 53% Buy Kernel Holding 21.37 8% Hold MHP 21.60 50% Buy Milkiland 7.05 48% Buy Mriya Agro Holding 8.57 37% Buy Ovostar Union 31.13 7% Hold

YTD Price Performance

Note: all prices in this report are as of Nov. 9, 2012 unless otherwise noted

Stock Overview Company Ticker Sector Price ($) MC ($m) ‘12E EV ($m) ‘12E Sales ($m) ‘12E EBITDA ($m) ‘12E NI ($m) ‘12E EV/EBITDA (x) ‘12E P/E (x) Agroton AGT PW Grain 3.41 74 105 102 26 12 4.1 6.4 Astarta Holding AST PW Sugar 19.12 478 731 504 149 91 4.9 5.2 Avangard AVGR LI Shell Eggs 10.20 651 861 639 256 205 3.4 3.2 Creativ Group CRGR UK Sunflower Oil 8.54 87 425 439 95 47 4.5 1.9 IMC IMC PW Grain 4.63 147 205 95 39 26 5.0 5.4 Kernel Holding KER PW Sunflower Oil 19.66 1,566 2,165 2,169 325 199 6.7 7.9 MHP MHPC LI Poultry 14.40 1,503 2,229 1,322 464 229 4.8 6.5 Milkiland MLK PW Dairy 4.81 150 258 372 40 15 6.4 9.6 Mriya Agro Holding MAYA GR Grain 6.22 660 949 352 215 141 4.4 4.7 Ovostar Union OVO PW Shell Eggs 29.25 175 168 73 33 31 5.1 5.7 Sintal Agriculture SNPS GR Grain 0.33 11 16.6** 31.8** 12.8** 10.0** - - Alpcot Agro ALPA SS Grain 0.97 135 151* 39.0* (0.3)* (22.9)* - - KSG Agro KSG PW Grain 3.56 53 74* 34.7* 30.8* 28.9* - - AgroGeneration ALAGR FP Grain 2.27 80 89* 30.5* 6.4* 3.0* - - Notes: *2011; **2010

(43.3%)

(40.1%)

(16.7%)

(7.3%)

(7.1%)

(5.8%)

2.2%

6.9%

11.1%

18.5%

34.5%

(50%) 0% 50%

KSG Agro

Agroton

Alpcot Agro

Kernel Holding

Agroliga

Agrogeneration

Creativ Group

Mriya Agro Holding

Milkiland

Astarta Holding

MHP

November 2012


Valuation Summary Company Price Currency MC EV/EBITDA P/E ($m) 2011 2012E 2013F 2011 2012E 2013F Ukrainian Companies Agroton 3.41 USD 74 10.6 4.1 2.6 neg. 6.4 2.9 Astarta Holding 18.85 USD 471 4.7 4.9 4.5 3.9 5.2 5.2 Avangard 10.20 USD 651 3.0 3.4 3.1 3.3 3.2 3.2 Creativ Group 8.52 USD 87 5.0 4.5 3.7 2.1 1.9 1.4 Industrial Milk Company 4.44 USD 139 6.4 5.0 2.9 8.0 5.4 3.5 Kernel Holding 19.71 USD 1,570 6.0 6.7 6.4 6.9 7.9 7.4 MHP 14.40 USD 1,503 5.9 4.8 3.9 6.0 6.5 5.4 Milkiland 4.76 USD 149 4.2 7.4 3.9 7.2 12.9 4.3 Mriya Agro Holding 6.23 USD 662 4.4 4.4 4.1 4.4 4.7 5.2 Ovostar Union 29.21 USD 175 7.1 5.1 4.3 8.7 5.7 4.9 Ukrainian Companies’ Median* 548 5.4 4.8 3.9 6.0 5.6 4.6 Premium (Discount) to Russian Peers 41% (29%) (4%) (30%) (25%) 75% 1% Premium (Discount) to DM Peers (92%) (34%) (25%) (36%) (59%) (57%) (63%) Premium (Discount) to GEM Peers (91%) (49%) (51%) (55%) (66%) (65%) (68%) Russian Peers Cherkizovo Group 12.12 RUR 799 6.4 5.0 5.7 5.5 4.0 4.2 Rosagro 7.00 USD 835 7.7 4.3 4.5 10.4 5.4 4.9 Razgulay 12.36 USD 62 - 5.6 5.6 - 2.3 1.4 Rusgrain 14.53 SEK 20 18.3 2.0 2.0 neg. 0.5 - Black Earth Farming 12.35 SEK 229 neg. 12.6 10.5 neg. neg. 16.8 Russian Peers’ Median* 389 7.7 5.0 5.6 7.9 3.2 4.5 Developed Market Peers Bell Holding (CH) 1,943.00 CHF 819 4.7 5.4 4.7 10.1 10.3 9.8 Campofrio Alimentacion SA (MX) 5.62 EUR 730 12.4 6.3 6.2 neg. 13.8 11.7 Tyson Foods (US) 16.59 USD 6,008 4.2 4.4 4.2 8.0 9.0 10.6 Archer-Daniels-Midland (US) 25.62 USD 16,871 5.8 6.6 6.0 13.8 11.4 9.4 Viterra (CA) 15.75 CAD 5,849 9.0 8.7 8.0 18.6 17.6 16.0 Andersons (US) 40.88 USD 760 6.0 4.4 4.4 9.4 10.0 - Graincorp (AU) 12.17 AUD 2,885 7.5 8.2 8.0 13.2 15.7 18.2 Bunge (US) 71.60 USD 10,466 5.9 6.0 5.9 10.9 8.9 8.2 Suedzucker (DE) 30.40 EUR 7,318 9.3 5.1 5.6 22.2 14.0 10.2 Agrana Beteiligungs (AS) 92.56 EUR 1,671 8.5 3.6 5.7 14.9 7.9 8.1 Ebro Puleva (SP) 13.82 EUR 2,702 8.5 8.3 7.9 12.8 13.4 12.4 Associated British Foods (GB) 1,379.00 GBp 17,371 9.3 7.0 7.8 20.0 19.9 14.7 Danisco (DE) 748.50 GBp 5,552 9.7 7.7 8.3 21.9 11.4 12.9 Dairy Crest Group (UK) 349.10 GBp 757 5.7 2.8 4.7 8.5 neg. 10.0 Bongrain (FR) 46.00 EUR 902 4.3 4.3 3.9 14.9 9.9 8.7 Glanbia (IE) 8.01 EUR 3,001 12.2 11.7 11.2 19.2 17.2 14.7 Emmi (CH) 237.80 CHF 1,341 6.7 6.3 5.9 14.3 13.1 12.9 Dean Foods (US) 16.62 USD 3,079 9.7 7.8 6.9 neg. 13.8 13.1 Groupe Danone (FR) 49.73 EUR 40,662 10.2 10.7 10.3 17.5 17.5 16.4 Calmaine (US) 42.36 USD 1,013 8.1 7.5 6.2 16.7 11.3 13.2 Developed Market Peers’ Median* 6,488 8.3 6.5 6.1 14.6 13.1 12.4 Emerging Market Peers Perdigao (BZ) 36.59 BRL 15,563 10.6 14.1 14.5 19.0 36.7 17.7 Astral Foods (SA) 10,245.00 ZAR 495 4.4 6.7 7.3 8.0 13.0 13.7 Charoen Pokphand Foods (TH) 36.00 THB 9,097 16.5 12.9 14.7 17.5 16.9 14.2 China Agri-Industries 4.63 HKD 2,412 11.3 9.8 8.7 11.0 8.3 7.4 IOI Corporation (MZ) 5.03 MYR 10,553 13.6 11.9 11.0 18.2 15.8 14.7 China Foods (HK) 7.70 HKD 2,778 9.2 9.0 7.3 23.7 19.0 15.5 Thai Vegetable Oil (TH) 24.90 THB 657 9.7 9.3 8.6 10.7 11.5 11.1 Emerging Market Peers’ Median* 5,936 10.6 9.8 8.7 17.5 15.8 14.2 Note: *average for market capitalization; prices as of Nov. 9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

November 2012


This page was left blank intentionally

November 2012


Agricultural Land Market in Ukraine LAND RESOURCES

Ukraine posesses 32.5 million ha of arable land

Ukraine has 42.8 million ha (Mha) of agricultural land comprising 71% of the country’s total area, of which 32.5 Mha is arable (excl. pastures, grasslands, permanent plantings etc.). Ukraine is richly endowed with chernozem (also known as “black earth”), one of the most fertile soils worldwide. Ukraine accounts for about 25% of the global chernozem area.

Highly fertile chernozems cover 41% of Ukraine

Chernozem, a black-colored soil that contains a very high percentage of humus (3% to 15%) along with phosphoric acids, phosphorus and ammonia, occupies 41% of Ukraine’s total area and even more of its agricultural land (54%) and plow land (62%). Only two chernozem belts exist worldwide: one extending from northeast Ukraine into Russia, and the other in the Canadian Prairies.

Ukraine Soil Resources

Sources: Harmonized World Soil Database, FAO

Thick humus layer improves soil fertility

The very thick dark topsoil layer typical of chernozems is the result of thousands of years of accumulation of organic matter in a cool temperate climate. The fertile part of chernozem is humus — its content in chernozem is one of the highest among all types of soil. A layer of humus exceeding 65 centimeters (cm) covers much of Ukraine, followed by layers 51-65 cm deep. Overall, humus exceeding 51 cm in depth covers about 80% of the country. The map below shows the distribution and depth of the humus layer across Ukraine.

Chernozem

Podzoluvisol

Greyzem

Phaeozem

Leptosol

Cambisol

Kastanozem

Arenosol

Water bodies

Gleysol

Fluvisol

November 2012


Depth of Humus Layer in Ukrainian Soil Source: Ukrainian Agriculture Ministry

Exceptional arable land and a good climate give Ukrainian agricultural producers strong competitive advantages. Given the size of its population and its feedstock needs, Ukraine is one of the few countries worldwide that can fully meet its domestic agricultural needs and export substantially.

Ukraine can feed itself and export to others

Ukraine enjoys one of the largest rates of arable land per capita compared to CEE and CIS countries. Ukraine’s level of 0.7 ha of arable land per capita is surpassed only by Kazakhstan (1.5 ha) and Russia (0.9 ha).

Ukraine has one of the largest rates of arable land per capita

in CEE and the CIS

Arable Land per Capita: Ukraine vs. CEE/CIS Peers (2009/10) Source: FAOstat

0.9 0.7

1.5

0.3 0.4

0.6 0.2

0.5 0.3

0.4 0.3

0.0

0.4

0.8

1.2

1.6

020406080

100120140

Russi

a

Ukrai

ne

Kaza

khsta

n

Polan

d

Roma

nia

Belar

us

Uzbe

kistan

Hung

ary

Serbi

a

Bulga

ria

Czech

Repu

blic

Arable land (Mha; lhs)

Arable land per capita (ha; rhs)

Most favorable ( > 65cm) F avorable ( 51 - 65cm) Satisfactory ( 36 - 5 0 cm) Unsatisfactory ( 20 - 3 5cm) Very poor ( <20 cm)

November 2012


Arable Land as a Share of Country’s Total Area: Ukraine vs. CEE/CIS Peers (2011) Source: FAOstat

Arable land covers 54% of Ukraine’s total area, among the world’s highest

Ukraine is an agricultural powerhouse with arable land covering 53.8% of the country’s total area, ranking third in the world after Bangladesh (55.4%) and neighboring Moldova (54.5%).

Arable Land as a Share of Country’s Total Area: World (2011) Source: FAOstat

LAND CULTIVATION TECHNOLOGIES

Three major land cultivation technologies are used by Ukrainian agrarians

Three major land cultivation technologies are applied in Ukraine: till, low-till or mini-till, and no-till. Tillage is the agricultural preparation of soil by mechanical agitation of various types, such as digging, stirring, and overturning. Intensive tillage systems leave less than 15% crop residue cover on arable land. The most important negative effect of such technology includes erosion of soil. The soil loses a lot of its nutrients like carbon, nitrogen and its ability to store water, thus requiring a higher rate of fertilizing and increasing grain production costs. Low till or mini-till leaves between 15 and 30% residue cover on the soil. In the no-till farming system, significant amounts of crop residue remain on the soil surface, protecting it from water erosion and improving soil cultivation. No-till farming (also called zero tillage or direct planting or pasture cropping) is a way of growing crops from year to year without disturbing the soil through tillage. It increases the amount of water and nutrients in the soil and decreases erosion. It also contributes to the variety of life in and on the soil but may require herbicide usage.

55% 54% 50%

40% 40% 39% 33%

30% 27%

11% 8% 7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Moldo

va

Ukrai

ne

Hung

ary

Polan

d

Roma

nia

Czech

Repu

blic

Serbi

a

Bulga

ria

Belar

us

Uzbe

kistan

Kaza

khsta

n

Russi

a

November 2012


Land Cultivation Technologies: Tillage

Source: Wikipedia

Land Cultivation Technologies: Low Till or Mini-Till Source: Wikipedia

Land Cultivation Technologies: No-Till

Source: Wikipedia

Land Cultivation Technologies: No-Till Source: Wikipedia

Traditionally, Ukrainian agrarians used the full tillage technique for soil cultivation, leaving almost no crop residue on fields. However, no-till and mini-till are starting to gain favor in the country due to significant soil erosion from full tillage. Still, only about 10% of Ukraine’s arable land was cultivated with the help of the no-till technique while full tillage accounted for over 45% of overall acreage in 2011, being used by both large agribusinesses (operating over 5,000 ha) and small and medium-sized farms.

No-till land cultivation is carried out on about 10% of

arable land in Ukraine

Land Cultivation Technologies in Ukraine:

Large Agricultural Companies (2011) Source: APK-Inform

Land Cultivation Technologies in Ukraine:

Small & Medium Agricultural Companies (2011) Source: APK-Inform

Till 45.5%

Mini-Till 36.4%

No-Till 9.1%

Mixed (till & mini-till)

6.1%

Other 3.0% Till

48.0%

Mini-Till 32.0%

No-Till 14.0%

Mixed (till & mini-till)

2.0% Other 4.0%

November 2012


No-till is most popular in countries where fuel is quite expensive

Brazil and Argentina experienced a significant increase in fuel costs in 1991-95 and that encouraged them to switch to no-till, which is the least fuel-intensive cultivation technique. Brazil, Argentina and Paraguay are the leading no-till users in the world. Overall, 94 million ha of land is cultivated with no-till technology globally, accounting for almost 6% of the world’s total arable land (1.6 billion ha).

No-Till as Share of Total Arable Land: Ukraine vs. World Peers (2011) Source: FAOstat

Agrarians still do not spend much on soil nutrient analysis

Ukrainian farmers still do not spend much on soil analysis including nutrient tests as it appears to be costly for most small and medium-sized companies. Some 21% of large farm perform nutrient land analyses annually and 67% do it every 2-3 years according to APK-Inform, a local agricultural consultancy. Over 50% of small and medium-sized producers do not perform such analysis at all and only 38% do it once in 2-3 years.

LAND REFORM: HISTORY AND OUTLOOK

About 85% of agricultural land in Ukraine is privately owned

Land reform in Ukraine, as in many other former Soviet republics, progressed very slowly after the country declared independence in 1991. It was only in 1999 that Soviet-era farms were restructured based on private ownership. All of them were mandated to conclude lease contracts based on land deeds (certificates) distributed among employees of former state and collective farms. Each deed was to be allocated an individual land plot and delimited. As of Jan. 1, 2008, 6.9 million people received land certificates, of which 6.2 million were allocated land plots. The size of plots in a given region depends on land availability and the region’s population, ranging from 1.1 ha in the mountainous Ivano-Frankivsk region to 8.7 ha in Luhansk, with the national average totaling about 4 ha. Some 35.5 Mha, or 85% of total agricultural land, is privately owned in Ukraine today.

Breakdown of Agricultural Land in Ukraine (as of Jan. 1, 2012)

Note: *orchards and vineyards; **incl. land under farm and administrative buildings. Source: State Committee for Land Resources

Agricultural Land Ownership in Ukraine (Jan. 1, 2012)

Source: State Committee for Land Resources

68% 57% 57% 55%

21% 13% 10%

0%

20%

40%

60%

80%

100%

Paraguay Canada Brazil Argentina USA Australia Ukraine

Arable land 76.0%

Pastures 12.8%

Grasslands 5.6%

Permanent plantings*

2.1%

Fallow land 0.6%

Other agro land** 2.8%

Private 85.3%

State and municipal

14.7%

November 2012


The Land Code approved in 2001 introduced a moratorium on agricultural land sales. The ban has since remained in effect, its removal being conditional on the passage of two laws, on the land market and on the state land cadaster. Although the relevant legal framework was drafted back in the early 2000s, successive Ukrainian governments have lacked the political will to initiate change, expressing concern that farmers would sell their land at very low prices, latifundia would emerge while small and medium-sized farms would disappear, depressing rural regions. With the moratorium in force, agricultural producers are not able to use their land as collateral for loans, which severely limits their capacity to attract financing.

The ban on agricultural land sales has been in effect since

2001…

Potential land reform also met with strong resistance from local authorities and some agro producers with an interest in the moratorium remaining intact. Local officials, in charge of registering land lease agreements, are interested in executing short-term leases to use the opportunity to extract bribes in the process. Moreover, they are responsible for distributing the government’s financial support to farmers in their regions (i.e. subsidies per hectare of cultivated land and interest rate compensations on commercial bank loans), which gives them additional power. The status quo is also beneficial for agro producers pursuing short-term business strategies. Enjoying low lease payments, they can plant highly profitable but soil-exhaustive crops, violating crop rotation rules and not investing in soil improvement, and then leave the exhausted fields and move on to lease new ones.

…and has strong advocates among regional authorities and

some agro companies

However, the turnaround may be near for land reform in Ukraine as the current government looks determined to pass the required laws this year and allow transactions from 2013 onwards. In January 2011, the State Committee for Land Resources published and invited public discussion of its draft law “On the Land Market”, one of the two pieces of legislation needed to revoke the ban on agricultural land sales, before having it passed by the government and submitted to parliament for approval. This bill is intended as the primary regulatory act for the future land market in Ukraine, its key objectives being to facilitate investment inflows and enable agribusinesses to acquire the land they lease and use it as loan collateral.

Land market reform is high on the current government’s

agenda, with preparations underway to lift the ban on

agro land sales as of Jan. 1, 2013 after enacting prerequisite

legislation

On December 9, 2011, Ukrainian parliament passed the land market bill in the first reading. The bill proposed launching transactions with agricultural land starting from Jan. 1, 2013. We believe the land market bill will be fully approved after the parliamentary elections in October 2012 but before end-2012 so as to launch the land market starting from 2013. Until then, we believe a lot of changes could be proposed to the current version of the bill.

The land market bill passed first reading in December 2011,

expected to be voted on after parliamentary elections in

October 2012

The other required bill, on the land cadaster, was approved in July 2011 and took effect the following month. It governs the create of an up-to-date electronic database with information on the exact sizes, locations and ownership rights of land plots as well as data on each plot’s soil quality and economic value. The cadaster will serve several purposes:

Ñ Most importantly, it will be the instrument that would ensure ownership rights for land, and will be used to solve territorial disputes

Ñ Provide landowners with an independent appraisal of their land plots, giving them a better understanding of the price they can charge for it

Ñ Allow for better regulated lease agreements, whereby land owners can demand that producers maintain soil quality

Ñ The soil quality data in the cadaster will allow agricultural firms to more effectively plan their land bank expansion, crop mix and yields.

The bill on the state land cadaster came into effect in

August 2011

November 2012


The land market bill’s key provisions: corporate entities are not allowed to own land…

The land market bill, which as we noted above can still be significantly amended or revised before final approval, forbids ownership of agricultural land for any legal entity in Ukraine, implying no changes for public agricultural companies who then will still continue leasing land. The bill says land can be owned only by: citizens of Ukraine, the state land bank and local village authorities. Moreover, the bill limits ownership of agri land to 100 ha per buyer and caps the area under lease to 6,000 ha per individual or other entity, or no more than 5% of total agricultural land in a given region. Should the current version of the bill be enacted, it will put substantial limitations on land lease holdings and as such implies additional paperwork for existing agricultural companies. For example, Mriya Agro Holding (with 295,000 ha of leased land currently) would have to register 49 separate legal entities in regions where it leases land, implying additional personnel and legal costs. However, this and other controversial provisions may still be changed during the final reading.

…current leaseholders will preserve their contracts in case of ownership change…

The bill also says that if the leased land gains a new owner, the current leaseholder will preserve his lease contract and does not have to renew it while the new land owner obtains the same rights and obligations as the previous owner of land in the lease contract.

…and foreigners may be barred from directly owning agricultural land

The current version of the land market bill bans direct land ownership by foreign individuals or companies, though they may own non-agricultural land, e.g. plots under buildings. We think this limitation can be overcome by setting up a duly registered Ukrainian subsidiary which would in turn establish a legal entity to acquire agricultural land. In some EU member states which joined the Union in 2004 foreign individuals and companies are barred from acquiring agricultural land during seven transitional years following accession (12 years in Poland). In Brazil, foreign ownership of agricultural land is limited to 25% of the area of an administrative region. In Canadian provinces, land ownership depends on both citizenship and residence, and foreign individuals and legal entities are not allowed to own agricultural land.

The bill envisages creation of state land bank

The land market bill also provides for creation of the State Land Bank to act as a market player and consolidator of state-owned arable land and provide farmers with loans collateralized by land. In June 2012, Ukrainian parliament approved two bills creating a legal framework for the land bank, providing that it can issue loans to farmers at targeted annual interest rates capped at 3% plus the NBU discount rate (currently 7.5%) and collateralized by private or leased land. The bills deprive local authorities of control over state-owned land, transferring it to the land bank. The bank’s other objective is to consolidate all state-owned land so as to start auctioning it as early as January 2013, when the existing moratorium on land sales may be lifted. The state owned about 15% of total agricultural land in Ukraine as of end-2011. The State Land Bank will remain fully owned by state and is not to be offered for privatization or reorganized.

More than 17.4 Mha of agricultural land is under lease

We expect lease to remain the simplest and most effective instrument for agricultural companies, especially those with foreign participation, to develop large-scale operations in the short to medium term. As of July 2011, some 4.6 million lease contracts for 17.4 Mha of agricultural land (42% of national total) were registered in Ukraine. Most of these contracts have a lease term of five to 10 years (80% of total number of contracts) though the maximum allowed term is 50 years. The share of longer-term 10-year contracts increased from about 2% in 2001 to over 11% in 2011. Also, the bulk of lease payments, or about 70%, are made in kind (with agricultural products or services). The share of in-kind payments declined from 77.4% in 2001 to 68.7% in 2011 and we believe will continue to shrink in the long run after the land market is launched.

November 2012


Land Lease Payments (as of July 15, 2011)

Note: payment is made by agricultural products grown on leased land. Source: State Committee for Land Resources

Breakdown of Land Lease Contracts by Duration

(as of July 15, 2011) Source: State Committee for Land Resources

Agricultural producers seeking to expand their land holdings may either sign direct lease contracts with land owners or go to the secondary market to acquire lease-holding enterprises. The latter option, enabling faster expansion, is commonly used by large integrated holding companies and normally involves an acquisition premium paid over the enterprise value ranging from $300-400/ha depending on the region and area being leased (pure land) and $500-1,100/ha depending what infrastructure is sold together with land lease rights (machinery, grain storage capacities, grain cleaning and drying infrastructure) and inventories (seeded fields or grain harvested and stored in silos).

Mechanisms to acquire land lease rights

Leased Arable Land in Ukraine (Mha; 2001-11) Source: State Committee for Land Resources

Ukraine’s 1998 land lease law gives eligible leaseholders the preemptive right to buy provided there is agreement on price. At the same time, the Land Code says Ukrainian citizens residing in rural areas and local authorities have such a preemptive right. We expect the new land market bill to resolve the existing ambiguity. Agricultural companies view land lease as an effective instrument because: (1) a lease contract, if appropriately executed, can be terminated by the land owner ahead of schedule only if the leaseholder does not perform his obligations (e.g. delaying payments due) or violates applicable legislation; (2) the leaseholder has the preemptive right to extend the lease contract; and (3) a lease contract is automatically extended on unchanged terms if the landowner does not object in writing within a month of lease expiry.

Preemptive rights to buy land

In kind* 68.7%

Cash 27.9%

Services 3.4%

45.7%

8.5%

41.3%

46.2%

11.3%

33.9%

1.8% 11.4%

0%

20%

40%

60%

80%

100%

2001 2011

1-3 years 4-5 years 6-10 years >10 years

22.4 21.6 22.1

21.1 20.0

18.8 17.7 17.4 17.7 17.5 17.4

10.0

15.0

20.0

25.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

November 2012


Results of Survey of Ukrainians’ Willingness to Sell

Agricultural Land (%; as of Feb. 2012) Source: Razumkov Center

Results of Survey of Ukrainians’ Willingness to Buy Agricultural

Land (%; as of Feb. 2012) Source: Razumkov Center

A recent survey offers insight into how many land owners could sell when the market opens

The local research center Razumkov conducted a land market survey in February 2012 ahead of potential completion of land reform, questioning 2,005 people all over Ukraine, in cities and villages. Over 40% of respondents said they planned to let or continue letting land in the future, around 30% said they would operate their own land plots to produce food for themselves and another 12% said they would do nothing and wait to see how the land market develops. Only 7% of respondents said they would be willing to sell their land when the market opens. Alternatively, 18% of respondents who do not currently have agricultural land plots would be willing to buy land when the market opens.

Potential Outcome of National Referendum on Agricultural

Land Market (%; February 2012) Source: Razumkov Center

Survey: Who Should Set the Minimum Price of Agricultural Land

(%; February 2012) Source: Razumkov Center

If a referendum were held, about 40% of participants would vote for a liberalized land market

According to the same survey, about 40% of respondents said they would vote for a liberalized land market if a national referendum were held. However, 44% said the land market should be liberalized later than Jan. 1, 2013. Also, 46% of respondents believe the minimum price for agricultural land plot should be set and monitored by the state.

LAND REFORM: NEIGHBORS’ EXPERIENCES

Ukraine is expected to complete land reform no later than spring 2013

Although the Ukrainian authorities are still working on the final version of the land market bill, the President and his majority in parliament seem willing to complete land reform in 2012-spring 2013, as also confirmed by Agriculture Minister Mykola Prysyazhnyuk in an interview in July. Lawmakers are currently discussing many limitations concerning land ownership, lease rights, preemptive rights and size of land plots to own. Below we provide a brief analysis of how land reform was carried out in peer countries and compare Ukrainian lawmakers’ initiatives.

Will let or continue to let

41.9%

Will operate land for my family needs

28.8%

Will do nothing and see how

market develops 12.0%

Will develop agri production

for sale 10.2%

Will sell land 7.1%

Want to buy 18.2%

Already own 22.8%

Don't want to buy

46.3%

Hard to say 12.7%

Will vote for liberalized

market 39.0%

Will vote against

liberalized market 43.8%

Don't know 17.3%

State 46.0%

Market 25.6%

Hard to say 28.4%

November 2012


The experience of neighboring countries suggests limitations on the size of owned land are justified and discourage land fragmentation and excessively oligopolistic concentration. Such limitations are common in emerging markets and countries with limited land resources. For example, Hungary limits land plot sizes to be owned by individuals or legal entities to 300 ha, Romania to 200 ha, Denmark to 30 ha (one also needs to have agricultural education and experience). In Brazil, there are limitations depending on region, whereby local authorities decide on the size of so-called standard land plot (SLP). Thus, land plots sized below three SLPs can be owned without limitations but larger plots require additional regulatory approvals, with land plots larger than 100 SLPs requiring approval by Brazil’s Congress. Nobody may own more than 40% of land in a single administrative unit in Brazil. In Ukraine thus far, the maximum proposed area is 100 ha for individual farmers while no legal entities are allowed to buy land.

Many of Ukraine’s peers have limitations on land ownership

Foreigners are allowed to own agricultural land in Brazil but ownership is limited to 25% of any administrative unit. In the EU, there are no limitations on land ownership regarding particular size of plot and legal or individual ownership. For some relatively new EU countries, like Estonia, Latvia, Lithuania, Slovakia, Hungary, the Czech Republic, Romania and Bulgaria, a transition period of up to seven years was created, during which no foreigners can own arable land. In Poland, the transition period was set at 12 years, until May 1, 2016. The aforementioned limitations apply for all non-EU residents. All EU-residents buying agricultural land have to prove they lived in the country for at least three years and operated leased land during that period. Transition periods are useful during land market formation and creation of a unified land cadaster. Thus, it could be a useful idea for the Ukrainian land market as well. The current version of the land market bill stipulates that foreigners cannot own agricultural land in Ukraine.

Foreigners can own land in Brazil but can’t in Ukraine

The preemptive right for individuals or legal entities to buy agricultural land exists in some EU countries, such as France, Germany, Italy and Lithuania. This right is given to inheritor, co-owner, leaseholder or neighbor who intends to operate this land. The preemptive right to buy land could also be given to the state for better development of rural areas and for environmental protection. Preemptive rights are absent in Switzerland, Great Britain and Slovakia. In Ukraine, the preemptive right to buy agricultural land is foreseen for owners of neighboring plots and for co-owners of the offered land plot. Preemptive right holders may issue a letter of intent to buy offered land during one month after it has been offered for sale. If no notification has been given, the land is to be offered on the market.

Preemptive right to buy land exists in several EU members as

well as in Ukraine

The terms and conditions of land lease agreements are determined by market players themselves in Germany, Slovakia, Sweden, Lithuania and Czech Republic among EU states. In France, agricultural land can be leased for 9, 18 or 25 years. The minimum annual lease payment is declared by the state in France, as it is in Ukraine (3% of cadaster value). Ukraine also orders that the minimum price of agricultural land cannot be less than its expert appraisal value. The expert appraisal value for a given land plot is calculated based on its capitalized operating and rental income, comparison with similar land plots, and investments in soil improvement.

Lease terms and minimum lease payments can be regulated by

the state

November 2012


MAJOR PLAYERS

Large operators control 20% of leased arable land

As of end-2011, there were more than 56,000 agricultural enterprises in Ukraine (mostly established on the basis of privatized Soviet-era farms) which operated 21.6 Mha of land, according to government statistics. However, no official statistics are available on large integrated agricultural holding companies, which have expanded at a dizzying pace in recent years. This is because only individual agricultural enterprises, which the aforementioned holding companies control in large numbers, report to the state statistics service. According to our estimates, which are based on information from individual companies and media reports, large agribusinesses presently lease over 3.9 Mha of land, or 12.0% (+3.5pp y-o-y) of total arable land and 22% (+2.4pp y-o-y) of leased arable land, with the smallest company in this group controlling over 30,000 ha.

Breakdown of Leased Land by Operated Acreage (2011)

Source: State Statistics Service (SSS) Largest Land Operators in Ukraine (’000 ha) (listed companies are highlighted in green)

Notes: UAI - Ukrayinski Agrarni Investytsiyi, IMC – Industrial Milk Company, ULF - Ukrlandfarming. Source: Companies

The bullish outlook for agricultural commodity markets stimulated growth of large land holding companies

The surge in global food prices in 2007 and 2008 and expectations of sustainable long-term growth in food demand stimulated the development of large land operators in Ukraine. Quite a few of these companies raised financing for expansion by placing their shares with foreign portfolio investors in private and public offerings.

Specialization and strategy differ from company to company

Whereas large land banks are a common feature of these listed companies, their specialization differs. For example, Mriya Agro Holding, MCB Agricole, Sintal Agriculture and KSG Agro are pure agricultural producers for which crop growing is a core activity. At the same time, MHP, while boasting a huge land bank, derives approx. 80% of its revenues from the poultry business; Kernel Holding is Ukraine’s leading vegetable oil producer as well as a grain trader; and Astarta Holding is the largest sugar producer. In addition, some of the existing large land operators could be viewed as financial investors intending to sell their land holdings in the future.

Consolidation offers advantages but efficient management is vital

Consolidating land with a large holding company generally offers certain advantages including: economies of scale; stronger bargaining power in future acquisitions and purchases of inputs (fertilizers, seeds etc.); a wider range of financing (borrowing) options; risk diversification; and better opportunities to take the company public to finance further growth. Similar to other agricultural producers, large land holders apply for state support and generally enjoy easier access to state-financed programs given their more efficient management and close contacts with relevant authorities. However, farm management and resources applied remain the decisive factors in terms of operating and financial results, in addition to qualified personnel and high corporate governance standards.

<50ha 3.0%

51-100ha 1.6%

101-500ha 8.2%

501-1,000ha 8.5%

1,001-3,000ha 31.8%

3,001-5,000ha 17.6%

5,001-10,000ha

15.9% >10,000ha

13.4%

0

100

200

300

400

500

600

Nibulo

nGle

ncore IM

CKS

G Agro

MCB A

gricol

eAlp

cot Ag

roPry

vat A

groVa

linor

Sintal

Agrot

onNa

fkom

HarvE

ast

Astart

a UAI

MHP

Mriya

Kerne

lNC

H ULF

November 2012


Listed agricultural companies operate in different regions of Ukraine (some operate across as many as 11 regions) depending on the location of their production assets and the climate requirements for each particular crop. In addition, many large producers seek to decrease machinery usage costs by concentrating operations in adjacent regions (e.g. Agroton, Astarta Holding and Mriya Agro Holding). Others lease land in regions with different climate conditions to diversify weather risks.

Large operators lease land in various regions to diversify

weather risks and lower machinery costs

Sintal Agriculture

IMC

KSG Agro

Agroton

Astarta Holding

MHP

Kernel Holding

Mriya Agro Holding

Listed Agricultural Producers’ Regions of Operations Source: Companies

November 2012


AgroGeneration

Alpcot Agro*

Agroliga Group

MCB Agricole

Listed Agricultural Producers’ Regions of Operations (cont’d from previous page) Note: *including Landkom International assets acquired in Jan. 2012. Source: Companies

LEASE PAYMENTS

Approaches to appraising land Ukrainian legislation offers several approaches to valuing agricultural land: (1) bonitation, which is part of the state land cadaster and mostly reflects soil’s fertility level; (2) economic evaluation of land as a basis for comparing it with other natural resources; and (3) monetary appraisal, which consists of expert and normative appraisals.

The coefficient for arable land revaluation increased by 76% y-o-y for 2012

The minimum lease payment for land is linked to its adjusted normative appraisal. The latter is calculated by multiplying the appraisal value as of Jul. 1, 1995 by inflation-linked annual revaluation coefficients set for 1996 onwards. For 2011, the coefficient totaled 3.2 as a product of all coefficients since 1996 (please see the table below). Before opening up the domestic land market, the government approved a 76% increase in the normative land appraisal value for arable land for 2012 (coefficient 1.756), to UAH 20,983 ($2,610)/ha from UAH 11,949 ($1,496)/ha in 2011. Previously, we viewed normative land appraisal as the minimum benchmark for future land deals. However, the current increased level of arable land appraisal seems too high and economically irrational as pointed out by market players. Thus, the new land appraisal value is being actively disputed and we believe will unlikely be the minimum land price when market potentially opens in 2013 as market players currently value arable land at below $1,000/ha. The current normative land appraisal level is also expected to serve as the basis for calculating the tax on land resale during the five years following initial sale. The government is considering a 100% tax on land resale in the first year, 90% in the second, 80% in the third, 70% in the fourth and 60% in the fifth. This tax barrier is intended to prevent speculative transactions and encourage long-term ownership.

November 2012


The land appraisal conducted in 1995 was based on the economic evaluation of land performed in 1988. Part of the final formula, rental income from arable land, was calculated by adding absolute rental income (set at 0.16 t/ha) to differentiated rental income (in t/ha), with the latter set as follows:

Differentiated Rental Income = (P×Y– C× (1+CPR))/P, where P is average grain price in 1986-1990, Y is average grain yield for a given land plot in 1986-1990 (in t/ha), C is average grain production cost in 1986-1990 (in t/ha), and CRP is profit rate coefficient set at 0.35 in 1988. The normative appraisal value of arable land as of Jul. 1, 1995 was then calculated as follows:

Arable Land Appraisal = RI × P × T,

where RI is total rental income (in t/ha), P is average grain price in 1986-1990, and T is capitalization period equaling 33 years. Normative appraisals of permanent plantings, grasslands and pastures were based on arable land rental income adjusted by a coefficient linked to the 1998 economic evaluation.

Normative land appraisal relies on cash flow generation

per unit area

Period 1996 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Evaluation index 1.703 1.000 1.000 1.035 1.000 1.028 1.152 1.059 1.000 1.000 1.756 Agricultural land ($/ha) 3,219 1,599 1,603 1,722 1,747 1,796 2,015 1,393 1,426 1,419 2,489 Arable land ($/ha) 3,388 1,683 1,687 1,812 1,839 1,891 2,124 1,468 1,503 1,496 2,610 Permanent plantings ($/ha) 10,465 5,198 5,211 5,598 5,681 5,840 4,328 4,497 4,520 4,475 4,475* Grassland ($/ha) 1,409 700 702 754 765 787 583 606 609 602 602* Pasture ($/ha) 1,072 533 534 574 582 599 444 461 464 459 459*

Agricultural Land Appraisal in Ukraine Note: *normative land appraisal for permanent plantings, grassland and pastures was left unchanged in 2012, at 1.000 coefficient.


A presidential decree, signed in 2002 and amended in 2008, orders that the lease paid for agricultural land equal at least 3% of its normative appraisal value. However, this order is not enforced properly, effectively allowing leaseholders to negotiate a lower rate. Normative land appraisal is also used to calculate land tax, rental payments for state-owned land as well state duties levied on swapping or inheriting a land plot or conveying it as a gift. Large agri holdings and medium size agri companies try to pay in excess of 3% of land’s normative appraisal value to attract landowners to let their land plots directly and not to other market players.

Rental payments are calculated using land appraisal values

Rental Payments for Arable Land in Ukraine ($/ha; 2012)

Sources: State Committee for Land Resources, Dragon Capital estimates

Arable Land Appraisal Values in Ukraine (Jan. 1, 2012; $/ha)


As of Jan. 1, 2012, the normative appraisal value for arable land in Ukraine was set at $2,610/ha on average (+76% y-o-y, a substantial increase in view of planned launch of land market transactions) and varied across regions depending on cash flows generated from land operation, with the lowest rates set for Zhytomyr ($1,695/ha), Chernihiv ($2,012/ha) and Zakarpattya ($2,161/ha) regions and the highest for Cherkasy ($3,280/ha), Crimea ($3,043/ha), and Donetsk ($2,871/ha) regions.

The latest appraisal value for arable land is $2,610/ha

40

60

80

100

Zhyto

myr

Kyiv-c

ityCh

ernihi

vZa

karpa

ttya

Myko

layiv

Luha

nsk

Lviv

Odesa

Iv.-Fr

ankiv

skSu

myVo

lynRiv

neUk

raine

avera

geTer

nopil Kyiv

Kirov

ohrad

Khark

ivDn

iprop

etrov

skVin

nytsi

aZa

poriz

hya

Chern

ivtsi

Khme

lnytsk

iyKh

erson

Polta

vaDo

netsk

Crime

aSe

vasto

pol-ci

tyCh

erkas

y 1,500

2,000

2,500

3,000

3,500

Zhyto

myr

Kyiv-c

ityCh

ernihi

vZa

karpa

ttya

Myko

layiv

Luha

nsk

Lviv

Odesa

Iv.-Fr

ankiv

skSu

myVo

lynRiv

neUk

raine

avera

geTer

nopil Kyiv

Kirov

ohrad

Khark

ivDn

iprop

etrov

skVin

nytsi

aZa

poriz

hya

Chern

ivtsi

Khme

lnytsk

iyKh

erson

Done

tskCri

mea

Seva

stopo

l-city

Cherk

asy

November 2012


Agricultural Land Normative Appraisal Values ($/ha)


Minimum lease is set at $78/ha on average

The lowest lease payments, equaling 3% of normative appraisal value, ranged from $51-98/ha across different regions, averaging $78/ha. We also verified that the value of lease payments does not neatly correlate with land fertility in a particular region, implying that climate conditions also play a role in addition to soil quality.

Lease Payments for Agricultural Land in Ukraine (2012/13; $/ha)


Breakdown of Lease Payments

as a Share of Normative Land Appraisal (2011/12) Source: State Committee for Land Resources

Some agribusinesses pay more than 3% of normative appraisal values for leased land

In many Ukrainian regions the obligation to pay rent in excess of 3% of the land appraisal value is ignored. Last year, almost half of lease contracts (49%) were concluded with average annual rental payments above 3%. But leaseholders interested in establishing long-term relations with land owners pay in excess of the prescribed 3% of normative land appraisal. Large agricultural holding companies report varying average rental payments for leased land; e.g. MHP with $70-90/ha, Astarta with $80-90/ha and Kernel with $90/ha, due to their farms being located in different regions. However, they generally pay at least the minimum required rate.

Lease Payments for Agricultural Land in Ukraine and the EU (2009; $/ha)

Sources: Eurostat, Dragon Capital estimates

0

2,000

4,000

6,000

8,000

10,000

12,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Agricultural land

Arable land

Permanent plantings

Pastures

<1.5% 6.2% 1.5%-3.0%

45.2%

>3.0% 48.6%

0

200

400

600

800

1,000

Lithu

ania

Slova

kia

Polan

d

Ukrai

ne

Malta

Hung

ary

Bulga

ria

Swed

en

Franc

e

Spain

Luxe

mbou

rg

Austr

ia

Nethe

rland

s

Greece

Denm

ark

- 50-60

- 60-70

- 70-80

- 80-90

- 90-100

November 2012


Large areas of agricultural land under lease are also found in several other European countries, including Belgium, where 70% of the land sown with agricultural crops is leased, and France and Germany (over 60%). In general, about 40% of agricultural land in the EU is leased, compared with 30% in Canada, 20% in Japan, 14% in New Zealand, 12% in the U.S. and only 5% in Australia and Argentina. The highest annual rental payments are observed in the EU’s most developed markets, such as Denmark, the Netherlands and Austria and countries with limited agricultural land resources, such as Greece. Ukraine’s current annual rental average of $78/ha is much lower compared to most EU peers.

Rental payments in Ukraine are lower compared with

most regional peers

MARKET PRICE OF AGRICULTURAL LAND

The aforementioned land market bill stipulates that the price of a land plot sold for the first time must not be lower than its expert appraisal value. The draft sets no price thresholds for subsequent sales but introduces special duties to prevent speculative deals. The expert appraisal value for a given land plot is calculated based on its capitalized operating and rental income, comparison with similar land plots, and investments in soil improvement. Expert land appraisals are used for collateral or insurance purposes and in case land is included in a company’s stated assets.

Expert appraisal of land values

Based on normative appraisal, the value of agricultural land in Ukraine is estimated at $110.8bn, including $84.9bn for arable land. Should the state revoke the moratorium on agricultural land sales without imposing any price thresholds, we expect actual market prices to be significantly lower than respective appraisal values in the short-term, one reason for this being abundant supply of agricultural land and prospective buyers’ strong bargaining power. However, we expect market prices for land to increase in the long term as the secondary land market develops and consolidates.

Market prices for land are expected to be lower than

appraisal values…

Estimated Value of Arable Land after Market Liberalization ($/ha; as of March 15, 2012)

Source: The Institute for Economic Research and Policy Consulting

Assuming no minimum price requirements, we expect market prices of arable land to equal 30-50% of the normative appraisal value (or $800–1,300/ha on average) depending on the region, local infrastructure and area being sold. This would value Ukraine’s total agricultural land area at $26-42bn. We expect agricultural land prices in Ukraine to remain much lower than in the EU due to higher land availability and lower state support for agriculture in the country (for example, land prices in the UK were reported at as high as $20,000-25,000/ha and in France at $6,000-7,000/ha).

…ranging from $800-1,300/ha

0

200

400

600

800

Zhyto

myr

Rivne

Volyn

Zaka

rpatty

a

Chern

ihiv

Lviv

Iv.-Fr

ankiv

sk

Crime

a

Sumy

Chern

ivtsi

Khers

on

Ukrai

ne av

erage

Odesa

Khme

lnytsk

iy

Myko

layiv

Terno

pil Kyiv

Done

tsk

Vinny

tsia

Dnipr

opetr

ovsk

Khark

iv

Zapo

rizhy

a

Polta

va

Cherk

asy

Kirov

ohrad

November 2012


Agricultural Land Prices in Ukraine and Europe ($ ’000 per ha; 2009) Note: *current normative appraisal value. Sources: Eurostat, Dragon Capital estimates

Lease to remain the preferred land bank expansion option

We forecast lease to remain the preferred land bank expansion option for agro producers should market prices for land be tied to normative or expert appraisal values.

Large agro holdings will succeed regardless of political decisions

Abundant supply of highly fertile land, ongoing reform of land legislation and institutional development of the land market imply positive growth prospects for large agricultural land holdings. We think either of the scenarios discussed above, namely the abolition or non-abolition of the land sale ban, would not significantly damage the prospects of large agricultural companies. Moreover, even if the moratorium is abolished, we think the land market will remain subject to state regulation in the medium term due to political and related social considerations.

0.4 0.7 0.8 1.3 1.7 2.0 2.1 2.6 3.1 5.2 6.1

9.8 12.4

15.3 24.8 25.2

35.9 37.9

65.6

0

5

10

15

20

25

30

35

Lithu

ania

Moldo

va

Russi

a

Polan

d

Slova

kia

Latvi

a

Bulga

ria

Ukrai

ne*

Cz. R

ep.

Swed

en

Franc

e

Finlan

d

Germ

any

Spain UK

Luxe

mbou

rg

Denm

ark

Belgi

um

Nethe

rland

s

November 2012


Weather Impact HISTORICAL WEATHER CONDITIONS ACROSS REGIONS

The territory of Ukraine is divided into five main agricultural areas, based on environmental, economic and historical conditions of farming: Polissya, Forest-Steppe, Steppe, the Carpathian Mountains and the Crimean Mountains.

Ukraine has five main agricultural zones

Ukraine Environmental Regions

Source: Bloomberg, UkrAgroConsult

The Polissya agricultural area covers Lutsk and Rivne regions, most of Zhytomyr region, and northern districts of Chernihiv, Sumy and Kyiv regions. The climate of the area is continental with warm and humid summers and mild winters. The average temperature in July is +17-19°C, in January it drops to -5-8°C. The vegetation period lasts from Apr. 10-20 to Oct. 20-30. So called peat-podzolic soils occupy about 75% of Polissya. Arable land covers 33% of the area (more than 4.0 Mha), hayfields account for 1.2 Mha and pastures for 0.7 Mha. This area is the most suitable territory in Ukraine for production of grains, industrial crops, flax, hops, sugar beets and potatoes, and meat and dairy products. Among the crops most widely planted are winter rye and buckwheat, oats and wheat.

Polissya is famous for winter rye, buckwheat, oats and wheat

Ukraine’s Forest-Steppe covers parts of Lviv and Chernivtsi regions, eastern parts of Ivano-Frankivsk region, Ternopil, Khmelnytskiy, Vinnytsia regions, the northern part of Kirovohrad region, Cherkasy, Poltava and Kharkiv regions. The climate of the area is moderate continental. The average July temperature in the northwestern part is +18°C, and in the south it reaches +22°C. The average temperature in January is in the range of -5-8°C. The upper layers of soil are quite different in composition: from podzolic to black soil. Agricultural land occupies 70% of the territory, including 66% of arable land. The agricultural conditions of the Forest-Steppe are most suitable for beet and grain, as well as for dairy, cattle and pig farming. The main grain crops planted in this area are winter wheat, corn, and barley. More than 10% of the area is planted with sugar beet.

Forest-steppe is best for sugar beet planting

November 2012


Steppe focuses on sunflower seed cultivation

The Steppe agricultural area covers all southern regions and represents 40% of Ukraine’s total territory and is the biggest producer of commodity grains. The climate of the area is moderately continental with hot summers and cold winters. The average January temperature ranges from -5-7°C while July conditions average from +21-23°C. Black soil (covers approximately 90% of the area) dominates the top layer of soil. Agricultural output is dominated by grains, fruits and vegetables, as well as viticulture. The main grain crops are winter wheat, maize, sunflowers, and barley and industrial crops. Vegetable cultivation is widespread, especially in suburban areas of large cities such as Donetsk. This region of Ukraine is famous for sunflower seed cultivation.

Agricultural area Area (sq.km)

Precipitation (mm per year)

Average temperature in June (°C)

Average temperature in January (°C)

Growing season (days)

Polissya 113,500 550-650 18 -6.2 190

Forest-Steppe 202,000 450-550 20 -6.5 205

Steppe 240,200 350-450 22 -6 225

The Carpathian Mountains 24,000 800-2,000 18 -8 125

The Crimean Mountains 1,255 500-1,000 24 4 200 Weather Patterns in Ukraine’s Environmental Regions (2012)

Source: UkrAgroConsult

Mountain areas of Crimea are known for wine grapes and aromatic plants

Foot-hill and mountain areas of the Carpathians cover parts of Lviv, Ivano-Frankivsk, Chernivtsi and Zakarpattya regions. Moderately moist climate of the foot-hills is mostly suitable for rye, wheat, corn and winter wheat. Foot-hill and mountain areas of Crimea cover the southern coast of the Crimean peninsula. Local agriculture focuses on viticulture, horticulture, vegetable production, as well as cultivation of aromatic plants (lavender, rose, sage).

Western Ukraine gets the most precipitation through the year

We estimate that western Ukraine (the Carpathian mountains and some regions of the forest-steppe zone including Lviv, Ivano-Frankivsk, Ternopil, Chernivtsi and Khmelnytskiy administrative regions) enjoy more than enough precipitation for crop cultivation through the year. On the contrary, southern regions of Ukraine belonging to the Steppe climatic zone are the driest regions in the country with high risk of drought.

Wheat Yields in Ukraine vs. Precipitation by Region (2011)

Source: SSS

Mykolayiv Оdesa

Simferopol

Zaporizhya Dnipropetrovsk

Kharkiv Kyiv Vinnytsiа

Kherson

Khmelnytskiy

Rivne Lviv

Ivano-Frankivsk Donetsk

Chernivtsi Uzhgorod

Lutsk

Ternopil Zhytomyr

Chernihiv Sumy Poltava

Kirovohrad Luhansk Cherkasy

Wheat yield in region (t/ha)

3.65 3.40

2.68

3.46 3.08 3.35

2.53

3.01 3.47

3.07 3.19

4.45

3.96 3.69

3.01

3.80

4.14

2.91

3.24

3.49 2.68

2.62

3.69

3.82

3.34

2.83

Annual precipitation:

< 500 mm 500 - 600 mm

> 600 mm

November 2012


Wheat is a relatively water-intensive crop while sunflower seed requires ample sunlight. Wheat can be cultivated in regions where annual precipitation is between 250 and 900 mm. Thus all regions of Ukraine are suitable for wheat cultivation. Still, regions with over 600 mm of rainfall are most suitable for wheat cultivation. Heavy rainfall and snowfall at the time of maturity cause severe losses to wheat crops, adversely affecting yields and seed quality. On the map above, one can see the highest wheat yields in Ukraine are where precipitation levels are also high.

Wheat yields closely correlate with regional moisture

distributions

Sunflower Seed Yields in Ukraine vs. Precipitation by Region (2011) Source: SSS

Sunflower can be grown in areas with precipitation of 350-500 mm, implying less need for water compared to any other crop grown in Ukraine. Still, sunflower naturally produces better yields in regions with precipitation of 500-600 mm (see map above). Kirovohrad, Vinnytsia, Cherkasy, Poltava, Kharkiv and Dnipropetrovsk are Ukraine’s traditional sunflower growing regions.

Sunflower seed requires less rainfall compared to other

crops

Precipitation Requirements for Different Crops (mm)

Source: FAO

300 400 500 600 700 800 900

Sugar beet

Corn

Potato

Wheat

Sorghum

Soybean

Sunflower

Mykolayiv Оdesa

Simferopol



Kherson

Khmelnytskiy

Rivne Lviv


Chernivtsi Uzhgorod

Lutsk

Ternopil Zhytomyr

Chernihiv Sumy Poltava


Sunflower yield in region (t/ha)

2.44 2.32

1.94

1.98 2.10 1.80

1.61

1.64 1.29

1.65 1.43

1.95

2.21 2.25

1.68

1.64

1.82

1.64

0.85

1.53 1.94

1.81

1.45

1.71

1.03

2.04

Annual precipitation:

< 500 mm 500 - 600 mm

> 600 mm

November 2012


Largest Land Operators in Ukraine (2012) Source: Focus Magazine

Most of Ukraine’s agricultural holdings operate in regions with solid precipitation levels

Most Ukrainian agricultural holdings, both public and private, concentrate their land bank leases in regions with good precipitation levels in order to obtain better crop yields. Thus, the most crowded agricultural zone is the Forrest-Steppe (parts of Lviv and Chernivtsi regions, eastern parts of Ivano-Frankivsk region, Ternopil, Khmelnytskiy, Vinnytsia regions, the northern part of Kirovohrad region, Cherkasy, Poltava and Kharkiv regions), where the precipitation level of 500-600 mm is optimal for cultivation of wheat, corn, barley, soybean, sugar beet, and sunflower seed.

WEATHER IMPACT ON 2012 HARVEST, OUTLOOK FOR 2013

Weather conditions were challenging in 2012…

Ukraine’s 2011/12 planting and harvesting season offers a good case study of multiple weather impacts.

…with lack of moisture in fall being negative for winter crop planting

Fall 2011 produced a wide array of weather conditions. After abundant precipitation at the end of the 2011 harvesting period for early crops (July) the winter crop seeding period (September-October) started with lack of moisture. Unusually high temperatures were recorded in September 2011 mainly in southern and eastern regions of Ukraine producing a soil drought and leaving only 10-15% of arable land, mainly in western and northern regions, optimally humidified. Considering these unfavorable conditions, the seeding campaign was partially postponed. Fall 2011 brought the worst drought in 10 years to the Polissya area (northern Ukraine) creating extremely unfavorable conditions for winter crop seeding. Precipitation throughout Ukraine was irregular. The state of winter crops at the end of the fall growth period and subsequent winter temperatures were the key determinants of winter crops’ poor harvest.

Ukrlandfarming Kernel Mriya MHP Astarta HarvEast Agroton Druzhba Nova (MHP) Argoprodinvest IMC Nibulon Svarog Group

Gals Agro APK-Invest Milkiland Creativ Group

Donetskstal KSG Agro AgroGeneration Agrotrade

20

1 Mykolayiv Оdesa

Chernivtsi 1

2 2 11

Simferopol 4 6 13

Zaporizhya Kherson

1 2 6 13

14

6

Luhansk 11

13 18 Dnipropetrovsk

Kharkiv Kyiv Vinnytsiа Khmelnytskiy

Rivne Lviv

Ivano-Frankivsk Donetsk Uzhgorod

Lutsk

Ternopil

Zhytomyr Chernihiv Sumy Poltava

Kirovohrad Cherkasy

1 1 1

1 1 1

1 2

2 2 2

2

2

2 2

2 3

3

3

3

4 4

4

4

4 4

4 5

5

5 5

5 5

6

6 6 7

8 8

8

9

9

9

10

10

10

11 11

11

11 11

11

11

12 12 14

14

14

15 15

15 15

16 16

16 16 17

17 19

19 20

20

20 2 3 4 5 6 7 8 9

10 11 12

13 14 15 16

18 17

19

November 2012


Weather in January-February 2012 further damaged winter crops, mainly wheat and barley, due to extremely low temperatures and lack of snow cover in some regions of Ukraine. As a result, winter wheat and barley dehydration and tissue freezing were observed, as well as partial loss of foliage. Low humidity of soil adversely affected development of winter rapeseed.

Thin snow cover in some regions…

Winterkill Areas in Spring 2012 (% of total plantings)

Source: Ukrainian Weather Forecast Agency

Spring 2012 revealed the extent of damage to winter crops. Between 30% and 50% of seeded areas were harmed in the Steppe area (southern Ukraine), a consequence of the most severe combination of drought, extreme temperatures and precipitation conditions in the last nine years. Farmers thus had to reseed 1.6 Mha (19%) of the winter crop area out of which winter wheat losses were around 1.0 Mha. The area was planted mostly with corn and to a lesser extent with sunflower seed and soybean. But extremely low soil humidity in southern regions (5-10 mm) created severe conditions for spring crop seeding.

…led to winter crop losses in spring 2012

Estimated Crop Winterkill Rates in Ukraine (2002-12)

Sources: SSS, USDA, Dragon Capital estimates

Winter Grain Conditions in Ukraine (as of January) Source: Agriculture Ministry, UkrAgroConsult

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Wheat Barley Rapeseed

32% 53% 61% 63%

46% 56%

23%

38%

36% 28% 31% 44%

37%

34%

30% 10% 11% 6% 10% 7%

43%

0%

25%

50%

75%

100%

2006 2007 2008 2009 2010 2011 2012

Good Satisfactory Weak or failed to emerge

November 2012


Summer 2012 brought new weather extremes

Summer 2012 brought high temperatures and insufficient precipitation, damaging southern regions of the country with air temperatures in excess of +30°C and upper layer soil temperatures of over +60°C. That caused early ripening of winter wheat and spring barley. Rainfall in northern and eastern areas of Ukraine slightly improved the situation in those regions. During June 2012 winter wheat, which was seeded in September, reached full ripeness. The best yields were demonstrated by crops seeded at the beginning and during the first half of the seeding campaign (4.2-4.7 t/ha). Yields of crops seeded during the second half of the seeding campaign totaled 1.0-1.2 t/ha. For example, corn development demonstrated low height (1.2–1.7 m) and weak acceleration. Weather conditions also harmed sunflower seed crop development as due to a lack of soil humidity (only 30-35 mm in summer months) plants grew sluggishly, producing low yields. But the overall state of the crop remained solid thanks to low overall exposure to drought risk.

The 2012 harvest is estimated to be 21-24% lower y-o-y

Despite adverse weather conditions, good quality of soil and improving cultivation technologies allowed Ukraine to preserve its grain export potential at over 20 Mt in 2012/13 MY. We estimate the 2012 harvest at 43-45 Mt (-21-24% y-o-y) with corn currently being harvested and showing quite good yields (4.3 t/ha; down 25% y-o-y).

Cumulative Precipitation in Central Ukraine (mm)

Source: USDA

Cumulative Precipitation in Eastern Ukraine (mm)

Source: USDA

Cumulative Precipitation in Southern Ukraine (mm)

Source: USDA

Cumulative Precipitation in Western Ukraine (mm) Source: USDA

Current precipitation levels favor winter plantings for 2013 harvest

Precipitation levels in Ukraine as of end-October suggest favorable weather conditions for winter crops being planted for the 2013 harvest. As of Nov. 2, farmers planted 8.0 Mha with winter crops or 98% of the initially allocated area. Winter planting have already sprouted on 86% of the planted area, with 91% of the sprouted crops being in good or satisfactory condition, implying a solid outlook for the 2013 harvest.

0

100

200

300

400

500

600

10-SepOct10 Nov10 Dec10 Jan10 Feb10Mar10 Apr10May10Jun10 Jul10 Aug10

Normal

2011

2012

0

100

200

300

400

500

600

Sep10 Oct10 Nov10 Dec10 Jan10 Feb10Mar10 Apr10May10Jun10 Jul10 Aug10

Normal

2011

2012

0

100

200

300

400

500

600


Normal

2011

2012

0

100

200

300

400

500

600

700


Normal

2011

2012

November 2012


Agricultural Production in Ukraine CROP PRODUCTION AND YIELDS

Ukrainian farmers planted 6.7 Mha with wheat for the 2012 harvest, or 24.4% of total planted area (flat y-o-y). However, a severe winter killed the crop on 1.6 Mha, reducing wheat’s total acreage to 5.8 Mha, or 21.1% (-3.4pp y-o-y). The killed area was replanted in spring mostly with corn and sunflower seed. Thus, total corn acreage increased by over 30% y-o-y to 4.7 Mha, or 17.2% of total (+4.1pp y-o-y), while sunflower area rose by over 3% y-o-y to 4.9 Mha, or 17.8% of total (+0.7pp y-o-y). As of end-2012, we expect a total of 9.4 Mha to be planted with winter crops (flat y-o-y) for harvesting in 2013, including 6.7 Mha under wheat (flat y-o-y), 1.4 Mha under winter barley (flat y-o-y) and 1.0 Mha under rapeseed (flat y-o-y).

Wheat occupies the largest area of any crop in Ukraine and corn acreage increased by 30% y-o-y

for the 2012 harvest

Arable Land Distribution in Ukraine (for 2012 harvest) Source: SSS

Areas Under Major Crops in Ukraine (Mha) Note: *other crops include sugar beet, sunflower seeds, potatoes and

vegetables. Source: SSS

Ukraine, the breadbasket of the former Soviet Union, produced over 50 Mt of grain annually in the late 1980s. As part of the Soviet economic planning system, Ukraine also had large dairy, livestock and poultry operations. Following the collapse of the Soviet Union in 1991, the Ukrainian agricultural industry entered a decade of decline: both agricultural production and livestock population tumbled due to the state’s dwindling farm subsidies and failure to reform the sector. Domestic consumption of cereal grains remained steady in the 1990s but the diminishing livestock population led to lower consumption of feed grains, which in turn provided for an increase in net exports from 1995 onwards despite declining crop output.

Historical background

Ukrainian wheat yields have averaged about 3 t/ha (winter crops) and 2 t/ha (spring) since 1991 but fluctuated widely from year to year due to unstable weather and insufficient fertilizer use (both these averages disregard 2000 and 2003, when crops in Ukraine were damaged by severe droughts). Unusually good weather in 2008 and 2011 provided for a remarkable recovery in winter wheat yields to 3.8 t/ha and 3.4 t/ha, respectively, but 2010 and 2012 saw a return to more customary 2.6 t/ha and 2.4 t/ha. This again underscored the need for higher investment in fertilizers and crop protection in order to avoid undue reliance on weather and thereby improve yields.

Wheat yields in Ukraine have been volatile and dependent on

weather…

Wheat 21.1%

Sunflower seed

17.8%

Corn 17.2%

Barley 12.5%

Soybean 5.4%

Rapeseed 2.1% Sugar beet

1.7%

Other 22.2%

7.6 5.5 5.2 6.6 5.5 6.5 7.1 6.7 6.8 6.3 5.8

7 8.5 7.4 8 8.7 9.0 8.5 9.1 8.7 8.3 9.8

17.9 17.0 14.6 11.4 11.7 10.6 11.4 11.2 11.6 12.4 11.9

0

5

10

15

20

25

30

35

'90 '95 '00 '05 '06 '07 '08 '09 '10 '11 '12

Wheat (Mha) Coarse grain (Mha)

Other crops* (Mha)

November 2012


Ukraine Grain Output, Export and Consumption (Mt) Sources: SSS, UkrAgroConsult, Dragon Capital estimates

Ukraine Wheat Yields (t/ha)

Source: SSS

…and remain low by international standards

Around the world, the highest wheat yields are reported in the EU (7-8 t/ha). Egypt’s rather impressive wheat productivity of 6.3 t/ha is offset by its very low harvested area (1.4 Mha). China has demonstrated high efficiency of large-scale crop production. With yields at 4.9 t/ha and a sizable area under cultivation (24.3 Mha), China is the single largest wheat producer in the world (17.8% of total). Ukraine’s average wheat yield of 2.6 t/ha in 2012/13 topped that of Turkey (2.0 t/ha) and Russia (1.9 t/ha), while Australia and Kazakhstan trailed with 1.9 t/ha and 0.8 t/ha, respectively.

Wheat Yields: Ukraine vs. International Peers (t/ha; 2012/13E) Sources: FAS, USDA, SSS for Ukraine

Coarse Grain Yields: Ukraine vs. International Peers (t/ha; 2012/13E) Sources: FAS, USDA

Favorable weather provided for record high harvest in 2011/12, helping exports…

Ukraine harvested 56.7 Mt of grain at an average yield of 3.4 t/ha in 2011, a record high harvest since the county declared independence in 1991. This enabled the country to export about 22 Mt of grain in the 2011/12 marketing year (MY; July-June), while retaining almost 27 Mt for domestic consumption. As of end-2011/12 MY, Ukraine held 9.8 Mt of grain stocks (+128% y-o-y due to a sharp decline in exports in July-October 2011 when export duties were in effect). In 2011/12 MY, Egypt was the largest importer of Ukrainian wheat with a 23% share, followed by Spain (20%) and Israel (14%).

Grain Production and Yields in Ukraine* Note: *in clean weight terms (after cleaning and drying). Source: SSS

Key Destinations of Ukrainian Wheat Exports (volume terms; 2011/12*)

Note: *cumulative data for Jul. ’11-Jun. ’12. Source: SSS

19.8 4.3

16.5 17.9 13.8 13.7 25.9 20.9 16.8 22.3 14.7

16.5

16.1

21.4 18.7 20.6 14.5

27.4 25.1

22.4

34.4 30.3

0

10

20

30

40

0

10

20

30

40

50

60

'02/03'03/04'04/05'05/06'06/07'07/08'08/09'09/10'10/11'11/12'12/13E

Ukraine coarse grain output (Mt; lhs) Ukraine wheat production (Mt; lhs)

Ukraine grain exports (Mt; rhs) Ukraine grain consumption (Mt; rhs)

0.0

1.0

2.0

3.0

4.0

5.0

1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012

Winter wheat yield (t/ha) Spring wheat yield (t/ha)

0.8 1.9 1.9 2.0 2.6 2.6 2.9 3.0 3.1 3.2 3.5 3.8

4.9 6.3

7.3 7.7 7.7

0.0

2.0

4.0

6.0

8.0

10.0

Kaza

khsta

nRu

ssia

Austr

alia

Turke

yRo

mania

Ukrai

neCa

nada

Argen

tina US

India

Hung

aryBu

lgaria

China

Egyp

tGe

rman

y UKFra

nce

1.5 1.6 1.9 2.3 2.5 2.7 3.2 3.4 4.2 4.3 4.7

5.6 5.7 5.9 6.1 7.3

8.7

0

2

4

6

8

10

Nigeri

aInd

iaRu

ssia

Austr

alia

Turke

yRo

mania

Mexic

oUk

raine

Thail

and

Brazil

Cana

da UKCh

inaArg

entin

aGe

rman

y USFra

nce

24 40 39

20

42 38 34 29

53 46 39

57 45

0.0

1.0

2.0

3.0

4.0

5.0

0

10

20

30

40

50

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

Grain production (Mt; lhs) Average yield (t/ha; rhs)

Egypt 22.8%

Spain 20.4% Israel

13.6%

Italy 5.6%

Tunisia 5.4%

Saudi Arabia 5.1%

Syria 3.6%

Jordan 2.9% Libya

2.9%

Thailand 2.7%

Other 15.0%

November 2012


Notwithstanding the record high harvest in 2011, the Ukrainian authorities decided to regulate grain exports in 2011/12 MY, creating distortions on the market and facilitating corruption. In May 2011, the Ukrainian parliament approved a bill that introduced export duties on wheat (9% but no less than EUR 17/tonne), corn (12% but no less than EUR 20/t) and barley (14% but no less than EUR 23/t) until Jan. 1, 2012. The law became effective starting from July 1, 2011, or the beginning of 2011/12 MY. However, the outstanding large supply of grain and trader lobbying helped to convince the authorities export regulations were needless. A bill canceling export duties on wheat and corn and leaving the tax on barley exports unchanged took effect on Oct. 22, 2011. Still, these export regulations reduced 1H11/12 (July-December 2011) grain exports and resulted in large 2011/12 MY ending stocks.

…but foreign sales of Ukrainian grain were depressed

in July-October 2011 due to export tariffs

We believe export regulations (either quotas or tariffs) are unlikely in 2012/13 MY thanks to large ending stocks and sufficient grain supply from the 2012 harvest. However, we still expect the government to continue to closely monitor export flows and potentially impose unofficial curbs to prevent domestic grain stocks falling too low. Production of early grains (wheat and barley) was reported at 25.2 Mt, the yield averaging 2.6 t/ha (-14.5% y-o-y). Harvesting of late crops will continue through October.

Export regulations are unlikely in 2012/13 MY thanks to large

ending stocks…

The reported early-crop harvest includes 16.3 Mt of wheat in bunker weight, the yield averaging 2.9 t/ha (-16% y-o-y). This slightly outperforms our net-weight forecast of 14.5 Mt (-35% y-o-y) as collected grain reportedly does not contain high levels of moisture and will not lose much weight after cleaning and drying. The barley harvest totaled 7.2 Mt in bunker weight with an average yield of 2.2 t/ha (-14% y-o-y), also slightly better than our forecast of 6.1 Mt (-33% y-o-y). We currently forecast Ukraine’s total grain harvest in 2012 at 43 Mt (-24% y-o-y) in net weight but do not rule out a higher actual volume if the corn harvest exceeds 21.1 Mt.

…and sufficient 2012 harvest

GLOBAL GRAIN MARKET AND UKRAINE

According to U.S. Department of Agriculture (USDA) baseline projections for 2012-21 published in February 2012, global income growth is projected to continue over the forecast period and slightly exceed the historical average long-term rate during the latter half of the period. This growth provides a foundation for increasing global demand and stronger trade in agricultural products. Consequently, agricultural product prices are projected to remain high.

Global incomes are projected to rise in 2012-21, supporting

agricultural demand and trade

Developing countries are the main source of growth in world agricultural demand and trade. Food consumption and feed use are particularly responsive to income growth in developing countries, with movement away from staples and/or traditional foods and toward more diversified diets. Agricultural demand in developing countries is further reinforced by population growth rates that are about twice the average of developed countries.

Developing countries will be the main source of growth in

world agricultural demand and trade in the long run

November 2012


Africa and the Middle East account for 23% of the projected growth in world coarse grain imports over the next 10 years

In particular, the combined region of Africa and the Middle East is projected to have some of the strongest growth in food demand and agricultural trade over the coming decade. Both poultry and beef imports have their largest projected increases in this region. By the end of the forecast period, Africa and the Middle East are projected to account for about half of global poultry imports and 22% of beef imports. Strong policy support for domestically produced meat also drives growth in feed grain and protein meal imports, especially where land constraints or agro-climatic conditions limit the expansion of domestic crop production. As a result, the region accounts for about 23% of the projected growth in world coarse grain imports over the next 10 years. Strong import growth by Africa and the Middle East over the forecast period also accounts for 48% of the increase in global wheat imports, 47% of the growth in rice imports, and 39% of the rise in soybean oil trade.

Ukraine enjoys increasing harvestable area

In most countries, the projected growth in total harvested area of all crops foresees rises of less than 0.5% per year. Areas will expand more rapidly in countries with a reserve of available land and policies which allow farmers to respond to higher prices. Such countries include Brazil, Russia, Ukraine, Argentina, and some other countries in South America and Eastern Europe.

Decelerating average crop yield growth to be offset by slower global population growth in the long run

About two-thirds of the projected growth in global crops production is derived from rising yields, even though yield growth is projected to slow. Growth in world-average crop yields has actually been slowing for nearly two decades. The market impact of slower yield growth will be partially offset by slower global population growth. Nonetheless, population growth is a significant factor driving overall growth in demand for agricultural products. Additionally, rising per capita income in many countries supplements population growth gains in the demand for vegetable oils, meats and coarse grains. World per capita use of vegetable oils is projected to rise 15% over the next 10 years, compared with 6% for meat and total coarse grains. Per capita use is projected to decline by about 1% for wheat and rice.

Developing countries such as Ukraine are increasing their presence in the world export market

Traditional exporters of a wide range of agricultural products, such as Argentina, Australia, Canada, the European Union (EU), and the United States, are set to remain important in global trade in the coming decade. But countries that have made significant investments in their agricultural sectors and are increasingly pursuing policies intended to encourage agricultural production, including Brazil, Russia, Ukraine, and Kazakhstan, are expected to have an increasing presence in export markets for basic agricultural commodities.

World wheat consumption is expected to sharply exceed supply in 2012/13

According to the USDA, world wheat production in 2012/13 MY is projected to decline by 32.4 Mt (or 4.7% y-o-y), to 662.8 Mt. Total world wheat production is expected to remain much lower than global use, projected at 683.2 Mt (down 12.3 Mt; or 1.7% y-o-y), resulting in a sharp decline in world wheat stocks to 177.2 Mt (-10.3% y-o-y). This represents a 26.0% stock-to-use ratio — slightly higher than the average for the last decade (25%) and significantly higher than the 30-year low in 2007/08 (18%). Thus, with consumption continuing to exceed supply, world wheat prices are forecast to remain strong in 2012/13 MY.

November 2012


The USDA projects 2012/13 wheat production will decline the most in Kazakhstan (-52% y-o-y), Ukraine (-32% y-o-y), Russia (-24% y-o-y) and Argentina (-23% y-o-y). Russian wheat production in 2012/13 MY is forecast at 43.0 Mt, down 13.2 Mt or 24% y-o-y. Winter wheat accounts for about 50% of the total wheat area but about two-thirds of total production due to inherently higher yield. The USDA spring wheat production estimate for Russia of 14.5 Mt would mark the fourth-lowest output in over 40 years. In Ukraine, the reported wheat harvest volume reached 16.3 Mt in bunker weight, the yield averaging 2.9 t/ha (-16% y-o-y). This slightly outperformed our net-weight forecast of 14.5 Mt (-35% y-o-y) as collected grain reportedly does not contain much moisture and will not lose much weight after cleaning and drying. We therefore upgraded our estimate to 15.4 Mt (-31% y-o-y). The USDA forecasts Kazakh 2012/13 MY wheat production at 11.0 Mt, down 11.7 Mt (or 52% y-o-y). The decline is based on persistently excessive heat and dryness in two of the country’s three main wheat-producing territories. Spring wheat comprises about 95% of Kazakhstan’s total wheat output.

Lower 2012/13 wheat harvests in Ukraine, Russia and

Kazakhstan contributing to booming wheat prices

Global Wheat Production, Consumption and Ending Stocks (1992/93-2012/13E)

Sources: FAS, USDA

Global Coarse Grain Production, Consumption and Ending Stocks (1992/93-2012/13E)

Note: coarse grains include corn, barley, sorghum, oats, rye, millet and mixed grains. Sources: FAS, USDA

Global Rice Production, Consumption and Ending Stocks (1992/93-2012/13E)

Sources: FAS, USDA

Global Corn Production, Consumption and Ending Stocks

(1992/93-2012/13E) Sources: FAS, USDA

100

150

200

250

400

500

600

700

1992/93 1996/97 2000/01 2004/05 2008/09 2012/13E

Ending stocks (Mt; rhs)Wheat production (Mt; lhs)Wheat consumption (Mt; lhs)

100

150

200

250

700

800

900

1,000

1,100

1,200

1992/93 1996/97 2000/01 2004/05 2008/09 2012/13E

Ending stocks (Mt; rhs)Coarse grain production (Mt; lhs)Coarse grain consumption (Mt; lhs)

50

100

150

200

250

300

350

400

450

500

1992/93 1996/97 2000/01 2004/05 2008/09 2012/13E

Ending stocks (Mt; rhs)Rice production (Mt; lhs)Rice consumption (Mt; lhs)

50

100

150

200

250

400

500

600

700

800

900

1992/93 1996/97 2000/01 2004/05 2008/09 2012/13E

Ending stocks (Mt; rhs)Corn production (Mt; lhs)Corn consumption (Mt; lhs)

November 2012


Coarse grain outlook for 2012/13

According to the USDA’s 2012-21 projections, world coarse grain trade will expand by 37 Mt (or 29%) from 2012 to 2021, to about 160 Mt. The share of global coarse grain production used as animal feed trended lower from 66% of total coarse grain consumption a decade ago to about 57% in 2011 and is projected to remain just below 60% over the next decade. Industrial uses, such as starch, ethanol, and malt production, are much less significant than feed use but are increasing twice as quickly. The expansion of livestock production in feed-deficit countries has also contributed to growth in the coarse grain trade. Such countries are mostly found in the Middle East, North Africa, and Asia. The USDA projected global coarse grain production to decrease by 28 Mt (or 2% y-o-y) in 2012/13, to 1,121.4 Mt. Most of the decline is attributable to falling corn output. World coarse grain consumption in 2012/13 MY is forecast to stand at 1,138 Mt (-0.6% y-o-y), as economic growth in many countries supports demand for meat. Global coarse grain production is thus expected to significantly fall short of consumption in 2012/13, which would contribute to a massive decrease in ending stocks to 152.1 Mt (-10% y-o-y), implying a stock-to-use ratio of 13.4% (-1.3pp y-o-y), which is below its 10-year average of 16.2%. This would definitely support high global prices for corn and barley.

Corn is the dominant feed grain

Corn is the dominant feed grain traded globally. According to the USDA, corn’s share of total world coarse grain trade will continue to rise slowly over the next decade, averaging 80%. Barley has the second largest projected share (13%) followed by sorghum (5%). The trade share of other coarse grains, mostly oats and rye, is projected to continue its slow decline, reaching about 2% by 2021. Commercialization of livestock feeding has been a driving force behind the growing dominance of corn in international feed grain markets. However, as global pork and poultry production becomes increasingly commercialized, higher-quality feeds are being used, boosting the demand for corn and soybean meal.

Ukraine is the world’s largest barley exporter

Ukraine became the world’s largest barley exporter in 2009 and is expected to remain so throughout the 2012-2021 forecast period. Australia, the EU, and Canada are expected to remain the largest exporters. Barley exports by the former Soviet Union countries (FSU) are projected to reach 7.4 Mt by 2021 with Ukraine accounting for 5.1 Mt and Russia for 1.0 Mt. This region’s exports are forecast to account for 44% of the increase in global exports over the next decade.

World wheat market players The world’s top five wheat producers — the European Union, China, India, the United States and Russia — accounted for an estimated 68% of total output in 2012/13 MY. The EU is by far the largest producer, with 133 Mt (20% of total) this year, followed by China with 118 Mt (18%), India with 94 Mt (14%) and the United States with 62 Mt (9%).

Global Wheat Producers (volume; 2012/13E)

Sources: FAS, USDA

Global Wheat Exporters (volume; 2012/13E) Sources: FAS, USDA

EU-27 20.1%

China 17.8%

India 14.2%

USA 9.3%

Russia 6.5%

Canada 4.1% Australia

3.9%

Pakistan 3.5%

Turkey 2.4%

Ukraine 2.3% Other 16.1%

USA 23.8%

Australia 15.4%

Canada 14.3%

EU-27 12.8%

Russia 5.9%

Kazakhstan 5.1%

Argentina 5.0% Ukraine

2.9%

Other 14.8%

November 2012


According to USDA projections for 2012/13 MY, Ukraine is expected to export approx. 4.0 Mt of wheat (our estimate is 4.8 Mt), accounting for an estimated 2.9% of total global wheat exports over the period (+0.1pp y-o-y). The United States is forecast to be the largest global wheat exporter (33 Mt; 24% of total wheat exports) and Egypt the largest importer (9.5 Mt; 7% of total wheat imports).

Ukraine to remain the 8th largest wheat exporter globally

in 2012/13 MY

Global Wheat Imports (volume; 2012/13E)

Source: FAS, USDA

Global Coarse Grain Production (volume; 2012/13E) Sources: FAS, USDA

In terms of coarse grains, we expect Ukraine to produce over 30.0 Mt in 2012/13 MY (including corn, barley, sorghum, oats, rye, millet and mixed grains), or 2.6% of global production. The U.S. is the largest coarse grain producer with a 26% share, followed by China with 19%.

Ukraine to account for 2.6% of world coarse grain output

in 2012/13…

World Coarse Grain Exporters (by volume; 2012/13E)

Sources: FAS, USDA

World Coarse Grain Importers (by volume; 2012/13E) Sources: FAS, USDA

According to the USDA “Grain: World Markets and Trade” report in August, global coarse grain exports are estimated to reach 116 Mt in 2012/13, with Ukraine projected to move up to third place (from fourth last year) with 12.9% of total exports (15.0 Mt). Japan is forecast to be the largest importer of coarse grain (15% of total imports), followed by Mexico with an estimated 9% share.

…and become third-largest coarse grain exporter globally

According to the USDA, world corn trade is projected to increase by 31 Mt (31%) to 131 Mt by 2021/22. Growth in coarse grain imports (mostly corn) is strongly linked to expansion of livestock production in regions unable to meet their own feed needs. Key growth markets include North Africa, the Middle East, China, Mexico, and Southeast Asia. Japan and South Korea are large but mature markets for coarse grain imports. China’s net imports of corn are projected to reach 18 Mt by the end of the forecast period as imports grow steadily while exports remain minor. The increase in China’s imports accounts for 45% of the 2012-2021F growth in the world corn trade.

Increase in world corn imports is a long-term price driver…

Egypt 7.0%

Brazil 5.1%

Indonesia 4.8%

EU-27 4.4%

Japan 4.3%

Algeria 3.7%

Morocco 3.3%

Others 67.4% USA

25.5%

China 18.5%

EU-27 12.9%

Brazil 6.5%

Argentina 3.5%

India 3.4%

Ukraine 2.6%

Mexico 2.6%

Canada 2.2%

Nigeria 2.1%

Others 20.1%

USA 31.1%

Argentina 20.5%

Ukraine 12.9%

Brazil 12.4%

Australia 4.6%

Canada 3.9%

EU-27 2.7% Other

11.9%

Japan 15.4%

Mexico 9.2%

Saudi Arabia 7.9%

Korea 6.5%

Egypt 4.5% EU-27

3.1%

Other 53.3%

November 2012


…while Ukraine strengthens its position in global corn exports

U.S. corn exports are projected by the USDA to grow over the next decade and approach record levels by 2021. However, large global supply of feed-quality wheat will compete with U.S. corn exports at the beginning of the forecast period. The U.S. share of world corn trade will decline slowly from an average of about 55% during the last half decade to less than 47% by 2021 as exports rise more rapidly from the countries of the former Soviet Union (including Ukraine), Brazil, the EU, and other European countries. Corn exports from ex-Soviet republics, mostly Ukraine, will rise nearly 60% to more than 17 Mt by 2021. Favorable resource endowments, increasing economic openness, wider use of hybrid seed, and greater investment in agriculture all stimulate corn production in this region.

Global corn prices began a new upward trend in 2H12 following U.S. undersupply fears…

Global corn prices rallied starting July 2012 (agricultural commodities traditionally gain at this time of year, as funds pump in fresh money). However, the latest rally was fueled by weather upsets in the USA (a major world corn supplier) as well as Australia, China and the former Soviet Union. Corn thus gained over 40% in price during July-August (Chicago Board of Trade corn futures rallied from $230/t to $327/t in August) as the USDA kept downgrading its U.S. corn supply forecast. The USDA reduced its 2012/13 MY export projection for the country to 33.5 Mt (-13% y-o-y) as of September 2012, with overall global corn exports projected to decline by 9% y-o-y to 90.9 Mt. The recent dip in global corn prices in September was attributable to a new USDA report which surprised investors by raising rather than lowering the forecast for 2012/13 U.S. carryout corn stocks. However, fundamentally we expect global corn prices to fluctuate around $300/t in 2012/13 MY with possible downward pressure in July-August 2013 when the status of the new world corn harvest is known. In the long run, we believe that rising human population and strong global demand from livestock feed producers will keep prices above 2006 levels ($170/t for wheat and $130/t for corn). CBOT December futures for corn currently trade at $291/t (+13% y-o-y and +15% YTD) and for wheat at $318/t (+36% y-o-y and +38% YTD).

CBOT Wheat and Corn Daily Futures ($/t; Oct. ’06-Oct. ’12)

Source: Bloomberg

…with wheat prices following suit

Weather, as was the case with corn, pushed global prices higher starting from July 2012. Ongoing dry conditions in Australia represent a major risk to global wheat supply in 2012/13 MY. Even the latest October USDA report did not ease the pressure, with wheat futures currently fluctuating around $320/t. We believe this level will be sustained through the rest of 2012/13 MY. However, a downside risk to our 2012/13 MY wheat price forecast exists given expectations of a record high wheat acreage for 2013/14 MY, potentially putting pressure on prices when new projected balances are reported towards the end of 1H13.

50

100

150

200

250

300

350

400

450

500

Oct-06 Aug-07 May-08 Dec-08 Aug-09 Mar-10 Nov-10 Jun-11 Jan-12 Sep-12

CBOT Wheat Futures ($/t; lhs)

CBOT Corn Futures ($/t; rhs)

November 2012


Prices for major crops are projected to decline in the near term as global production responds to recent high prices. Nonetheless, after these brief declines, long-term growth in global demand for agricultural products, in combination with the continued presence of U.S. ethanol demand for corn and EU biodiesel demand for vegetable oils, will sustain prices for corn, oilseeds, and many other crops at historically high levels.

Long-term grain price forecasts remain strong

AGRICULTURAL PRODUCTION COSTS

Fertilizers, seeds, fuel and land lease costs are the largest contributors to agricultural companies’ grain production costs. The diagrams below show 2011 wheat, corn, sunflower seed and potato production cost data for Agroton, Astarta Holding and Industrial Milk Company (IMC), which are typical large agricultural holdings companies in Ukraine and can therefore serve as examples. Fertilizers accounted for an estimated 28% of Agroton’s 2011 wheat production costs and 10% of Astarta’s corn costs, as well as 25% of Agroton’s sunflower seed costs and for 57% of IMC’s potato production costs combined with plant protection expenses. Land lease, ranging from $40-55/ha p.a. in 2011, accounted for an estimated 16% of wheat costs and 9% of corn costs. Land lease costs as a share of total crop production costs are set to increase in 2012 as lease payments rose by 76% y-o-y to $70-100/ha p.a.

Fertilizers, seeds, fuel and land leases are the largest

contributors to grain crop production costs

Wheat Production Costs per Hectare (value terms; 2011) Source: Agroton

Corn Production Costs per Hectare (value terms; 2011)

Source: Astarta Holding

Sunflower Seed Production Costs (value terms; 2011) Note: *includes repairs, organic fertilizers, electricity costs, amortization etc.

Source: Agroton

Potato Production Costs (value terms; 2011)

Note: *includes repairs, electricity costs, amortization etc. Source: IMC

Fertilizers 28%

Land Lease 16%

Fuel 13%

Seeds 9%

Labor 2%

Other 32%

Seeds 16%

Fertilizers 10%

Fuel 10%

Land lease 9%

Services 9%

Labor 7%

Crop protection 5% Amortization

3%

Other 31%

Fertilizers 25%

Land Lease 15% Fuel

11%

Seeds 19%

Labor 1%

Other* 29%

Fertilizers & PPC 56%

Seeds 21%

Labor 8%

Fuel 7%

Land Lease 2% Other*

6%

November 2012


Ukrainian agricultural producers enjoy cheap labor and land lease costs…

Ukrainian agro producers enjoy a number of competitive advantages over their developed market peers, particularly low labor costs and moderate land lease rates. Domestic agricultural companies pay farm workers $233/month on average compared to $1,470/month in Germany, $417 in Russia, $306 in Kazakhstan and $108-210 in other CIS countries. Land lease payments in Ukraine, averaging $40/ha p.a. in 2011 but increased to $80/ha p.a. in 2012, are diminutive in comparison with the $260/ha prevailing in Spain but fall in line with CEE rates of $45-94/ha. The abundance of arable land as well as quite fragmented land ownership in Ukraine, with only 15% of the total arable land consolidated by agro-holding companies, leave land owners with little bargaining power and help to keep domestic lease rates low. Moreover, according to government statistics, about 55% of land owners in Ukraine are pensioners with limited capacity to cultivate land on their own.

Average Labor Costs in Agriculture: CIS vs. EU ($/month; 2011) Sources: FAO, USDA, Eurostat, EIU, SSS

Annual Land Lease Costs ($/ha; 2011) Sources: FAO, USDA, Eurostat, EIU, SSS

…and low fuel and fertilizer costs

Agriculture-related fuel costs in Ukraine averaged EUR 0.96/liter in June 2012, or 40-50% lower than in other European countries thanks to smaller excise taxes. In terms of fertilizer expenses, domestic ammonia costs ($460/t in June 2012) were also comparatively low as they are calculated net of U.S. Gulf transportation costs.

Average Diesel Costs: Ukraine vs. International Peers (EUR/liter; June 2012)

Sources: FAO, USDA, Eurostat, EIU, SSS

Fertilizer Costs ($/t; June 2012) Source: Argusmedia.com

FERTILIZER USAGE

Fertilizer usage in Ukraine remains lower than in peer countries…

Ukrainian fertilizer usage rates plummeted by 90% in the 1990s, from 141 kg/ha in 1990 to 13 kg/ha in 2000, as state support for agriculture dwindled. Fertilized area also shrank over the period, from 25.1 Mha to 4.6 Mha. Both indicators have been recovering since 2000, albeit slowly, as state subsidies remained low and farmers lacked financing. Ukraine’s current fertilizer rate stands at 68 kg/ha (2011) and is expected to reach 78 kg/ha in 2012, which is higher than in neighboring Russia (33 kg/ha) but still lower than, for example, in developed EU countries (120 kg/ha on avg.), the U.S. (150 kg/ha) or China (130 kg/ha).

1,470

1,230

900 750 660

360 417 306 233 210 165 108

0250500750

1,0001,2501,500

Germ

any

Franc

e

Italy

Spain UK

Polan

d

Russi

a

Kaza

khsta

n

Ukrai

ne

Armen

ia

Moldo

va

Kyrgy

zstan

260 255

145 60 50 45 40 80

050

100150200250300

Spain UK

Hung

ary

Czech

Repu

blic

Russi

a

Roma

nia

Ukrai

ne '1

1

Ukrai

ne '1

21.71 1.65 1.46 1.42 1.34 1.32 1.29 1.29 0.96

0.70

0.0

0.5

1.0

1.5

2.0

UK Italy

Hung

ary

Germ

any

Franc

e

Polan

d

Spain

Roma

nia

Ukrai

ne

Russi

a

610 605 600 580 460

0100200300400500600700

NorthernEurope

U.S. Gulf India Northern Africa Ukraine

November 2012


Area Fertilized and Fertilizer Usage Rates in Ukraine Sources: SSS, Dragon Capital estimates

Despite low fertilizer usage, Ukrainian farms have demonstrated superior crop productivity per unit of fertilizer applied thanks to the country’s fertile soil. Ukraine reported 57 kg of crop output per 1 kg of fertilizer applied for 2011.

…but still allows for comparatively high crop

productivity thanks to fertile soil

Crop Productivity vs. Fertilizer Usage (kg/kg; 2010) Sources: IFA, FAO, SSS

Ammonium nitrate (AN) accounted for the biggest share (47%) of overall fertilizer consumption in Ukrainian agriculture in 2011. Ukrainian farmers consumed 1,625 kt of the product last year (+0.3% y-o-y), out of which 240 kt or 15% was imported, mostly from Russia. Imports declined substantially from 25-30% of total AN consumption in 2010 after Ukraine imposed import duties. In 2011, AN prices in Ukraine ranged from UAH 3,040-3,176 ($375-400) per tonne, up 44% y-o-y.

Ammonium nitrate accounts for the lion’s share of total fertilizer

consumption in Ukraine…

Ukraine Fertilizer Consumption (volume terms; 2011)

Source: Marker

NPK Fertilizer Usage by Country (kg/ha; 2011) Source: TradingEconomics

25.1

8.2 4.6 6.4 6.2 5.8 7.9 7.8 9.5 10.9 12.9 10.1 12.6 14.2 15.0

0

25

50

75

100

125

150

0

10

20

30

1990 1996 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E

Area fertilized (Mha; lhs) Fertilizer usage rate (kg/ha; rhs)

51.7

36.1 36.0

32.4 32.2 31.7 30.3 24.5

0

10

20

30

40

50

60

Ukraine Canada Argentina Australia USA EU-27 Russia Brazil

Crop productivity vs. fertilizer usage (kg/kg)

World average (kg/kg)

Ammonium Nitrate 47%

NPK 26%

Urea 13%

UAN 7%

NP 5%

Ammonium Sulphate

2%

0500

1,0001,5002,0002,5003,0003,500

China

Polan

dFra

nce

Germ

any

Brazil USA

India

Serbi

aHu

ngary

Cana

daArg

entin

aSo

uth Af

rica

Austr

alia

Ukrai

neRu

ssia

Kaza

khsta

n

November 2012


…followed by compound (NPK) fertilizers

Compound (NPK) fertilizers, which are mainly imported, accounted for 26% (second largest share) of total domestic fertilizer consumption in 2011, or 924 kt (+32% y-o-y). The increase in consumption was supported by higher, though still relatively low, local production (up six-fold y-o-y to 154 kt or 17% of total NPK consumption in 2011). Imports rose 12% y-o-y to 770 kt, delivered mainly from Russia (597 kt or 77%) and Belarus (144 kt or 19%). NPK prices fluctuated around $400/t last year (+45% y-o-y).

Urea consumption surged by 43% y-o-y in 2011

Ukrainian farmers increased consumption of urea by 43% y-o-y, to 450 kt in 2011, out of which 138 kt was imported (30% of total; compared to 50 kt in 2010). A temporary shortage of widely used AN at the beginning of 2011 caused such a substantial increase in alternative nitrogen fertilizer usage. Urea thus accounted for 13% of domestic fertilizer consumption in 2011 and was priced at UAH 4,000 ($500)/t on average, up 50% y-o-y. In contrast to Ukraine, urea is the most popular nitrogen fertilizer globally. While urea consumption in Ukraine amounts to roughly 20% of the AN volume used, globally AN consumption is equivalent to 30-35% of urea usage.

Fertilizer consumption structure won’t change much in 2012

We believe Ukrainian farmers will utilize the same fertilizer types in 2012 compared to last year. In 1H12, Ukrainian farmers purchased 796 kt of AN (+0.9% y-o-y) for the spring sowing campaign. This accounted for 70% of total fertilizer delivery to farmers over the period (+7pp y-o-y) and we believe ammonium nitrate will still account for almost 50% of fertilizer usage in the country for the full year (flat y-o-y).

DOMESTIC AND EXPORT PRICES

2012/13 MY price outlook mixed

World wheat prices have climbed by 37% YTD in 2012, to $315/t (CBOT), with the upward trend starting in June when the USDA continued to report reduced global wheat ending stocks due to bad weather in major producing countries. Ukrainian wheat export prices are up 36% YTD, to $338/t (FOB Black Sea). Current Ukrainian grain export prices follow CBOT dynamics as exports remain unrestricted, with prices on the local market tending to follow export quotes with a 1-2 week lag. Ukrainian domestic wheat prices rose 29% YTD to $257/t (EXW, incl. VAT), driven by global markets. Domestic grain producers’ wheat price in 9M12 stayed almost flat y-o-y, at $223/t, as it suffered from downward pressure in late 2011–beginning of 2012 and only in the summer enjoyed an upward trend (which still holds for now). We forecast local wheat prices will average $225/t (EXW, incl. VAT) for the full year, staying flat y-o-y. In 1H13, we believe global prices may start to retreat in February-March if farmers plant more than usual to benefit from current high prices. This might drag Ukrainian producers’ prices down in 1H13 although 2013/14 MY global grain balances are still very much dependent on weather in spring 2013 and could mitigate the downside risk. In 2013, we forecast an average 10% y-o-y decline in wheat and corn prices assuming current prices have peaked reflecting the usual cycle in the agricultural sector. Still, government restrictions on grain exports pose another risk to our price forecasts.

November 2012


Average Weekly Prices for Wheat, Corn and Barley in Ukraine (EXW; incl. VAT)


Following Ukraine’s accession to the WTO in May 2008, liberalized exports led domestic grain prices to become more closely correlated with global trends. However, the export quotas and tariffs imposed in 2010/11 MY and 2011/12 MY caused domestic wheat prices to diverge from global dynamics. Currently, no export restrictions are foreseen for 2012/13 MY. However, the Ukrainian government still keeps an eye on grain exports having signed memorandums with major traders. According to the latest memorandum signed in September, 2012/13 MY grain exports are capped at 20.4 Mt, including 5.0 Mt of wheat, 3.0 Mt of barley and 12.4 Mt of corn. This prevents local grain prices from perfectly correlating with the global trend and maximizes the time lag for domestic prices to catch up with global trends.

No grain export restrictions foreseen in 2012/13 MY

CBOT Wheat Futures vs. Ukraine 3rd Grade Wheat Prices ($/t)

Sources: Bloomberg, UkrAgroConsult

Such a situation in fact favors local grain exporters as they stand to improve their trading margins by taking advantage of excess domestic leftover stocks as of end-2011/12 MY (about 10 Mt compared to 10-year average of 5-6 Mt). For example, in October, the difference between export and local wheat prices totaled about $80/t, with approximately $50/t accounted for by trading and transportation costs and the rest (about $30/t currently) constituting traders’ margins (about 8-9% on EBIT level).

Export curbs may in fact benefit grain traders

0

50

100

150

200

250

300

350

Jan-08 Jul-08 Feb-09 Aug-09 Feb-10 Sep-10 Mar-11 Sep-11 Mar-12 Oct-12

Wheat Corn Barley

50

100

150

200

250

300

350

400

450

Nov-00 May-02 Dec-03 Jul-05 May-07 Dec-08 Jul-10 Jan-12

CBOT wheat futures

Domestic 3rd grade wheat price

November 2012


From Field to Port: Ukraine’s Agricultural Infrastructure GRAIN STORAGE CAPACITIES

Substantial grain export growth potential, but investments in infrastructure are required

Ukraine possesses some of the best agricultural soil in the world and has a unique opportunity to almost double future grain harvests by improving yields per hectare. Although Ukraine has undergone significant grain export logistics development, including improvement of port transshipment facilities, modernization and expansion of existing port terminals, revival of inland river navigation, and improved automotive transportation utilizing a growing truck fleet, the country still needs large-scale investment in infrastructure modernization. Insufficient modern elevator storage capacities and the high depreciation level of grain hoppers owned and operated by the state railway monopoly Ukrzaliznytsya currently represent major obstacles to efficient grain exports.

Grain storage capacities in Ukraine total 30.1 Mt while annual harvests have ranged from 40-50 Mt

Ukraine’s grain harvest has ranged from 40-50 Mt over the past 10 years and the existing storage infrastructure of 30.1 Mt only provides for immediate storage of 50-75% of the annual harvest. International experts claim that in order to ensure sufficient grain storage a country should strive to create capacities equal to harvest volumes plus 15-20%. Thus, should Ukrainian grain producers seek to ensure at least 100% of harvested grains can be safely stored they will need to invest in the construction of 15-30 Mt of storage capacity. However, experts claim that Ukraine currently has storage capacities of 40-50 Mt, but only about half of those are certified (all grain elevators in Ukraine should be certified on an annual basis but it is planned to extend the certification for a three-year period). The quality of storage (silos vs. old granaries) is another concern. The shortage of high efficiency modern silos in Ukraine works in favor of grain traders, who operate their own modernized private elevator capacities.

Existing storage facilities consist of old and modern silos as well as granaries

Currently, about 619 certified elevator complexes operate in Ukraine, including modern silo elevators made of hot rolled steel coils, Soviet era infrastructure such as concrete-silo elevators, and floor-type granaries (images below). Both concrete and steel silos provide a high quality storage environment which allows grain to be stored for between one and three years, provided grain is rotated within the silo thus preventing bacteria and insect contamination. Floor granaries are not equipped with modern quality control systems and offer only 3-4 months of optimal storage without damage to grain quality.

November 2012


Modern Steel Silo in Ukraine Source: Mriya Agro Holding (site visit on May 29, 2012)

Concrete Silo in Ukraine Source: Kernel Holding (site visit on April 2, 2009)

Floor Type Granary Source: UkrAgroConsult

Plastic Silage Bags Source: UkrAgroConsult

Plastic Silage Bag Being Filled


Plastic silage bags offer a cheap alternative to traditional storage facilities. Grain can be stored in silage bags for up to 18 months. Their sealed environment allows the carbon dioxide level to increase while the level of oxygen decreases thereby reducing the risk of fungus and grain pest infestation. However, there are certain disadvantages, such as high humidity accumulation inside the bag, the higher security risk of storing grain outside of a silo and complications with grain load/unload procedures. Silage bags can be easily cut or broken if stored on a rocky surface or attacked by rodents.

Plastic silage bags offer an alternative means of storage

November 2012


Grain Storage Facilities in Ukraine (August 2012) Source: SSS

Granaries account for 54% of Ukraine’s storage capacities

The lion’s share of storage facilities in Ukraine were built during the Soviet era. Despite some modernization following the first wave of privatization in the 1990s, many elevators, especially granaries, remain outdated. Ukraine’s storage infrastructure is still underdeveloped with about 80% of farmers lacking access to grain cleaning and drying equipment, which leads to significant (est. 5-7%) harvest losses and reduces grain quality. Granaries account for 54% of total storage capacities whereas elevators (steel and concrete silos) constitute the remaining 46%. Granaries are not mechanized and are usually not equipped with drying and cleaning machinery, and are able to hold grain for only 3-4 months (vs. up to 2 years for elevators). High humidity, which is a consequence of the varying moisture content and the temperature divergence in different parts of the storage space, could significantly damage grain quality during storage. High temperature and humidity create the perfect environment for mold development. Moldy grain, in turn, attracts insects that can spread around mold spores thereby quickly enlarging the mold layer on the grain surface.

Storage Capacity and Harvest Breakdown by Region (kt; 2011) Sources: SSS, Dragon Capital estimates

0

1,000

2,000

3,000

4,000

5,000

6,000

Zaka

rpattia

Iv.-Fr

ankiv

sk Lviv

Chern

ivtsi

Volyn

Rivne

Zhyto

myr

Terno

pilLu

hans

kCri

mea

Chern

ihiv

Khme

lnytsk

iyDo

netsk Kyiv

Khers

onZa

poriz

hya

Sumy

Cherk

asy

Khark

ivMy

kolai

vKir

ovoh

radVin

nytsi

aPo

ltava

Dnipr

opetr

ovsk

Odesa

Harvest (kt) Storage Capacities (kt)

Mykolayiv Оdesa

Simferopol



Kherson

Khmelnytskiy

Rivne Lviv


Chernivtsi Uzhgorod

Lutsk

Ternopil

Zhytomyr Chernihiv

Sumy Poltava


Total storage capacity in region (‘000 tonnes)

1,626 40

2,109 38

1,137

29

1,853 44

2,166 49 1,103

32

759 16

1,215 29 1,211

33

1,652 29

2,345 29

1,897 46

1,540 29

Number of elevators in region

81 4

407 17

218 5

1,102 24

27 2

223 11

186 10 1,137

29

1,043 32

303 7

468 16

920 16

1,424 32

Regions with storage capacity over 1.5 Mt

November 2012


Modern steel elevators and concrete silos offer reliable all-seasons mechanisms of grain quality control as they are equipped with technology for temperature control, aeration and insect detection. More importantly, grain can be easily rotated and dried in modern silos. Granaries, on the other hand, are not mechanized and are usually not equipped with drying and cleaning machinery. Ukraine’s elevator capacities range from 25,000 tonnes to above 200,000 tonnes while the capacity of each silo ranges from 8,000-25,000 tonnes. Poltava, Odessa, Dnipropetrovsk, Poltava, Vinnytsia and Kirovohrad regions possess the largest storage volumes in Ukraine, jointly accounting for 38% of total national storage capacity. Market players expect further investments in storage infrastructure with total capacities expected to rise by 12-15 Mt in the next 10 years.

Total storage capacity is forecast to rise by 12-15 Mt in the next decade

Grain Storage Capacities in Ukraine (August 2012) Sources: SSS, Dragon Capital estimates

Breakdown of Silo Storage Capacities in Ukraine (kt; 2011) Source: UkrAgroConsult

State-owned operators are major players in Ukraine’s grain storage market, possessing joint storage capacities of an estimated 5.6 Mt, or 18% of total. The State Food and Grain Corporation of Ukraine (that now incorporates Khlib Ukraine), the largest owner of grain elevators in the country and the most powerful state operator, owned total storage capacity of 3.4 Mt last year (11% of total), including highly attractive assets such as the Odessa and Mykolayiv port elevators. The second largest state owner is the State Reserve, which has a network of elevators covering most regions of Ukraine with total estimated storage capacity of 1.9 Mt (6% of total).

State-owned operators control 18% of total storage capacity…

Grain traders represent the second largest group of storage owners, operating mostly modern steel and concrete silo units. Swiss-based trader Glencore owns elevators with total storage capacities of 1.9 Mt (6% of total) in Ukraine which makes it the largest among private traders. Nibulon, which is owned by a Ukrainian businessman, is another large exporter of agricultural commodities which operates storage capacities of up to 1.6 Mt (5% of total), including a modern terminal at Mykolayiv port and elevators and river terminals in Dnipropetrovsk, Cherkasy, Poltava and Zaporizhya regions. Other large grain traders include international trading giants such as Louis Dreyfus, Alfred C. Toepfer and Cargill. It is estimated that major grain traders jointly own storage capacities of 6.2 Mt, or over 20% of the total in the country.

…followed by grain traders…

Granaries 54% Silos

46%

13.0%

18.0%

24.0%

15.0%

16.0%

9.0%

5.0%

0% 5% 10% 15% 20% 25% 30%

under 20

20-40

40-70

70-100

100-150

150-200

above…

November 2012


Grain Storage Capacity Ownership Structure (August 2012) Sources: SSS, Dragon Capital estimates

Storage Capacity Breakdown by Region (kt; June 2012) Sources: UkrAgroConsult

…and other agribusinesses Large integrated Ukrainian agribusinesses have actively expanded their storage capacities to become major players in the grain storage market and to lower their exposure to short-term grain price volatility. Most listed large agricultural holdings have sufficient storage capacities for their own operations, and provide the remainder for lease to other companies and farmers. WSE-listed Kernel Holding, the largest Ukrainian sunflower oil producer, is also the largest domestic silo company, currently operating more than 20 silo units with total capacity of 2.7 Mt (9% of total domestic capacity). LSE-listed MHP, the country’s largest poultry producer, operates 1.1 Mt of storage capacities and ranks second among agribusiness storage operators.

State-Owned and Top-15 Private Silo Operators in Ukraine (Mt; June 2012) Sources: UkrAgroConsult, Companies, Dragon Capital estimates

Silo construction costs range from $150-250 per tonne of storage

Ukrainian agribusinesses report total elevator construction costs of $150-250 per tonne of storage capacity. The expenses attributed to the construction of a new elevator can be recouped in 5-7 years assuming full-year 100% silo utilization, with the possibility to accelerate the payback period through increased grain turnover, proper usage of modern equipment and employment of skilled and qualified staff. Small farms lack working capital and experience difficulties in attracting loans due to Ukraine’s constrained lending environment and are thus unable to finance construction of new elevators. They have to lease storage capacities from either state-owned operators or large agribusinesses.

State-owned 23%

Private 77%

Odesa 8.7%

Dnipropetr. 8.0% Poltava

7.8%

Vinnytsia 7.0% Kirovohrad

6.9% Mykolaiv

6.1% Kharkiv 6.0%

Cherkasy 5.7%

Sumy 5.3%

Zaporizhya 4.5%

Other 34.0%

5.6

2.7

1.9 1.6 1.1 0.9 0.8 0.7 0.7 0.6 0.4 0.3 0.3 0.3 0.3

0

2

4

6

State-

owne

d stor

age

Kerne

l Hold

ing

Glenc

ore

Nibulo

n

MHP

Ukrla

ndfar

ming

Alfred

C. To

epfer

Bung

e

Mriya

Agro

Holdi

ng

Agrot

rade

Astart

a Hold

ing

Cargi

ll

Trigo

n Agri

Louis

Drey

fus

Agrot

on

November 2012


Silo Maintenance Costs (%) Source: UkrAgroConsult

Ukraine Silos: Storage Cost Structure (%; 2005/06-2010/11)


State company Khlib Ukraine provides grain storage services, charging an average of $9 per tonne. However, according to a Kernel estimate, grain storage costs at Ukrainian elevators average $14.6/t, including costs attributed to acceptance of grain ($1.29/t) such as the unloading of trucks and railway hoppers and loading grain to an elevator, storage ($3.15/t), and loading for further transportation to port ($6.67/t). Kernel itself set monthly storage rates at $12.42-16.55/t for 2012 depending on the crop. Thus, total grain storage expenditures in Ukraine are higher compared to Russia ($11.39/t), and the storage cost itself ($3.15/t in Ukraine) is higher than in Russia ($2.01/t), the U.S. ($2.00/t) and Western European countries such as the Netherlands ($2.00/t), reflecting a shortage of modern storage facilities and lower competition locally. Grain storage prices vary depending on the availability of elevators in different regions. More importantly, the operation of elevators is highly energy-intensive and thus the rates charged for storage depend on energy price dynamics (however, rates are set annually and are usually fixed for one season).

Average cost of storage in Ukraine is high compared to

European counterparts

Storage Costs ($/tonne/month) Ukraine average Khlib Ukraine Russia U.S. Netherlands

Truck/hopper unload to silo 1.29 1.41 4.02 - - Cleaning and drying ($/tonne-%)* 3.49 2.36 - - - Storage 3.15 1.66 2.01 2.00 2.00 Loading for transportation to port 6.67 3.59 5.36 - -

Total 14.60 9.00 11.39 2.00 2.00 Grain Storage Costs ($/tonne/month; 2011-2012)

*Note: tonne-% is a conventional measure used for cleaning and drying services of the elevator, which accounts for difference in humidity of grain already stored at the elevator and of that being delivered to the elevator.

Sources: Kernel, Khlib Ukraine, AgroActual, World Bank, Dragon Capital estimates

Storage Costs ($/tonne/month) Sunseed Soybean Corn Early Crop Rapeseed Truck/hopper unload to silo 1.54 1.38 1.39 1.05 1.42 Cleaning and drying ($/tonne-%) 3.55 4.21 4.52 3.01 4.18 Storage 3.53 2.88 3.18 2.45 3.33 Loading for transportation to port 7.90 6.89 7.47 5.91 6.49

Total 16.52 15.35 16.55 12.42 15.41 Kernel: Grain Storage Costs ($/tonne/month; 2012)

Sources: Kernel, Dragon Capital estimates

47%

25%

11%

5%

11%

0% 10% 20% 30% 40% 50%

Gas

Salaries

Electricity

Overheads

Other

15% 14% 26% 10% 11% 10%

23% 21% 10%

14% 7% 6%

6% 7% 15% 16% 20% 19%

18% 17% 16%

19% 22% 25%

38% 42% 33% 41% 40% 40%

0%

25%

50%

75%

100%

'05/06 '06/07 '07/08 '08/09 '09/10 '10/11Receiving Cleaning Drying Storage Loading on railcars

November 2012


Silage bags are the cheapest grain storage alternative

The alternative method to grain storage in elevators is the aforementioned plastic silage bags, or “sleeves”. Placed in the open air, these sleeves allow for optimization of grain storage costs, which are estimated to be 2-3 times lower than costs associated with storage in an elevator. One bag can contain 180-200 tonnes of grain with storage costs estimated at $3-5/t for a season lasting up to 10 months (vs. $9-13/t per month in an elevator). Also, the usage of silage bags involves minimal acceptance costs (load/unload of trucks) and has lower transportation costs but requires additional expenditure such as security at field, rent/purchase of grain-packaging machinery (total costs of $11,000-20,000), and about the same amount for platform preparation of where grain sleeves will be stored (est. $1 per tonne of stored grain during amortization life of equipment assumed at 15 years).

Silage Bag Storage Cost Structure Sources: Plastic Planet (Ukrainian producer of sealed bags), Dragon Capital

estimates

Silo Storage Cost Structure Sources: Plastic Planet, Dragon Capital estimates

RAILROAD — THE KEY TRANSPORT

Ukraine’s railway system… Ukraine has a developed network of railways with around 22,000 km of operational tracks. Almost 70% of the country’s rail lines are equipped with modern management systems, centralized traffic control and automatic blocking systems. The Ukrainian railroad system (which is linked to railways in Russia, Belarus, Moldova, Poland, Romania, Slovakia and Hungary) utilizes six railways connecting all regions of the country and serves all 18 Ukrainian sea ports in the Black Sea-Azov basin. State-owned Ukrzaliznytsya, established in December 1991, is the monopoly operator of rail transportation in Ukraine. Currently Ukrzaliznytsya is expected to follow the example of Russian Railways’ reorganization which started a decade ago. From the beginning of this year, Ukrzaliznytsya has transferred most of its open and hopper car fleets to its fully owned subsidiaries. The railcars’ status was changed from “inventory” (meaning they could be used by other CIS rail operators pursuant to a relevant multilateral agreement) to “private” (similar to how Russian Railways transferred its fleet to Freight One and Freight Two) in order to ensure more efficient use of available railcars. In the medium-term Ukrzaliznytsya‘s restructuring should encourage investments in the railway sector (e.g. via privatizations, similar to Russian Railways’ Transcontainer or Freight One) and spur large-scale modernization of the domestic railcar fleet, benefiting domestic railcar makers.

Transhipment bunker 26%

Grain packaging machinery

19%

Silage bags 55%

Unload to silo 9%

Cleaning and Drying 24%

Storage 21%

Transhipment to port 46%

November 2012


Ukrainian Railroad Map and Access to Sea Ports Sources: SSS, Dragon Capital estimates

High depreciation of rolling stock and inefficient usage by Ukrzaliznytsya pose logistical hurdles for Ukrainian grain market operators. This is compounded by red tape in obtaining relevant sanitary permits, causing delays in grain deliveries and holding up hopper cars while they may be needed in other regions. At the same time, Ukrzaliznytsya’s existing 11,579-strong hopper fleet, which can carry close to 2 Mt of grain monthly, is deemed sufficient to meet demand for grain transportation from elevators to ports, as annual grain exports from Ukraine have ranged from 15-20 Mt. However, evidence points to the contrary.

…is one of the weakest links in the grain logistics chain due to

inefficient use of available capacities

Grain Hopper

Source: Ukrzaliznytsya

Grain Hopper Unloading Source: Nibulon

Apart from the inefficient use of available hoppers due to red tape and other reasons, the shortage for local agricultural producers has been compounded by Ukrzaliznytsya’s practice of leasing grain-hoppers to local and Russian rail operators, leading to a further reduction in capacity utilization. For example, while the travel time of a grain hopper in Ukraine averages 10 days (from elevator to port and back, assuming it returns empty from port), it would be used for up to 40 days if leased by a Russian operator for operations outside of Ukraine. The lack of hoppers thus led to Ukrzaliznytsya failing to deliver about 6% of grain, or more than 70 kt per month, in 2008 (when the grain harvest in Ukraine hit 53 Mt, one of the best levels in 10 years). Moreover, due to the existing hopper fleet growing outdated and too few new hoppers being purchased, agribusiness players expect the grain hopper deficit to increase by up to 30% by 2015.

State monopoly Ukrzaliznytsya faces a growing shortage of

grain hoppers

November 2012


Car Type Available Fleet Surplus/Shortage* Universal open cars 42,119 (34,832) Oil tanks (8-wheel) 5,075 (4,366) Tanks (16-wheel) 152 (398) Grain hoppers 11,579 (88) Cement hoppers 2,822 (3,609) Cement hoppers (closed) 9,874 852 Platforms 3,903 1,341 Total 75,524 (41,100)

Ukrzaliznytsya Rail Fleet Breakdown (units; 2010)* Note: *Ukrzaliznytsya estimates. Sources: Transport Business, Ukrzaliznytsya

Indicator State-owned Private Turnover (days) 6.0 9.0 Empty runs (%) 37% 49% Tariff growth (% p.a.) 5-10 50-70

State-Owned and Private Rail Fleets Comparison (2010) Source: UkrAgroConsult

Grain Transportation by Rail in Ukraine (Mt)* Note: *Grain deliveries per calendar year.

Sources: UkrAgroConsult, Dragon Capital estimates

Grain accounts for only 3% of overall rail traffic

Grain has accounted for an unchanged 3% volume share of total freight rail transportation in Ukraine since 2002. Ukrzaliznytsya has not expanded its grain-hopper fleet in the past few years, purchasing additional cars only to replace those going out of service. Factoring in optimistic projections of growth in Ukrainian grain exports to some 42 Mt by 2020, Ukrzaliznytsya would need to increase its hopper fleet by 14,000 units thereby spending an est. $1.1bn (based on current hopper prices) in order to ensure delay-free transportation. However, due to grain transportation by rail accounting for a small share of total rail freight turnover, Ukrzaliznytsya is expected to give priority to more strategically important cargoes such as coal, whose share of total freight turnover is close to 30%.

Ukrzaliznytsya Turnover Breakdown by Cargo Type (%) Source: SSS

Only 7-8% of the grain hopper fleet is privately owned

Only around 800-950 hoppers are estimated to be in private ownership in Ukraine (vs. 11,597 owned by Ukrzaliznytsya). We believe that private hoppers are owned by large agribusinesses and grain traders that aim to ensure timely exports of their own produced/purchased crops through decreasing exposure to the supply of rented hoppers. However, the still relatively small stock of private grain-hoppers is explained by the high seasonality of the business, making hoppers fully loaded only in July-August and late September-October. For the rest of the year, the equipment is not utilized but still requires substantial maintenance costs related to repairs, parking and security. Moreover even during the high season, grain hoppers are utilized only on the way from silo to port but run empty on the way back due to their special design permitting only transportation of grains.

5.6 9.2

11.5 9.2

7.3

15.5 18.9

12.2 14.3

0.00.20.40.60.81.01.21.41.61.82.0

0

3

5

8

10

13

15

18

20

2003 2004 2005 2006 2007 2008 2009 2010 2011

Grain deliveries by rail (Mt; lhs)

Average monthly deliveries (Mt; rhs)

0%

25%

50%

75%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

Coal Coke Petroleum and products Iron and manganese ore Ferrous metals Grain Other goods

November 2012


Overall grain railroad transportation costs in Ukraine averaged $14.90/t for distances from 200 km to 500 km, and $18.93/t for distances from 500 km to 1,000 km in 2011, including transportation ($15.96/t) and veterinary and quarantine certificates ($2.97/t). Compared to Russia, Ukraine’s grain transportation cost was 10% cheaper last year.

Ukrzaliznytsya offers cheaper transportation rates than Russia

Ukraine Russia Transportation cost items ($/tonne):

Transportation (200-500 km distance) 11.93 - Transportation (500-1,000 km distance) 15.96 21.0 Quality certificates 2.97 -

Total (200-500 km distance) 14.90 - Total (500-1,000 km distance) 18.93 21.0

Grain Transportation Cost Comparison (2011)* Note: *quality certificates: Veterinary and Quarantine, Certificate of State Inspectorate for Bread Products.

Sources: Ukrzaliznytsya, Ukrainian agricultural companies, Grain Ukraine, RZD-Partner, Dragon Capital estimates

The shortage and wear and tear of the grain hopper fleet in Ukraine has fueled demand for automotive transportation, which is expected to play an increasing role. This stands in contrast to the dominant pattern in Europe, where the share of railroad transportation is increasing at the expense of auto transport due to stringent environmental regulations and high fuel costs.

Roads are an alternative to rail

Length of Railways and Roads in Ukraine (’000 km)

Source: SSS

Freight Turnover Structure by Transport Type in Ukraine (%) Source: SSS

PORTS

Ukraine operates 18 ports along the Black Sea and Sea of Azov coastlines, 12 of which deal with grain transshipment and jointly operate grain storage capacities totaling an estimated 2.1 Mt. All ports, including the underlying land and coastline, are state-owned, with some of their transshipment terminals leased to private grain traders under long-term contracts. The most attractive ports for grain transshipment in terms of relevant infrastructure and utilization are the three sea ports near Odesa (Odesa, Yuzhny and Illichivsk), cumulatively accounting for 60% of Ukraine’s maritime turnover. The largest grain traders such as Glencore, Toepfer, Kernel and Bunge have their grain terminals in this region. The Odesa ports offer berths 13.5 meters deep and serve Panamax vessels of 50,000-80,000 deadweight tons (DWT). Capesize vessels of 80,000-300,000 DWT can also be partially loaded in these ports and then fully loaded in a deeper area off the coast.

Ukraine has 18 ports on the Black Sea and Sea of Azov

coastlines

160

165

170

175

0

5

10

15

20

25

1980

1985

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Rail ('000 km; lhs) Auto roads ('000 km; rhs)

0%

25%

50%

75%

100%

1940

1955

1965

1975

1985

1995

2001

2003

2005

2007

2009

Rail Roads Sea River Pipeline Air

November 2012


Ukrainian Sea Ports Source: Dragon Capital

Odesa area ports are the largest hub for grain trading in Ukraine

Among Crimean ports, Sevastopol and Feodosiya offer infrastructure comparable with that of the Odesa port area. The Avlita grain terminal in Sevastopol, owned by System Capital Management (SCM), the largest industrial group in Ukraine, works closely with Cargill. Feodosiya’s port is mainly used for oil transshipment. Mykolayiv ports offer berths 9 meters deep, allowing their grain terminals to accept Handysize and Handymax type vessels capable of carrying 25-30 kt of grain.

Ukrainian Ports by Grain Export Volume (2011) Source: UkrAgroConsult

Largest Grain Traders in Ukraine (volume terms; 2011/12) Sources: Delo, Dragon Capital estimates

Nibulon was the largest grain trader in 2011/12 in volume terms

Nibulon, the largest grain trader in Ukraine in the 2011/12 season (July-June), accounted for an est. 15.8% of total grain throughput in volume terms, transshipping over 3.5 Mt via the Mykolayiv port. Khlib Ukraine was second largest with an est. 13.6% share, followed by Kernel Holding, which accounted for an est. 9.5% of grain throughput, transshipping 2.1Mt of grain.

Big ports (Odesa, Yuzhny,

Illichivsk, Sevastopol)

46% Medium-sized

ports (Mykolayiv, Mariupol,

Kherson, Kerch) 30%

Small sea and river ports

24%

Nibulon 15.8%

Khlib Investbud 13.6%

Kernel Holding 9.5%

Louis Dreyfus 7.2%

Alfred C. Toepfer 4.5%

Cargill 4.1%

Suntrade (Bunge)

3.6%

Serna (Glencore)

3.6% Noble Resources

2.7% Hermes-Trading

1.8%

Other 33.5%

0.3

Feodosiya

0.9

Kerch

0.1

Skadovsk

Belgorod-Dnistrovskiy 0.4

Nikka-Terra

0.5

Reni

0.2

Izmail

0.4

Ust-Dunaysk

0.2 0.2

Nortek-Azot

November 2012


Grain Transshipment Terminal Site in Illichivsk

Source: Kernel Holding

Grain Transshipment Terminal Site in Mykolayiv

Source: Nibulon

Direct Grain Loading to Vessel in Black Sea Port

Source: Expert

In addition to sea ports, Ukraine boasts 11 river ports. As grain harvests in the country improve and competition in its sea ports grows, the attractiveness of river terminal facilities is set to increase. Currently, out of 11 river ports in Ukraine only three (Dnipropetrovsk, Kherson and Mykolayiv) are involved in grain transshipment. Only 5% of available capacities (2.3 Mt throughput and 125 kt storage) are being utilized due to underdeveloped river transport infrastructure. One of the largest owners of river grain elevators in Ukraine is Nibulon, which invests heavily in the construction of river grain terminals to foster the recovery of merchant shipping in Ukraine.

Ukraine operates 11 river ports

River Grain Throughput Terminals by Operator (2010)


River Port Owner/Operator Throughput (kt) Storage

Capacity (kt) Dnipropetrovsk State 600 30 Prydniprovska Agrarian Group 150 - Kherson UkrKazexportastyk 800 20 Nortek-Azot 300 8 Mykolayiv Agroexport 400 66.5 Total 2,250 124.5

Ukrainian River Ports’ Annual Throughput Capacity (2011) Source: UkrAgroConsult

Nibulon 59% Khlib Ukraine

23%

NKZ 10%

Kernel Holding (Allseeds)

3%

Toepfer 1%

Other 4%

November 2012


Ukraine’s grain throughput capacities in sea ports amount to almost 40 Mt p.a.

The combined throughput capacity of Ukrainian sea ports currently totals 39.8 Mt of grain p.a. (+4.0 Mt y-o-y thanks to Bunge launching a grain transshipment terminal in Mykolayiv port last year), well above annual exports which range from 15-25 Mt p.a. Record high capacity utilization of 80% was recorded in the 2008/09 season following a bumper harvest of 53.3 Mt. In 2012/13 MY, we expect Ukraine to utilize ports at a rate of 55% thanks to the grain export memorandum signed by the government and major traders in September 2012. The document caps 2012/13 MY grain exports at 20.4 Mt, including 5 Mt of wheat, 12.4 Mt of corn and 3.0Mt of barley.

Throughput Capacity and Utilization Rate

in Ukrainian Sea Ports (2002-2011) Sources: UkrAgroConsult, Dragon Capital estimates

Monthly Grain Throughput vs. Exports in Sea Ports (Mt) Sources: SSS, UkrAgroConsult

Monthly sea port grain transshipment exceeds exports thanks to foreign sub-contractors

Ukraine exported 22.0 Mt of grain in 2011/12 MY while we estimate the country’s sea port throughput reached 29.8 Mt, or 35% higher than actual exports. This is explained by foreign sub-contractor activity in Ukrainian ports, including exports of grain originating in Russia. Grain accounted for 3.2% of total Ukrainian transit last year.

Growing international demand for Capesize vessel grain transshipment to stimulate deep sea port development in Ukraine

Domestic ports have started to increasingly serve vessels with deadweight of 150,000 tonnes and more (Capesize) but only on roadsteads as their berths are not equipped properly and sea depth is less than 15.5 meters in the deep-water Odesa, Illichivsk, Yuzhny and Avlita ports.

Capesize Vessel (178.5 DWT)

Source: Nautic Expo

Handysize Vessel (15-35 DWT) Loaded with Grain

Source: AnyFoodAnyFeed

7.9 9.8 15.7

20.8 23.7 27.8 31.2 34.7 35.8 39.8

0%

20%

40%

60%

80%

100%

05

10152025303540

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Throughput capacity (Mt; lhs) Utilization (%; rhs)

0.00.51.01.52.02.53.03.54.0

Jul-11

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-12

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-12

Export (Mt) Monthly transshipment (Mt)

November 2012


Sea Ports Storage Capacities Share of Total Throughput

Share of Total Draft Vessels Max Deadweight (kt) (%) (Mt/year) (%) (meters) (type) (kt) Odesa area 1,269 60% 20.6 54% 13.5 - 15.5 Panamax 60-80 Odesa 340 16% 6.0 16% 13.5 Panamax 60-80 Illichivsk 540 25% 10.7 28% 13.5 Panamax 60-80 Yuzhny 380 18% 3.5 9% 13.5 - 15.5 Post-Panamax 80-160 Belgorod-Dnistrovskiy 9 0% 0.4 1% 4.5 Handysize/Handymax < 60 Crimea ports 238 11% 4.2 12% 8.1 – 14.2 Panamax 60-80 Avlita 170 8% 3.0 8% 12.3 - 14.2 Panamax 60-80 Feodosiya 8 0% 0.3 1% 11.5 Panamax 60-80 Kerch 60 3% 0.9 2% 8.1 Handysize/Handymax < 60

Mykolayiv region 380 18% 5.9 15% 10.3 - 10.5 Panamax 60-80 Mykolayiv port 207 10% 4.0 10% 10.3 Panamax 60-80 Nibulon 133 6% 1.7 4% 10.5 Panamax 60-80 Nikka-Terra 40 2% 0.2 1% 10.3 Panamax 60-80

Southern Dnipro ports 134 6% 1.8 5% 6.0 – 8.1 Handysize/Handymax < 60 Kherson 120 6% 1.5 4% 8.1 Handysize/Handymax < 60 Skadovsk 6 0% 0.1 0% 7.6 Handysize/Handymax < 60 Nort-Azot 8 0% 0.2 1% 6.0 Handysize/Handymax < 60

Danube ports 47 2% 1.1 3% 7.5 Handysize/Handymax < 60 Izmail 20 1% 0.2 1% 7.5 Handysize/Handymax < 60 Reni 25 1% 0.5 1% 7.5 Handysize/Handymax < 60 Ust-Dunaysk 2 0% 0.4 1% 7.5 Handysize/Handymax < 60

Sea of Azov ports 64 3% 2.2 6% 8.0 Handysize/Handymax < 60 Berdyansk 18 1% 1.6 4% 8.0 Handysize/Handymax < 60 Mariupol 46 2% 0.6 2% 8.0 Handysize/Handymax < 60

Total 2,132 100% 35.8 100% 6.0 – 15.5 Panamax 60-80 Ukrainian Sea Ports (end-2011)

Sources: SSS, UkrAgroConsult

Before the economic downturn of 2008-09, several projects for deep-water ports were announced but none have been delivered so far. Grain traders and agribusinesses estimate sea port grain terminal construction costs at $25-40 per tonne of grain transshipped. Thus, a deep-sea port in Odesa region with a throughput capacity of 5 Mt would cost about $150-200m.

Port construction costs are estimated at $25-40 per tonne of

throughput

GRAIN HANDLING COSTS

The export price (FOB) of Ukrainian 3rd grade milling wheat stood at $340/t at the beginning of October, while the local price (EXW; field price at which grain-grower sells) totaled $260/t. The difference of $80 between the FOB and EXW quotes is explained by logistics costs. Field grain (sold at EXW price of $260/t), is transported first from field to storage facilities (storage cost of $15/t/month), and then from storage to port (transportation costs $12-16/t depending on distance). After all necessary documents are received (quality certificates — $3/t), grain is loaded on to the vessel (loading — $14/t). The trader’s margin, ranging from $32-36/t, accounts for the remainder of the aforementioned $80/t difference. This margin translates into 9-11% profitability in relative terms for the trader in the current environment, but historically it has varied significantly and, for example, stood at 3.5% in 2Q12.

From field to port: how grain export prices are determined

November 2012


Ukrainian 3rd Grade Milling Wheat Price Formation: from Field to Port* Note: prices as of Oct. 5, 2012. Source: Dragon Capital

Port throughput charges in Ukraine are higher than in developed European countries

Grain transshipment rates at Ukrainian ports (charged by port operators in excess of international freight rates) tripled over the last five years and currently range from $15-17/t, compared to $7/t in France and Germany. Rising harvest volumes and lack of effectively managed grain logistics chains exert upward pressure on grain handling costs at domestic ports.

Average Grain Handling Rate at Ukrainian Ports ($/t)


Port charges ($/t) Ukraine France Germany

Throughput 15.00 6.78 6.21 Fumigation 0.68 - 0.41 Customs clearance

1.07 - 0.02

Total 16.75 6.78 6.64

Port Charges in Ukraine, France and Germany (2009/10) Sources: Cargill, SSS, Dragon Capital estimates

Port charges should decline as more capacity is launched in neighboring countries

According to market players, grain throughput charges at Ukrainian ports should decline as ports in other Black Sea countries are increasingly investing in new storage and throughput capacities, increasing competition for grain shipment in the region.

5.0 6.0 8.8

13.0 16.8 14.9 14.0

0358

1013151820

2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/12E

Average grain handling complex rate ($/t)

EXW: $260/t

Silo: $15/t

Transportation to Port: $12-16/t

Quality certificate: $3/t

Loading to vessel: $14/t

Trader’s margin:

$32-36/t

FOB: $340/t

November 2012


RUSSIAN PORTS: KERNEL FIRST UKRAINIAN OPERATOR IN TAMAN

Joint grain throughout capacities at Russian ports reach about 25-27 Mt p.a., including deep water ports on the Black Sea (15-16 Mt), shallow water ports on the Azov Sea (6 Mt), Volga-Don basin (4 Mt), Caspian Sea, and the Russian Far East. The Black Sea ports, including Novorossiysk (11-12 Mt), Tuapse (2.5 Mt) and Taman (1.5 Mt), jointly account for an est. 55-65% of Russia’s total grain throughput capacity. In 2011, Russian grain terminals operated at 84% capacity utilization compared to 45% in Ukraine.

Russia can export 25-27 Mt of grain p.a. with over half

shipped through Black Sea ports

Russian Black Sea and Azov Sea Ports

Source: Russian Business Newspaper Novorossiysk, which alone accounts for 41-44% of Russia’s total grain throughput capacity, consists of two grain terminals and can load Panamax-sized vessels. Terminals at the port have both railroad and truck access. The port is owned by both the state (terminal with throughout capacity of 4-5 Mt p.a.) and private investors (6-7 Mt). Market experts estimate that traders will increase grain exports via Novorossiysk to 14 Mt by 2015/2016 MY, accounting for 35% of total projected grain exports from the country over the period.

Novorossiysk is the main Russian port for grain exports

Black Sea: Grain Export Capacities and Exports (Mt p.a.)

Source: UkrAgroConsult, Dragon Capital estimates

Grain Export Capacity at Russian Ports (Mt p.a.)*

Note: Taman port effective capacity. Source: USDA Foreign Agriculture Service, Dragon Capital estimates

0

10

20

30

40

Ukraine Russia

Current Export Capacities Maximum Grain Exports

Novorossyisk (11.5)

Volga-Don-Azov (10.0)

Tuapse (2.5)

Taman (1.5) Other (1.0)

November 2012


Tuapse port grain throughput is constrained by lack of access to railroads

Tuapse (9-10% of Russia’s grain throughput capacities) is the second largest terminal complex in Russia with storage capacity of 100 kt and, similar to Novorossiysk, can serve Panamax-sized vessels and is connected inland only by rail (loaded trucks cannot access due to steep roads in the area). Tuapse does not work at full capacity due to its railway infrastructure also being used for heavy traffic in Sochi where construction works for the 2014 Winter Olympics are ongoing.

Taman port, recently purchased by Kernel and Glencore, remains under-developed, but an investment program is underway

Traders exported about 1.5 Mt of grain through Taman port in 2011/12 MY, which we believe is the port’s current effective throughput capacity (though nameplate capacity is 3.0 Mt), being constrained by the lack of railway access. Taman is still under-developed and does not have railway access, but with its deep waters (18 m) that allow for serving vessels with 100-160 kt deadweight (post-Panamax vessels) and close proximity to major Russian grain-growing regions it has the potential to become Russia’s second largest Black Sea port after Novorossiysk. Attracted by Taman’s strategic importance, Kernel and global grain trader Glencore (50/50 joint venture) acquired a 100% stake in a deep water grain export terminal in Taman port from EFKO Group in September 2012. The deal was valued at $265m, or $88 per tonne of throughput capacity. It was announced that the grain export terminal has installed throughput capacity of 3 Mt p.a. and will serve as a platform for large scale deployment of Kernel’s Russian grain export business. Kernel plans to invest $30-40m in the port in 2013-2014 and intends to boost its throughput capacity to 5-6 Mt.

Ports 2009/2010 2011/2012E 2015/2016F Novorossiysk 10.4 11.0 14.0 Azov and Volga-Don ports 8.9 9.0 11.5 Tuapse 0.8 1.7 3.0 Taman - 0.7 6.0 Samur 0.4 0.5 - Baltic ports - 0.5 - Caspian sea ports 0.3 0.3 0.5 Ukraine 0.2 0.2 - Far East ports 0.1 0.1 1.0 Kaliningrad 0.1 0.1 4.0 Other 0.4 - - Total 21.6 24.1 40.0

Breakdown of Russian Grain Exports by Port (Mt) Source: RusAgroTrans

Russia: Grain Exports and Throughput Capacity (Mt p.a.) Source: UkrAgroConsult, Dragon Capital estimates

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010 2011

Exports Grain Handling Capacities

November 2012


REFORM OF UKRAINIAN SEA PORTS

President Viktor Yanukovych signed a bill on Ukrainian sea ports into law on June 8, 2012, and the legislation will enter into effect in June 2013. The document contains detailed regulations regarding operations and ownership of Ukrainian sea port infrastructure (it does not apply to river ports). According to the law, the government will remain the sole owner of ports’ strategic facilities, including waters and hydraulic structures (mainly docks), but other port facilities can be privatized or leased once the law takes effect. Private investors can only own the hydraulic structures they build themselves.

Reform of Ukrainian ports was approved in June 2012...

Previously, any clear legislative framework outlining the rights of private investors regarding their investments in sea port infrastructure was absent in Ukraine, which prevented major private sector involvement in the sector. Now, the state undertakes to guarantee the right of private ownership of port infrastructure that was acquired in accordance with the new law. The legislation also allows for preserving existing contracts with operators (contracts signed before the law was enacted), but unlike before, investors will have clear guarantees of their contracts from the state. There are a number of opponents of the decision to leave existing contracts in effect, claiming that there are currently operators/joint ventures that control the terminals but have no actual throughput, i.e. capitalizing on their monopoly position but having no intention to invest in port infrastructure development.

...providing for protection of private investments...

The law allows for concession and lease (not possible before) of docks and related infrastructure, including access roads, communication lines, and utilities for up to 49 years. The law also foresees the possibility for investors to lease land plots where the facilities in concession are located without an auction. Thus, private investors will be given land and docks on lease or concession terms in order to develop terminals and increase throughput capacities, while the state will own the waters. Private investors will capitalize from growing throughput while the state will receive payments for land/docks lease or concession and for use of port waters.

...introducing concession of docks and state-owned port

infrastructure...

The law forbids privatization of strategic facilities at Ukrainian sea ports, but foresees the privatization of single port property complexes (including all types of equipment/facilities used in operations) and purchase of shares of PJSCs formed in the process of port reorganization. The law provides that if an investor privatizes a single port property complex, it becomes eligible without an auction to lease docks and land plots where the privatized complex is located (both leases for up to 49 years).

...privatization of single property complexes...

Private investments in state port property (strategic facilities) through repairs, modernization, renovation or construction, are subject to a compensation mechanism. Provided the modernization and construction works are carried out on the basis of relevant agreements with the state, investors will be compensated by the state through port charges or other sources not prohibited by legislation.

...and providing for compensation of private

investments

The law on Ukrainian sea ports was passed on to the Constitutional Court after the President signed the bill into law in June, where it is being checked for conformity with existing legislation. Therefore, there is a possibility that the law will be modified.

The law is being examined by the Constitutional Court

November 2012


We hypothetically value Ukraine’s sea port grain terminals at $3.2bn

Based on the experience of privatization of Turkish ports during the last few years with an average valuation of $1.6 per tonne of throughput capacity and assuming 49 years of operational life (i.e. the lease term for the land and docks), we hypothetically value Ukraine’s grain terminals at $3.2bn. However, we note that the valuation does not account for infrastructure other than grain throughout facilities (such as grain silos, railroads, etc.) and that there is a large number of private terminals at local ports that will not be put up for sale, thus our estimate is approximate and hypothetical.

Sea Ports Grain Throughput Capacity Hypothetical Valuation (Mt/year) ($m) Illichivsk 10.7 846 Mykolayiv 6.0 633 Odessa 8.0 475 Yuzhny 3.5 277 Avlita 3.0 237 Nibulon 1.7 134 Berdyansk 1.6 127 Kherson 1.5 119 Kerch 0.9 71 Mariupol 0.6 47 Reni 0.5 40 Belgorod-Dnistrovskiy 0.4 32 Ust-Dunaysk 0.4 32 Feodosiya 0.3 24 Nikka-Terra 0.2 16 Nort-Azot 0.2 16 Izmail 0.2 16 Skadovsk 0.1 8 Total 39.8 3,148

Ukrainian Sea Port Grain Terminals: Hypothetical Valuation Sources: UkrAgroConsult, dragon Capital estimates

November 2012


Ukrainian Agricultural Exports EXPORT DYNAMICS

Following its accession to the WTO in May 2008, Ukraine set out to abolish grain export quotas which it had imposed to protect domestic consumers and keep local bread prices low. However, the country had a grain deficit and imposed export quotas in the 2010/11 marketing year (MY; July-June) followed by export duties in the first half of 2011/12 MY despite the fact grain stocks were sufficiently high as Ukraine harvested a record high harvest of 56.7 Mt in 2011. The Ukrainian government realized the irrationality of its tariff policy when it calculated ending stocks for end-2011/12 MY and as a result abolished wheat and corn duties as early as October 2011 and barley tariffs from Jan. 1, 2012. Still, export dynamics did not recover to 2008/09 levels when exports peaked at 25.3 Mt (the highest since independence). Export tariffs that were in effect in June-October 2011 totaled 9% or EUR 17/t for wheat, 14% or EUR 23/t for barley and 12% or EUR 20/t for corn.

Grain export tariffs were enacted in 2011/12 despite WTO

membership

Given the 56.7 Mt grain harvest in 2011 and domestic needs of about 26.0 Mt, Ukraine enjoyed grain export potential of about 30.0 Mt. However, the aforementioned duties discouraged exports and grain traders sold only 8.8 Mt in 1H11/12 (July-December 2011), up 27% y-o-y but 37% lower than the same period in 2008/09 when the country collected a comparable harvest (53.3 Mt) and exported over 25.0 Mt. In 2011/12 MY, Ukraine exported 22.0 Mt of grain (+73% y-o-y).

Ukraine exported 22.0 Mt of grain in 2011/12…

Ukraine’s Quarterly Grain Exports (kt; 3Q08-2Q12) Sources: UkrAgroConsult, SSS

Corn accounted for 62% of total grain exports in 2011/12 MY, wheat contributed another 24% and barley added 11%.

…mainly corn and wheat…

Ukraine’s Monthly Grain Exports (kt; Jul’11-Jun’12) Sources: UkrAgroConsult, SSS

3,018 3,615 2,836 3,169 3,624 3,255

1,498 781 1,263 1,318 554 1,032 1,545 936 1,323 1,415

2,745 1,926

894 769

2,282 1,544

1,208 1,199

1,802 576

336

1,453

267

486 738

2,242 2,043

473 2,420

1,752

703 197

1,405

1,549

1,946 109 4,119

4,902 4,466

0

2,000

4,000

6,000

8,000

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Wheat Barley Corn Other crops

139 571 835

143 442 351 367 388 569 494 607

317 157

627 668

229 6 32 68 10

180 112 168 33

13 63

635

1,700 1,783 1,776 1,211

1,914

1,415

1,739

1,313

0

500

1,000

1,500

2,000

2,500

3,000

Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12

Wheat (kt) Barley (kt) Corn (kt) Other (kt)

November 2012


…creating the largest ever ending stocks

As of July 1, 2012 Ukraine possessed its highest ever (9.8 Mt) grain stocks in storage (excl. small enterprises), being 2.3 times higher y-o-y, including 5.4 Mt of wheat, 2.7 Mt of corn, and 1.2 Mt of barley — a result of the irrational tariff policy at the beginning of 2011/12 MY. The level of ending stocks in Ukraine as of July 1 normally ranged from 5.0-6.0 Mt in previous years.

Ukraine’s Quarterly Grain Ending Stocks (kt; 4Q08-3Q12)* Note: *stocks at the end of marketing year are highlighted in oval areas. Sources: UkrAgroConsult, SSS

Compliance with WTO rules is possible even with market limitations

Ukraine will not face sanctions from the WTO as long as quotas and limitations are temporary and introduced in order to prevent shortages of foodstuffs. Under WTO rules, countries can restrict exports of agricultural products, but only temporarily, and have to comply with GATT Article XI (export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party), in this case paragraph 2(a), and with Article 12 of the Agriculture Agreement (to notify the WTO as soon as possible). These require the relevant country to take into account the impact on importing countries’ food security, be prepared to discuss the restrictions with importing countries, and to supply detailed information when requested. Despite general disapproval of such limitations from the WTO, the organization still has exceptions to the rule. For example, a country has the right to establish quotas for definite timeframe in order to prevent exports of food products from the country during a period of shortages or in order to increase food security.

Ukraine exported 3.3 Mt of vegetable oil in 2011/12…

Sunflower oil exports from Ukraine totaled 3.2 Mt (+22% y-o-y) between September 2011 and August 2012 (the marketing year for sunflower), while sunflower seed exports fell significantly (by 37% y-o-y; to 282 kt).

Ukraine Sunflower & Soybean Quarterly Exports by Product (kt; 4Q08-2Q12)* Note: *sunflower seed and soybeans are annually harvested in September, which explains relatively low exports for this month. Sources: UkrAgroConsult, SSS

10.2 6.8

3.4

13 7.6 4.8 2.4

9.9 6.6 4.4 1.9

13.9 9.7 7.1 5.4

10.5

3.3

1.3 1.8

6.2

4.1

2.3 1.1

3.2

1.9 1.3

3.5

2.4 1.7

5.5

1.6 1.1

1.1

4

1.8

0.7

3.3 6

3.6

0.9

3 12.2

7.4

2.7

4.3

0

5

10

15

20

25

30

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12

Wheat Barley Corn Other crops

506 557 616 518 644 572 776 560 795 778 696 384 812 776 978

511 629 687

473 702 668

692

463

837 928 772

470

947 1056 1141

408

1,245 235 637

943

138 760

541

460

432 148 164

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Sunflower Oil Sunflower Seed Sunflower Meal Soybean Rapeseed

November 2012


Rapeseed exports totaled 1.2 Mt (-15% y-o-y) in 2011/12 (July-June), while soybean exports amounted to 1.3 Mt (+35% y-o-y) in 2011/12 (Sep.-Aug.).

…and increased exports of soybean by 35% y-o-y to 1.3 Mt

Ukraine Sunflower & Soybean Monthly Exports by Product (kt; September 2011-August 2012)* Note: *sunflower seed and soybeans are annually harvested in September, which explains relatively low exports for this month. Sources: UkrAgroConsult, SSS

The Agriculture Ministry estimates grain exports from Ukraine in 2012/13 MY at 22.2 Mt, or flat y-o-y. We think a potential increase in grain exports in the 2012/13 season is possible given substantial leftovers from 2011/12 MY (estimated at 12.6 Mt as of end-June, or +103% y-o-y). Given that the government promised to impose no export restrictions for grain exporters in the current marketing year, we estimate Ukraine’s grain exports will reach 22.3 Mt (+1% y-o-y). Sunflower oil exports are estimated at 3.0 Mt (-8% y-o-y) for 2012/13 MY (September-August), due to a lower expected sunflower seed harvest this year of about 7.9 Mt (-10% y-o-y).

2012/13 MY grain exports are estimated at 22.3 Mt

From the beginning of the marketing year 2012/13 in July until Nov. 1, Ukraine exported 8.4 Mt of grain crops, up more than 78% y-o-y. A total of 12.13 Mt of grain was reported to have been contracted for export delivery as of the same date, comprising 5.3 Mt of wheat (incl. 4.06 Mt exported in July to end-October), 2.0 Mt of barley (incl. 1.53 Mt already exported) and 3.5 Mt of corn (incl. 2.69 Mt already exported). Grain exports accelerated after major exporters signed a memorandum with the Agriculture Ministry to export 20.4 Mt of grain in 2012/13 MY and received verbal guarantees from the government that no export curbs will be imposed in the current marketing year.

Current grain export dynamics support our full-year outlook

EXPORT DESTINATIONS

Egypt was the largest importer of Ukrainian wheat and corn in 2011/12 MY, with a 23% share of wheat exports and 25% share of corn exports over the period. Saudi Arabia was the largest importer of Ukrainian barley (69% of total).

Egypt was the largest importer of Ukrainian wheat in

2011/12 MY…

Egypt’s state-owned grain purchasing company (GASC) renewed Ukraine’s status as a priority grain exporter to the country in October 2011, after an Egyptian delegation visited Ukraine and certified the quality of domestic grain. The decision was also helped by cancellation of Ukrainian grain export duties and the potential introduction of export duties in Russia. Egypt imports 10 Mt of wheat and 5 Mt of corn annually.

…after renewing Ukraine’s status as a priority grain exporter in October 2011

85.1

269.8 280.1 262.2 235.7 256.3 283.4 339 349.2 285.7 237.7 342.6

54 188

147 202 100

109 147 111

149

88 39

276

129

187

115 63

32 53

55 67 42

49

204

0

250

500

750

Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12

Sunoil (kt) Sunseed (kt) Soybean (kt) Rapeseed (kt)

November 2012


Ukraine Wheat Exports by Country (volume terms; 2011/12*) Note: *July ’11-June ’12. Source: SSS

Ukraine Barley Exports by Country (volume terms; 2011/12*) Note: *July ’11-June ’12. Source: SSS

Ukraine Corn Exports by Country (volume terms; 2011/12*) Note: *Oct. ’11-June ’12 cumulative, MY: Oct. ’11-Sep. ’12. Source: SSS

Ukraine Sunflower Oil Exports (volume terms; 2011/12*)

Note: *Sep. ’11-June ’12 cumulative, MY: Sep. ’11-Aug. ’12. Source: APK-inform

Sunflower oil is exported mainly to India, Egypt and Russia

India is the largest importer of Ukrainian sunflower oil, accounting for 37% of total exports from September 2011–June 2012. The top-3 importers (India, Egypt and Algeria) jointly accounted for 54% of total sunflower oil exports from Ukraine during the same period.

RUSSIA – UKRAINE’S CLOSEST COMPETITOR

Russia accounted for 14% of the global wheat trade in 2011/12 MY…

Russia is Ukraine’s closest grain export competitor, with the two countries sharing main export destinations. As Russia became a WTO member in August 2012, this should intensify competition in the Black Sea region as WTO membership limits scope for trade restrictions. In 2011/12 MY, Russia exported almost 28 Mt of grain, including 21.6 Mt of wheat (+440% y-o-y), becoming the third largest global wheat exporter after the U.S. and Australia. For 2012/13 MY, the Russian Agriculture Ministry anticipates exports of about 20 Mt (-40% y-o-y) with a downside risk due to exceptionally unfavorable weather this year (some experts estimate grain exports may be cut in half, declining to 12-15 Mt out of which 8-9 Mt is wheat).

Egypt 22.8%

Spain 20.4% Israel

13.6%

Italy 5.6% Tunisia

5.4%

Saudi Arabia 5.1% Syria

3.6% Jordan 2.9%

Libya 2.9% Thailand

2.7%

Lebanon 2.3%

Other 12.8%

Saudi Arabia 68.5%

Syria 9.4%

Iran 4.8%

Jordan 3.9% Israel 3.2%

Other 10.2%

Egypt 25.4%

Spain 15.0%

Iran 12.5%

Japan 6.9%

Korea 6.2%

Portugal 6.1%

Syria 4.0%

Israel 3.5% Tunisia

3.1% Algeria 2.6%

Other 14.7%

India 36.6%

Egypt 11.0%

Algeria 6.6%

Turkey 6.6%

Iran 5.5%

Spain 3.9%

China 3.4% The Netherlands

2.6%

Poland 2.2%

France 2.0%

Others 19.6%

November 2012


Top Global Wheat Exporters (volume; 2011/12)

Sources: FAS, USDA

Top Global Corn Exporters (volume; 2011/12) Sources: FAS, USDA

Russia was the fifth largest wheat exporter globally in 2011/12, accounting for over 14% of world wheat trade. The country competed with Ukraine in every tender and managed to significantly ramp up exports while Ukrainian wheat export tariffs were in effect (July-October 2011). Russia ranked only seventh in world corn trade in 2011/12 MY with a 2% share, as wheat is more widely grown in the country than corn.

…and for only 2% of world corn trade

Egypt accounted for 35% of Russia’s wheat exports in 2011/12 MY and 23% of Ukraine’s wheat exports over the same period. Ukraine actively competes with Russia in Egyptian tenders. Thus far in 2012/13 MY (July through mid-October), Russia exported 8.7 Mt of grain to Egypt compared to Ukraine’s 6.7 Mt for the same period, out of which 7.1 and 3.4 Mt was wheat respectively.

Ukraine competes with Russia in Egyptian tenders

Russia Wheat Exports by Country (volume terms; 2011/12*)

Note: *July ’11-June ’12. Source: APK-inform

Russia Corn Exports by Country (volume terms; 2011/12*) Note: *Oct. ’11-June ’12 cumulative, MY: Oct. ’11-Sep. ’12. Source: APK-inform

GRAIN AND SUNFLOWER OIL EXPORTERS IN UKRAINE

Privately owned Nibulon was the largest grain exporter in volume terms in 2011/12 MY, accounting for 16% of total exports over the period. Partially state-owned Khlibinvestbud ranked second with a 14% share. WSE-listed Kernel Holding, Ukraine’s largest sunflower oil producer, was the third largest grain exporter in 2011/12 with an almost 10% share of total grain exports.

Private Nibulon was the largest grain exporter by volume in

2011/12 MY

USA 18.4%

Australia 15.1%

Russia 14.2%

Canada 11.5%

EU-27 10.8%

Argentina 7.8%

Kazakhstan 7.0%

Ukraine 3.6%

Other 11.7%

USA 37.5%

Argentina 16.3% Ukraine

14.6%

Brazil 12.4%

India 4.3%

EU-27 3.1%

Russia 2.1%

Other 9.8%

Egypt 34.7%

Turkey 14.2%

Yemen 5.2%

Kenia 3.4%

Israel 3.2%

Italy 2.9%

Libya 2.7%

Jordan 2.0%

Spain 2.0%

Other 29.7%

Spain 22.6%

Turkey 19.5% Israel

17.4%

Syria 5.4%

Italy 5.2%

Azerbaijan 4.7%

Lybia 4.2%

Greece 3.5% Iran

2.8% Tunisia 2.8%

Other 11.9%

November 2012


Largest Grain Traders in Ukraine (volume terms; 2011/12) Sources: Grain Ukraine, Transport of Ukraine, Khlib Ukraine, Dragon Capital

Ukrainian Bulk Sunflower Oil Exporters (2011/12E)*

Note: data for September 2011-July 2012. Source: Grain Ukraine

Kernel Holding is the leader in sunflower oil exports

Kernel Holding exported over 800 kt of sunflower in 2011/12 MY and was the leader in sunflower oil exports from Ukraine over the year, accounting for 25% of total, followed by Cargill (owns two crushing plants in Ukraine) with a 14% export share.

CBOT BLACK SEA WHEAT FUTURES

CBOT Black Sea Wheat futures were launched on June 6

On June 6, 2012, trading of Black Sea Wheat Futures was launched on the Chicago Board of Trade (CBOT). Contracts, 136 tonnes each, are deliverable in Russian, Ukrainian and Romanian ports on the Black Sea. Futures thus set the benchmark price for wheat from the Black Sea exporting region, which accounts for more than 20% of global wheat exports, also providing a hedging tool for effective risk management. To date, Black Sea Wheat futures are not as liquid as other CBOT contracts, but are becoming more popular among traders as the Black Sea region is expected to play a major role in world grain exports in the future.

CBOT Black Sea Wheat Futures vs. Other Indicative Wheat Prices

(since launch on June 6, 2012) Source: Bloomberg, UkrAgroConsult

Nibulon 15.8%

Khlib Investbud 13.6%

Kernel Holding 9.5%

Louis Dreyfus 7.2%


Cargill 4.1%

Suntrade (Bunge)

3.6%

Serna (Glencore)

3.6%

Noble Resources

2.7%

Hermes-Trading 1.8%

Other 33.5%

Kernel Holding 25.0%

Cargill 14.0%

Majola 6.0% MHP

6.0%

ViOil 5.0%

Others 44.0%

200

250

300

350

400

Jun-06 Jun-21 Jul-06 Jul-21 Aug-05 Aug-20

CBOT Black Sea Wheat Futures ($/t)

CBOT Wheat Futures ($/t)

Wheat UkrAgroConsult, FOB ($/t)

November 2012


FOB, CPT AND CIF EXPORT TERMS AND PRICE FORMATION

FOB (Free on Board) is the trade term under which the seller is responsible for arranging transportation of goods to a vessel at a named port, and for all costs of placing the goods on board the vessel if this is not included in the ocean carrier’s basic transportation rate. The seller’s responsibility is satisfied when the cargo is “on-board” the vessel. The seller is not responsible for costs of actually stowing the goods on board, but is responsible for that portion of the terminal charges which cover services other than stowage and vessel wharfage charges. The seller is not responsible for the cost of ocean carriage, marine cargo insurance, nor for arranging the contract of carriage unless the buyer requests assistance. Ukrainian crops traded on an FOB basis are available at Black Sea ports, with the price covering costs of transportation to the port, export cleaning, loading costs and trader’s margin.

FOB is the most widely used export contract among traders

in Ukraine

CPT (Carriage Paid To) is the delivery term under which the seller is responsible for arranging transportation and paying the freight for goods to a named point, typically in the destination country. The seller has fulfilled his obligation when he has tendered the goods to the transportation carrier who, under the contract of carriage, will accomplish this transportation to the named point. At this point, typically in the origin country, the buyer assumes the risk of loss of the goods and/or unforeseeable costs. Under CPT terms, the seller has no obligation to insure the shipment. Hence, under CPT the seller is also responsible for freight and under CIF is responsible for cargo insurance costs, while the buyer bears the same risks of loss or damage as under FOB.

CPT is when freight is paid by seller…

CIF (Cost, Insurance and Freight) is the trade term under which the seller is responsible for arranging and paying for transportation of the goods and shipping insurance through a named ocean or inland waterway destination port. The seller has fulfilled his obligation when it has tendered the goods to the transportation carrier who, under the contract of carriage, will complete transportation to the named point. Once the cargo is “on-board” the vessel, typically in the origin country, the risk of loss of the goods and/or unforeseeable costs transfers to the buyer. CIF prices, including freight and cargo insurance costs, vary based on port of destination and cargo weight.

…with CIF entailing further responsibilities

Export Contract Pricing: FOB vs. CPT vs. CIF Source: Dragon Capital

As of end-September 2012, Ukrainian 3rd Grade wheat was traded at $325-328/t (FOB Black Sea) and 2nd Grade wheat at $332-336/t (on the same basis). As of the same date, CIF prices for Ukrainian wheat stood at $370/t (Syria), implying about $34/t of freight and insurance costs. As of the same date, freight costs in Black Sea ports varied from $15/t to Egypt and Turkey and up to $35/t to Saudi Arabia, down from $40/t and $25/t respectively at the beginning of the year.

Grain freight costs to Egypt currently fluctuate around $15/t

CIF: Port of destination

FOB: Origin port Freight Cargo Insurance CPT: Port of destination

November 2012


Sugar Market: Supply to Cover Demand in 2012/13 MY

Overproduction in the 2011 processing season…

Ukrainian refineries produced 2.34 Mt of sugar in 2011 (+51% y-o-y) having processed 17.8 Mt (+36% y-o-y) of sugar beet. Last year’s production volume significantly exceeded domestic demand (estimated at 1.9-2.0 Mt p.a.) implying significant ending stocks for 2011/2012 MY (ended in August 2012).

…formed high beginning stocks in 2012/13 MY

End-August sugar stocks were officially reported to be 43% higher y-o-y at 124.2 kt despite the state Agrarian Fund buying about 200 kt of 2011-produced sugar and another 160 kt being exported, both helping to reduce stocks and ease pressure on domestic prices. However, taking into account household sugar stocks, which we believe the official figure does not include, we estimate 2011/12 MY sugar ending stocks at 283 kt, or almost 15% of annual domestic consumption.

Annual Sugar Production in Ukraine Sources: SSS, Dragon Capital estimates

Ukraine Sugar Supply & Demand Balances (kt; Oct. ’12) Note: year starts in September and ends in August. Sources: SSS, DC estimates

We expect 2012 sugar output to decline 19% y-o-y to 1.9 Mt but fully cover internal consumption

Ukrainian farmers planted 466,000 ha with sugar beet for the 2012 harvest, down 10% y-o-y. As of Oct. 22, sugar beet was collected from 0.3 Mha (68% of planted area) at an average yield of almost 37 t/ha (+4.5% y-o-y), bringing the harvested volume to 11.4 Mt. Assuming an average crop yield of 37 t/ha and a sugar extraction rate of 11%, we estimate Ukraine will produce 1.9 Mt of sugar in the 2012 processing season (September-December), down 19% y-o-y. This would almost cover internal annual consumption of 1.9-2.0 Mt, however ample leftover stocks should offset the possible slight shortage.

Agrarian Fund plans to purchase 400 kt of 2012-produced sugar

The government has ordered the Agrarian Fund to purchase up to 400 kt of sugar to be produced in the current season. This volume accounts for about 20% of annual domestic consumption and could help absorb oversupply and support prices. In 2011/12 MY, the Fund was ordered to buy 247 kt of sugar (12% of annual consumption), but actual purchases totaled 200 kt or 81% of the planned volume.

Industry consumes about 34% of total sugar output

Domestic sugar consumption is dominated by households thanks to a strong tradition of producing homemade jams and preserves. Among industrial consumers, confectioners accounted for over 70% of industrial sugar consumption in 2011, followed by distilleries with a 5% share

2.7

1.9 1.6 1.3 1.5 2.3

1.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13E

Sugar Production (Mt)

2011/12 2012/13E Change (%, y-o-y) Opening stocks 25 283 1,028% Beet sugar production 2,330 1,953 (16%) Cane sugar processing 0 0 - Total sugar output 2,330 1,953 (16%) Legal imports 10 10 0% "Gray" imports 0 0 - Total imports 10 10 0% SUPPLY 2,365 2,246 (5%) Legal exports 160 70 (56%) "Gray" exports 2 2 0% Total exports 162 72 (56%) Industrial consumption 650 650 0% Household consumption 1,270 1,270 0% DEMAND 2,082 1,992 (4%) Closing stocks 283 254 (10%)

November 2012


Ukrainian Sugar Consumption (volume; 2001-12E)

Source: Ukrtsukor, Dragon Capital estimates

Industrial Consumption of Sugar (volume; 2011E)

Sources: SSS, Dragon Capital estimates

We do not expect Ukraine to import any raw cane under WTO agreements in 2012 or 2013 thanks to oversupply of beet sugar on the local market. Even if international pricing conditions provide for cheaper imports, we think processing raw cane will be economically viable for domestic sugar producers only if they find export destinations for their beet sugar. Besides, Ukraine cannot export cane sugar processed from imported raw cane according to its WTO membership terms. In 2011/12 MY (September-August), Ukraine imported only 13.5 kt of sugar (or 0.7% of annual consumption), mainly from Belarus under bilateral agreements, while exporting 167 kt, mainly to CIS countries such as Kazakhstan (vs. almost no exports in 2010/11 MY).

No imports expected under WTO agreements

The prospect of Ukraine enjoying its first sugar surplus in five years drove domestic sugar prices down 33% between mid-September 2011, when the sugar production season began, and the end of the year. Domestic sugar prices remained depressed in 1H12 (-39% y-o-y), but posted 25% m-o-m growth in July due to diminished sugar ending stocks and expected output decline. In the beginning of September, farmers corrected their outlooks for 2012 sugar beet production and a new wave of downward pressure on local sugar prices emerged. Prices have averaged $660/t in 10M12 (-35% y-o-y; incl. VAT) and currently stand at $637/t, down 21% y-o-y and 10% lower compared to the beginning of the year.

Overproduction depressed sugar prices in 4Q11 and has kept them

subdued this year

Sugar Prices in Ukraine (incl. VAT) vs. LIFFE White Sugar and NYBOT Raw Cane Sugar Futures ($/t; Jan. ’11-Oct. ’12)

Sources: ICIS, Astarta Holding, Bloomberg

We expect downward pressure on sugar prices to persist in 2012/13 MY due to large remaining stocks. We currently expect an average 2013 sugar price forecast for relevant listed companies of $660/t incl. VAT (flat y-o-y).

Prices to remain subdued in 2013

0250500750

1,0001,2501,5001,7502,0002,2502,500

2004 2005 2006 2007 2008 2009 2010 2011 2012E

Individual consumption Industrial consumption

Confectionery 70.1%

Spirits 5.0%

Canned milk 4.2%

Beer 4.1%

Wine 3.6%

Bread 2.9%

Soft drinks 2.7%

Juices 2.6%

Other 4.8%

400

600

800

1,000

1,200

Jan-11 Apr-11 Aug-11 Nov-11 Mar-12 Jun-12 Sep-12

Ukrainian sugar price ($/t)

LIFFE White Sugar Futures ($/t)

NYBOT Raw Cane Sugar Futures ($/t)

November 2012


Fuel and electricity account for about 20% of total sugar production costs

Below we analyze production costs based on data provided by Astarta Holding, the largest domestic sugar producer. The figures should not be significantly different for other large sugar processors as their operating environment is similar to Astarta’s. Sugar beet was estimated to account for 63% of the company’s total production costs in 2011. We note Astarta is 90% self-sufficient in sugar beet, which is an important profitability factor since beet growing costs for vertically integrated agribusinesses averaged $45/t last year compared to an overall market price of $55/t. Fuel (harvest collection and transportation), natural gas (sugar beet processing) and electricity accounted for 15% of Astarta’s sugar production costs (20% if one accounts for another 6% related to beet growing costs).

Astarta Holding Sugar Beet Production Costs

(value terms; 2011) Sources: Astarta Holding, Dragon Capital estimates

Astarta Holding Sugar Production Costs

(value terms; 2011) Sources: Astarta Holding, Dragon Capital estimates

The domestic sugar industry remains fragmented

The Ukrainian sugar industry remains relatively fragmented. The top six players accounted for 51% of total production in 2011. Astarta Holding, which operated eight sugar plants in 2011, accounted for 16% of total sugar output, followed by Ukrprominvest (operating one of the largest confectionery producers in Ukraine) with an 8% share. Dakor sugar plants (owned by Ukrlandfarming) also accounted for 8% of total sugar production in 2011, while Ukrros (owned by Kernel Holding) had a 7% market share. The sugar refining business controlled by the major shareholders of Mriya Agro Holding (which is not consolidated into the eponymous listed company) also accounted for 7% of total sugar production in 2011. Most sugar refineries in Ukraine have processing capacity of 3 to 6 kt of sugar beet per day, while western European plants can normally process more than 7.5 kt/day.

Top Sugar Producers in Ukraine (volume; 2010-11)

Note: *not part of Mriya Agro Holding. Source: Ukrtsukor

Fertilizers 19.6%

Seeds 12.0%

Crop protection

10.7%

Services 7.7%

Fuel 6.5%

Salaries 5.9%

Amortization 4.1%

Land lease 3.2%

Other 30.2%

Sugar beet 62.6%

Natural gas 15.2% Transport.

4.0%

Repairs 3.0%

Salaries 6.1%

Other processing

costs 9.1%

13%

8%

5% 7%

6% 5%

56%

16%

8% 8% 7% 7%

5%

49%

0.0%

5.0%

10.0%

15.0%

20.0%

Astart

a

Ukrpr

ominv

est

UkrLa

ndFa

rming

Kerne

l Hold

ing

Mriya

*

Rade

khiv-T

suko

r

Othe

rs

2010 2011

November 2012


Poultry Market: Leader Boosts Capacity

Poultry production in Ukraine increased dynamically at a CAGR of 16% from 2003-11, and reached to 1.0 Mt last year (+5% y-o-y), including 799 kt supplied by industrial producers (80% of total) and 203 kt by private farmers (20%). In 2012, we expect domestic poultry production to increase 5% y-o-y to 1.05 Mt, with industrial producers contributing 80% of the total.

Ukraine produced 1.0 Mt of chicken meat in 2011…

Ukrainian Poultry Production (kt; 2002-12E) Sources: SSS, Dragon Capital estimates

Ukrainian Poultry Production Breakdown (by volume)


Meat consumption in Ukraine has been increasing steadily in recent years, boosted by growing disposable income. In 2011, per capita poultry consumption rose by 4% y-o-y to 24 kg. Poultry accounted for almost 50% of Ukrainians’ meat diet last year (flat y-o-y but up from 35-40% five to six years ago).

…while per capita consumption stood at 24 kg

We estimate domestic poultry production will increase by 5% y-o-y to 1,052 kt in 2012. Production growth may accelerate as market leader MHP increased its production capacity by 110 kt p.a. this year and expects to fully utilize it in 2013. Total chicken meat output may thus rise by 9% y-o-y in 2013 thanks to MHP.

We expect Ukraine to increase chicken meat output by 5% y-o-y

in 2012

Ukraine Poultry Consumption per Capita (kg; 2004-12E)


Ukraine per Capita Meat Consumption (kg; 2004-11)

Sources: GfK, Dragon Capital estimates

Poultry products in Ukraine are mainly distributed to retailers or to industrial producers for further processing. Domestic industrially produced chilled poultry is mostly supplied to retailers, while cheaper frozen chicken is sold to industrial processors for production of meat products (e.g. sausages).

Distribution

0%

10%

20%

30%

40%

50%

0

250

500

750

1,000

1,250

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12E '13E

Total Production ('000 t; lhs) Growth (%; rhs)

40% 50% 61% 64% 70% 76% 79% 81% 82% 80% 80%

60% 50% 39% 36%

30% 24%

21% 19% 18% 20% 20%

0

200

400

600

800

1,000

1,200

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12E

Industrial Supply (%) Private Farmers' Supply (%)

14 14 16

18

22 23 23 24 24

0%

10%

20%

30%

40%

50%

4

8

12

16

20

24

2004 2005 2006 2007 2008 2009 2010 2011 2012E

Poultry Consumption per Capita (kg; lhs)Growth (%; rhs)

14 14 16 18 22 23 23 23 4 4 4

4 3 3 1 13 12 13

16 14 12 12 17 11

12 13

11 10 9 9 9

0

10

20

30

40

50

2004 2005 2006 2007 2008 2009 2010 2011

Poultry (kg/year) Unofficial Poultry Import (kg/year)

Pork (kg/year) Beef (kg/year)

November 2012


Ukraine’s consumption of poultry is relatively high

Poultry consumption in Ukraine is moderately high by international standards. Last year for example, the country consumed more poultry per capita (24 kg) than both neighboring Russia (22 kg) and the EU (21 kg), although this figure lagged far behind the United States (45 kg) and some other countries.

Per Capita Poultry Consumption (kg; 2011)

Source: OECD-FAO

Imports, primarily from the U.S., account for about 13% of domestic poultry consumption

Notwithstanding impressive production growth over the past five years, Ukrainian demand for poultry continues to exceed domestic supply. Imports accounted for 13% of total poultry consumption in 2011 (-6.0pp y-o-y and down from 38% in 2005). Ukraine imported 61 kt of poultry last year (-61% y-o-y), with an estimated 91% of this volume (56 kt) delivered from other European countries. Volumes imported from Great Britain (18% of total imports) and the Netherlands (15%) could have any other origin (most probably the U.S.) as they were imported through off-shore trading companies. Official statistics, however, disregard illegal imports (estimated at 80 kt in 2011), which are delivered for processing to domestic meat plants. Frozen meat accounts for most such illegal imports and thus does not directly affect domestic producers who focus on fresh and chilled meat.

Ukraine Domestic vs. Imported Poultry (kt; 2004-11)

Source: SSS

Ukraine Poultry Imports Breakdown (by volume; 2011E)**

Note: *volumes imported from Great Britain and the Netherlands could have other (most probably U.S.) due to imports being structure through offshore trading

companies; **official data. Sources: SSS, Dragon Capital estimates

Poultry production has a low fodder ratio

Poultry processors enjoy competitive advantage over other meat producers thanks to poultry being the least fodder-intensive type of meat (2 kg of grain per 1 kg of poultry as compared to 6.0 kg for beef). Large players in this industry have invested extensively in modernization and new capacities and thus boast much more advanced technologies compared to local pork and beef producers.

45 42 34

24 22 21

0

10

20

30

40

50

USA Brazil Australia Ukraine Russia EU-27

376 491 589 690 799 860 930 952 396 242

252 262

253 193 155 61

0

200

400

600

800

1,000

1,200

2004 2005 2006 2007 2008 2009 2010 2011

Domestic Poultry Supply Official Poultry ImportsUnoficcial Imports

Germany 22.6%

Great Britain* 17.8%

The Netherlands*

14.9%

Other EU members 35.4%

USA 8.0%

Other 1.4%

November 2012


Ukraine Meat Production and Fodder Ratios (kt; 2010-11)

Source: MHP, SSS, DC Estimates

Total Ukrainian Poultry Sales (volume; 2011)

Source: Dragon Capital estimates

MHP, the largest domestic market player in volume terms (34% of total) in 2011, is expected to retain its leading position in 2012. The company reported 2011 net sales of $1,299m (+30% y-o-y), EBITDA of $401m (+24%) and net income of $259m (+20%). With a 2011 EBITDA margin of 33%, MHP is the most profitable poultry producer in Ukraine. The company’s poultry production units continued to operate at full capacity in 2011 and the company sold 371 kt of chicken meat (+12% y-o-y). MHP embarked on a major capacity expansion project in 2010, a poultry farm in Ladyzhyn (Vinnytsia region), which is expected to be launched over 2013-2015, increasing the company’s total poultry capacity to 580 kt p.a. (+220 kt) by 2016 from an estimated 360 kt in 2012. Two more lines with a combined 220 kt of poultry meat production capacity may potentially be built over 2016-18 conditional on market demand. Thus, when fully built, the Vinnytsia poultry farm will add 440 kt of chicken meat production capacity, bringing MHP’s total to 800 kt p.a. The company began production trials at its new facility in June and plans to produce 15 kt of poultry there by year-end. MHP expects domestic poultry consumption to increase to 1.3 Mt in 2015 from the current 1.1 Mt.

MHP remained the leading chicken meat producer in 2011…

Domestic demand for chicken meat remained high throughout 2011 as consumers continued to substitute poultry for other types of meat. MHP thus sold close to 100% of its output, increasing its market share of industrially produced chicken to 50% (+1.0pp y-o-y) in 2011.

…increasing its market share by 1pp to 50% of total industrial

production

Ukraine Industrial Poultry Producers (volume; 2010)

Source: MHP

Ukraine Industrial Poultry Producers (volume; 2011)

Source: Agromars

Poultry prices in Ukraine averaged UAH 15.55/kg ($1.9; net of VAT) in 2011 (+8% y-o-y), having peaked at UAH 17.9 ($2.2)/kg in December. MHP outperformed the market increasing its average selling price by 10% y-o-y to UAH 15.00/kg. In 9M12, the average price of domestically produced poultry rose by 20% y-o-y to UAH 17.70 ($2.2)/kg, with MHP reporting UAH 17.29/kg (+20% y-o-y).

Domestic chicken meat prices increased 8% y-o-y in 2011 and

20% y-o-y in 9M12…

428 408

631 699

954 1,002

0

500

1,000

1,500

2,000

2010 2011

Beef Pork Poultry

Fodder Ratio

2.0

4.0

6.0

MHP 34%

Agromars 10%

Dniprovsky 5%

Other Industrial Producers

17%

Households 20%

Imports 14%

MHP 49.0%

Agromars 15.4%

Dniprovski 6.5%

Agro-Oven 4.5%

Volynska 3.1%

Landgut-Broiler 1.9%

Gubin 1.7%

Agroukrptaha 1.3%

Others 16.6%

MHP 50.0%

Agromars 15.0%

Dniprovski 8.0%

Agro Oven 6.0%

Others 21.0%

November 2012


Poultry Prices in Ukraine (UAH/kg; 2009-2012) Sources: UkrAgroConsult, Dragon Capital estimates

…with 15% y-o-y growth expected for the full-year

We expect domestic poultry prices to increase by 15% y-o-y in UAH terms this year, thanks to recovering consumer demand and the fact that chicken remains the cheapest source of protein. MHP’s reported 9M12 selling price matches our full-year estimate of UAH 17.3/kg (+15% y-o-y).

11

12

13

14

15

16

17

18

Jan-09

Mar-0

9Ma

y-09

Jul-09

Sep-0

9No

v-09

Jan-10

Mar-1

0Ma

y-10

Jul-10

Sep-1

0No

v-10

Jan-11

Mar-1

1Ma

y-11

Jul-11

Sep-1

1No

v-11

Jan-12

Mar-1

2Ma

y-12

Jul-12

Sep-1

2

Avg. Monthly Price 2009 Avg. Annual Price

2010 Avg. Annual Price 2011 Avg. Annual Price

+2% +8%

+20%

November 2012


Egg Market: Listed Players Continue Expansion

Ukraine is the second largest shell egg producer in Europe and #9 in the world. Domestic egg production rose at a CAGR of 6.2% during 2005-11, reaching 18.7 billion pieces in 2011 (+9.6% y-o-y). Per capita consumption stood at 310 eggs last year, up from 280 in 2010 and 240 five years before.

Egg output increased by 10% y-o-y to 18.7 billion pieces in 2011…

Per Capita Egg Consumption vs. Real Disposable Income in Ukraine (2003-11E)

Sources: SCU, Pro-Consulting

Egg Production in Ukraine (millions of pieces; 2005-12F) Sources: SSS, Dragon Capital estimates

Taking into account production capacity expansion plans announced by two leading market players (LSE-listed Avangard and WSE-listed Ovostar Union), we estimate shell egg production in Ukraine will increase by 7% y-o-y to about 20.0 billion pieces this year.

…and we expect 7% y-o-y growth in 2012

The total number of egg-laying hens worldwide is estimated at 4.93 billion, including 800-1,000 million in China, 276 million in the U.S., 290 million in the EU-15, 133 million in India, and 115 million in Mexico. Ukraine had around 66 million laying hens out of a total chicken flock of 199 million as of end-2011. China is the world’s largest egg producer with annual output of more than 28 Mt forecast for 2012. Per capita egg consumption varies from country to country, ranging from 355 eggs in Mexico to 255 in the U.S., 248 in France, 186 in Portugal and only 40 in India in 2010. Ukraine’s rate (280 in 2010 and 310 in 2011) was close to the higher end of the global range.

Ukraine’s per capita egg consumption is in line with peers

Per Capita Egg Consumption in Different Countries (2010) Sources: IEC, SSS, Dragon Capital estimates

(15%)(10%)(5%)0%5%10%15%20%25%30%

140

190

240

290

340

2003 2004 2005 2006 2007 2008 2009 2010 2011E

Egg Consumption Per Capita (lhs)

Real Disposable Income (%, y-o-y; rhs)

13 14 14 15 16 17 19

20

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012E

344 325 280 255 248 242

197 186 149 123 40

050

100150200250300350

China Japan Ukraine USA France UAE Argentina Portugal UK S. Africa India

CAGR =6%

November 2012


Households accounted for 37% of 2011 egg production

Households accounted for 37% of Ukraine’s total egg production in 2011 (-3.0pp y-o-y), having grown only marginally in absolute terms since 2003 (from 6.5 billion to 6.9 billion pieces). Total output growth was thus driven by more cost-efficient industrial producers which doubled output over 2003-11, to 11.8 billion eggs or 63% of total production last year, thanks to increasing domestic and foreign demand. The largest industrial egg producer in 2011 was Avangard, whose market share increased to an estimated 51% (+4.0pp y-o-y).

Ukraine Egg Production Breakdown (volume terms; 2003-11)

Sources: SCU, Pro-Consulting

Major Industrial Egg Producers in Ukraine (volume; 2011)

Sources: Avangard, Ovostar, Pro-Consulting

Egg exports surged by 120% y-o-y in volume terms in 2011

Ukraine’s shell egg exports totaled 39 kt or about 710 million pieces in 2011 (+120% y-o-y), accounting for 3.8% of total egg production (+1.9pp y-o-y). Another 6.5% of last year’s egg output (or about 1.2 billion pieces; +99% y-o-y) was processed into dry and liquid egg products (+2.9pp y-o-y).

Ukraine’s Egg Production and Exports (billions of pieces; 2005-12E)


Avangard was the leading exporter of shell eggs in 2011

Avangard, the largest domestic egg producer, was also the leading exporter in 2011, accounting for 42% of total egg exports (-10.9pp y-o-y). Ovostar Union followed with an 11% share (-2.8% y-o-y). Although both companies’ share of total exports fell y-o-y in 2011, they both increased export volumes by 74% and 76% y-o-y, respectively.

Imports are regulated Ukraine currently maintains import duties on shell eggs (12%), hatching eggs (5%), dry and liquid egg products and frozen yolk (all 10%) and albumen (2%). In addition to the import duties, VAT is applied (17% since January 2011). Due to the higher prices of shell eggs produced in neighboring countries and relatively high transportation costs, we believe that even full abolition of the import duties on shell eggs would not significantly increase shell egg imports. However, a reduction or elimination of the duties on egg products may provide a significant boost to imports.

44% 46% 50% 54% 54% 57% 58% 60% 63%

0

5

10

15

20

2003 2004 2005 2006 2007 2008 2009 2010 2011

Households Industrial Producers

Avangard 50.7%

Inter-Zaporizhya

9.6% Ovostar Group

5.7%

Agrofirma Berezanskaya

5.1%

Landgut Ukraine 2.8%

Other 26.1%

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011E 2012E

Egg Output (net) Export Processed into Egg Products

November 2012


Ukraine’s Shell Egg Exports by Destination

(volume terms; 2011) Source: SSS

Listed Egg Producers’ Export Share

(volume terms; 2011) Sources: Avangard, Ovostar, Dragon Capital estimates

Egg prices in Ukraine are subject to seasonal fluctuations and normally drop in summer when warmer temperatures increase egg yields and supply from households while fodder prices hit their intra-year low (moreover, egg consumption normally decreases during summer months when food markets offer more fresh fruits and vegetables). With fodder being the main cost component in egg production, egg prices follow grain price dynamics. In 2011, Ukrainian egg prices averaged UAH 0.54 ($0.07)/piece (net of VAT; +1% y-o-y), while corn averaged UAH 1,273 ($159)/t (net of VAT; +45% y-o-y). Avangard managed to increase its average egg price in 2011 by 12% y-o-y to UAH 0.64 ($0.08). Ovostar recorded 14% y-o-y growth, to UAH 0.62 ($0.08). In 1H12, when egg producers still used expensive 2011-produced feed grain, egg prices surged by 53% y-o-y to UAH 0.65/piece.

Domestic egg prices averaged UAH 0.54/piece in 2011 (+1% y-o-

y) in 2011, but listed egg producers reported 12-14% y-o-y

price growth

Average Monthly Shell Egg Prices in Ukraine (EXW, net of VAT; UAH/10 eggs)


CIS 51.3%

Iraq 35.8%

Liberia 6.1%

Other 6.8%

Avangard 41.5%

Ovostar Group 11.1%

Other 47.3%

0

2

4

6

8

10

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

Ukraine 2010 shell egg price (EXW, net of VAT; UAH/10 eggs)



November 2012


EU reform underpinned egg price growth in 1Q12

Egg prices in the EU surged by 42% y-o-y in February 2012 and were up 75% y-o-y as of mid-March due to regional industry reform (EU ban on battery hens), with all EU egg producers required to change cages in line with new standards towards free-cage breeders. Instead of investing in new standardized equipment, many EU egg producers decided to go out of business. Improved welfare for hens thus resulted in a pan-European shortage of eggs and pushed prices higher. This affected international price benchmarks and led Ukrainian egg producers to allocate more output for export due to favorable pricing, thus creating shortages on the local market in 1Q12 when industrial egg production is the only source of supply while the household sector awaits warmer temperatures for hens to start laying eggs. Normally, cage-free private flocks start producing eggs only when outdoor temperatures reach +15˚C. As a result of the aforementioned EU reform and domestic shortages, Ukrainian egg prices increased by 72% y-o-y to UAH 0.78/egg ($0.098) in 1Q12. However, prices started to correct in April when supply from households increased.

We expect egg prices to increase by 12% y-o-y in 2012

Taking into account strong price growth in 1Q12, we do not rule out another strong price hike in 4Q12 when household supply will shrink and industrial producers may again decide to increase exports. We currently forecast the average domestic egg price in 2012 at UAH 0.72 ($0.09), up 12% y-o-y, while in 5M12 prices averaged UAH 0.70 ($0.088), up 60% y-o-y.

The egg powder market expanded by 11% y-o-y to 18 kt in 2011

Egg products are represented by dry and liquid egg products and are sold mainly to the food industry to use in the production of bread, sauces, confectionery and other products. The market for egg products in Ukraine has enjoyed much faster growth than the shell egg market (42% CAGR in 2005-11). In 2011, 6.5% of total domestic egg output or about 1.2 billion pieces (+99% y-o-y) was processed into dry and liquid egg products (+2.9pp y-o-y). Last year’s egg product volumes totaled 18.4 kt (+10.5% y-o-y). Dry egg products are easy to export as they are not fragile like shell eggs and have a much longer storage period as well as much lower transportation costs.

Egg Product Output and Exports (kt; 2005-12E) Sources: Companies, Pro-Consulting, Dragon Capital estimates

Egg Product Output Breakdown (volume terms; 2005-12E)

Sources: SSS, Pro-Consulting, Dragon Capital estimates

11% 19%

46% 42% 41%

0

5

10

15

20

2005 2006 2007 2008 2009 2010 2011 2012E

Production (net) Exports

47% 35% 46%

38% 40%

23% 24% 24%

0

5

10

15

20

2005 2006 2007 2008 2009 2010 2011 2012E

Dry Egg Products Liquid Egg Products

November 2012


Ukraine started to export egg products only in 2007 (to Tunisia), though domestic production had been launched in 2002 (by Ovostar). Ukrainian egg products were uncompetitive prior to 2007 because domestic producers lacked modern egg processing equipment. Currently, only a few domestic producers export egg products, including Avangard, Ovostar and Inter-Zaporizhya. They export mainly dry egg products as the shelf life of liquid egg products is limited to 21 days, making transportation more challenging. According to statistics compiled by market players, Ukraine’s egg product exports reached about 7.7 kt in 2011 (almost flat y-o-y). However, official data from the State Statistics Services shows exports reached only 1.7 kt. Such a discrepancy has been observed since 2010 when Avangard boosted exports after completing reconstruction at its egg processing plant Imperovo Foods and increasing egg product output from 0.7 kt to 10.2 kt. Imports of egg products to Ukraine are tiny, totaling 10.5 tonnes in 2011.

Exports accounted for an estimated 41% of total egg

product output in 2011

Ukraine’s Egg Product Exports (volume terms; 2011)


Average Prices of Dry Egg Products in Ukraine (2007-11)

Sources: SSS, Pro-Consulting

Ukraine exports egg products mainly to the MENA region. The United Arab Emirates (UAE) was the leading importer of egg products from Ukraine with a 32% share of total exports in 2011, followed by Jordan with 28%.

Egg products were mainly exported to MENA region in 2011

Ukraine produced 14.1 kt of dry egg products in 2011 (+9.2% y-o-y), which accounted for 76% of total egg product output (-1pp y-o-y). Liquid products are fresh and more suitable for food processors but are only starting to find customers in the Ukrainian food market as processors need to change equipment to use liquid products. Egg products are mostly used in biscuit and cake production where they account for 40% of recipes.

Dry egg products accounted for 76% of total egg product output

in 2011

Avangard also enjoys the leading position in the egg product segment, accounting for over 66% of total egg product output and for an estimated 87% of dry egg product output in 2011. The entire market for egg products in Ukraine is basically shared by two players, Avangard and Ovostar. Avangard focuses mainly on dry egg products and sells mostly in bulk, exporting 70% of its annual output, while Ovostar is a more client-oriented player focusing on liquid products (74% of total egg products output in 2011 in volume terms).

Avangard was the leader in egg product output in 2011

We expect Ukraine’s egg product output to increase substantially in the next 2-3 years as both Avangard and Ovostar are due to complete announced capacity expansion programs in 2012-2013, intending to more than double their egg processing capacities. We thus expect domestic egg product output to increase by 40-45% over the next two to three years (this year, though, we expect production to increase by only 6% y-o-y to 19.5 kt as the new capacities being installed will mostly start operating in 2013). We believe that additional egg product volumes will mostly be exported as local consumption has grown by 15-20% annually in the past three years.

Outlook for 2012-13

UAE 31.7%

Jordan 28.3%

Korea 7.6%

CIS 7.4%

Indonesia 6.9%

Saudi Arabia 6.5%

Iran 6.1% Egypt

5.6%

Avangard 66.3%

Ovostar Group 31.3%

Other 2.4%

November 2012


Dairy Market: Russian Import Ban Lifted

Milk production declined for the sixth consecutive year in 2011...

Milk production in Ukraine declined at a 1% CAGR in 2000-10 as the domestic milking cow population shrank at a 6% CAGR over the period. In 2011, domestic milk production decreased by 1.4% y-o-y to 11.1 Mt, while the cow population declined by 1.6% y-o-y to 2,588,800 head (slowing the pace of decline from -3.9% y-o-y in 2010).

...and we expect further decline in 2012

In 2012, we expect milk production in Ukraine to decline by about 1% y-o-y due to the lack of funds for households to invest in livestock development and a further slight decline in livestock population.

The local milk market is still highly unconsolidated

Private livestock owners (households) account for 80% of total Ukrainian raw milk output, and dairy farms produce the remaining 20%. Poor sector consolidation entails additional expenses for dairy producers as they have to invest in equipment for improving the quality of purchased milk (in terms of fat content, bacterial resistance and other parameters).

Ukraine Milk Production and Livestock Population (kt, ’000 head; 2001-11E)


Domestic producers fully satisfy local demand for whole milk products and cheese

Ukrainian production of whole milk products (WMPs) has tripled in the past decade to reach 1.3 Mt (+3% y-o-y) in 2011, fully satisfying local demand. Imports (1% of 2011 consumption) and exports (1% of output) are negligible in this segment. Cheese output has also tripled in the past decade, to 247 kt in 2011 (-1% y-o-y and still below the pre-crisis level). Cheese imports account for only 5-7% of the local market while cheese exports from Ukraine have increased sevenfold in the past decade and currently account for 32% of total output (up from 14% in 2000).

However, demand for butter is partially satisfied by imports...

Domestic butter production has almost halved since peaking in 2003, to 76 kt in 2011, almost matching the decline in demand. Ukraine thus became a net importer of the product over the past three years. The drop in butter consumption resulted from growing popularity of spreads (butter alternatives) and 2.5x growth in local butter prices since 2003.

...while dry milk is predominantly exported

Output of dry milk products in Ukraine has been quite volatile over the past decade. Domestic dairy producers exported an est. 95% of produced dry milk products last year. Dry milk products have a long shelf life and are used in the production of other foodstuffs including other dairy products (cheese, WMPs, butter), confectionary and bakery.

(20%)

(10%)

0%

10%

20%

30%

3,000

6,000

9,000

12,000

15,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E

Milk Production (kt; lhs) Livestock Population ('000 head; lhs)

Milk Production Growth (% y-o-y; rhs) Livestock Growth (% y-o-y; rhs)

November 2012


Consumption of Whole Milk Products in Ukraine (kt)

Sources: UkrAgroConsult, SSS, Dragon Capital estimates

Consumption of Cheese in Ukraine (kt)


Consumption of Butter in Ukraine (kt)


Consumption of Dry Milk Products in Ukraine (kt) Sources: UkrAgroConsult, SSS, Dragon Capital estimates

The Tax Code enacted in January 2011 changed the procedure for VAT settlements between milk producers and processors by ordering that processors start paying the tax to a special state budget fund for subsequent redistribution among milk producers by the government. Prior to 2011, all retained VAT was transferred to processors’ special accounts and paid out to raw milk producers directly, preventing the latter from inflating milk prices. In 2011, the average milk price stood at UAH 3.03 ($0.38)/liter net of VAT, up 5% y-o-y.

Raw milk prices increased by 5% y-o-y in 2011...

Ukraine’s average raw milk price ($0.38/liter) was around 14% below the global average of $0.44/liter in 2011, according to our estimates, and 20-22% lower than in the EU ($0.48/l) and Russia ($0.49/l) last year. However, such a difference between Ukrainian and EU raw milk prices can be explained by the quality of produced milk. EU raw milk prices are set using different quality parameters, and accounting for additional investments made into improving the quality of milk by Ukrainian dairy processors, the average milk cost for Ukrainian dairy producers is higher than that for EU peers.

...remaining below the global average, but quality

improvement expenses are substantial

(250)

0

250

500

750

1,000

1,250

1,500

2000 2002 2004 2006 2008 2010

Production Imports

Exports Consumption

(100)

0

100

200

300

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Production Imports

Exports Consumption

(50)

0

50

100

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Production Imports

Exports Consumption

(150)

(100)

(50)

0

50

100

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Production Imports

Exports Consumption

November 2012


Average Milk Producer Prices ($/liter; 2010-11) Sources: MilkUA, Dragon Capital estimates

VAT subsidies were again revised this year

Since the state budget paid out only tiny amounts to raw milk producers in 2011, the aforementioned subsidy mechanism introduced by the Tax Code was changed. In December 2011, parliament approved a bill on state subsidies for milk and meat processors, partially reinstating the original scheme which was viewed favorably by the market. The bill took effect on Jan. 1, 2012. According to this legislation, each processing company is required to distribute retained VAT amounts between two accounts: the processor’s own special account (used solely to pay subsidies to raw milk producers) and a special state budget fund managed by the government. Reinstating subsidies for milk producers helped to stabilize raw milk prices and allowed for better control of processing companies’ raw material costs and margins.

2010 2011 2012 2013 2014 Company Special Account 100% 0% 70% 60% 50% Special State Budget Fund 0% 100% 30% 40% 50%

Distribution of Retained VAT Source: Verkhovna Rada

Russia banned cheese imports from seven Ukrainian plants in February-May 2012…

In February 2012, Russia announced a ban on cheese imports from seven Ukrainian plants, citing non-compliance with Russian food safety standards (and possibly as a result of lobbying by Russian cheese producers). However, due to Russia’s domestic dairy production falling short of demand, Ukraine and Russia agreed measures to end the ban. Three major producers, including WSE-listed Milkiland, resumed exports to Russia as early as May.

...depressing local raw milk prices

The aforementioned Russian cheese import ban forced several domestic plants to either discontinue cheese production or shift to butter, dry milk or processed cheese. As some 40% of local milk output is consumed by cheese producers, this created a surplus of raw milk on the domestic market, pressuring prices. Household raw milk prices declined by 9% y-o-y in 9M12, sliding by 22% q-o-q in 1Q12 and 23% q-o-q in 2Q12, when the Russian ban was in effect, and stabilizing in 3Q12 (+1% q-o-q).

0.38 0.39 0.39

0.48 0.49

0.0

0.1

0.2

0.3

0.4

0.5

Ukraine New Zealand USA EU Russia

2010 2011

November 2012


Raw Milk Monthly Purchase Price for Dairy Companies

(UAH/liter, net of VAT and transportation costs; Jan. ’10 - Sep. ’12) Source: UkrAgroConsult

In August 2012, the Ukrainian government set the minimum price of raw milk purchased from households for further processing at UAH 2.2/liter (net of VAT) for the rest of 2012 while purchase prices ranged from UAH 1.6-1.8/liter in August. The decision seemed to be another reflection of the approaching Oct. 28 parliamentary elections. Raw milk growing more expensive will be negative for milk processors, inflating their COGS and forcing them to pass this cost growth on to end-consumers, thus potentially dampening demand.

The government approved the minimum purchase price for raw

milk in 2012

Rising global grain prices have triggered growth in local grain prices which in turn may boost feed costs and lead to intensified cattle slaughter by poorer households, thereby decreasing raw milk supply and potentially fueling raw milk price growth in 4Q12. However, our current 2012 forecast of flat y-o-y raw milk costs for traded milk processors already factors in grain price growth. Also, we believe that raw milk prices will be pressured by the latest revision of VAT subsidies for the dairy sector aimed at preventing raw milk price inflation.

We expect the average raw milk price to be flat y-o-y in 2012

1.31.51.71.92.12.32.52.72.93.13.33.5

Jan Feb

Mar

Apr

May

Jun Jul Aug

Sep Oct

Nov

Dec

2010

2011

2012

November 2012


Sunflower Oil Market: Top Exporter Globally

The global vegetable oil market grew by 4% y-o-y in 2011/12

The international market for vegetable oil continues to grow dynamically. According to the USDA, global vegetable oil production expanded by 60% over the last decade and was expected to reach 154 Mt in 2011/12 MY (September-August), up 4% y-o-y.

World Production of Vegetable Oils* (Mt)

Note: *coconut, cottonseed, olive, palm, palm kernel, peanut, rapeseed, soybean, sunflower seed. Source: USDA

Sunflower oil accounts for 10% of global vegetable oil output

World vegetable oil production is dominated by palm oil with a 32% share of total output in 2011/12 MY. Soybean oil followed with a 27% share and rapeseed and sunflower oils accounted for 16% and 10%, respectively. Global vegetable oil exports were projected to increase by 5% y-o-y to 60 Mt in 2011/12 MY (39% of total production). According to the USDA, the largest global exporters of vegetable oils in 2011/12 MY were Indonesia (32% of total), Malaysia (28%), Argentina (8%), Ukraine (5%), Canada (4%) and Brazil (3%).

World Sunflower Oil Producers (2011/12E)

Source: USDA

World Sunflower Oil Exporters (2011/12E)*

Note: *year starts in September and ends in August. Source: USDA

Ukraine is the world’s largest sunflower oil producer and exporter

Ukraine is the world’s largest sunflower oil producer. In 2011/12 MY, global output of sunflower oil was estimated at 14.7 Mt, with Ukraine’s share at 27%. The country also ranks first among world sunflower oil exporters with 49% of total exports (3.1 Mt) expected in 2011/2012 MY. The potential of Ukraine’s sunflower oil sector is enhanced by the fertility of its soil, favorable climate and European location.

0

20

40

60

80

100

120

140

160

'03/04 '04/05 '05/06 '06/07 '07/08 '08/09 '09/10 '10/11 '11/12E

Palm Oil Soybean oil Rapeseed oil Sunoil Others

Ukraine 27.1%

Russia 24.2%

EU 19.9%

Argentina 9.3%

Turkey 4.9%

Other 14.6%

Ukraine 48.6%

Russia 21.9%

Argentina 15.4%

Turkey 4.4%

EU 3.0%

Other 6.8%

November 2012


Producers ‘000 tonnes % of total Russia 9,627 25.6% Ukraine 9,500 24.3% EU-27 8,280 21.2% Argentina 3,340 8.5% Turkey 925 2.4% Others 7,473 19.1%

Total 39,145 100.0%

Exporters ‘000 tonnes % of total EU-27 550 29.5% Russia 340 18.3% Ukraine 260 14.0% Argentina 65 3.5% Turkey 40 2.1% Others 608 32.6% Total 1,863 100.0%

World Sunflower Seed Production in 2011/12E* Note: *data as of mid-September 2012. Source: USDA

World Sunflower Seed Exports in 2011/12E* Note: *data as of mid-September 2012. Source: USDA

Producers ‘000 tonnes % of total Ukraine 3,988 27.1% Russia 3,552 24.2% EU-27 2,918 19.9% Argentina 1,367 9.3% Turkey 718 4.9% Others 2,147 14.6% Total 14,690 100.0%

Exporters ‘000 tonnes % of total Ukraine 3,100 48.6% Russia 1,400 21.9% Argentina 980 15.4% Turkey 280 4.4% EU-27 190 3.0% Others 431 6.8% Total 6,381 100.0%

World Sunflower Oil Production in 2011/12E* Note: *data as of mid-September 2012. Source: USDA

World Sunflower Oil Exports in 2011/12E* Note: *data as of mid-September 2012. Source: USDA

The area devoted to sunflower production in Ukraine increased to 4.7 Mha (17% of the total area harvested) in 2011/12 MY, compared to 1.6 Mha in 1990/91 (5% of total arable land at the time). Ukraine’s 2011/12 MY sunflower acreage accounted for 18% of the global area sown with sunflower seed (based on preliminary data). Annual sunflower crop yields in Ukraine have varied widely, with the lowest level of 0.89 t/ha registered in 2005 and the highest, 1.87 t/ha, in 2011. This is still lower than the output of global leaders such as the EU (expected average of 1.94 t/ha in 2011) but higher than the global average of 1.50 t/ha estimated for 2011/12 MY.

Ukraine more than doubled the area dedicated to sunflower

production in the last 15 years…

Ukraine Sunflower Seed Production and Exports


As Oct. 22, 2012 Ukrainian farmers harvested 7.65 Mt of sunflower from 4.7 Mha (97% of planted area) at an average yield of 1.64 t/ha (-11% y-o-y). The current sunflower seed yield outperformed our initial expectation of 1.55 t/ha, suggesting higher than projected supply of seeds for listed crushers and boding well for their processing margins. We expect Ukraine to harvest 7.9 Mt of sunflower seed in 2012 (-10% y-o-y from a record high of 8.8 Mt in 2011) and produce 3.4 Mt of oil (-7% y-o-y).

…with the 2012 harvest projected at 7.9 Mt (-10% y-o-y)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

2.0

4.0

6.0

8.0

10.0

'05/06 '06/07 '07/08 '08/09 '09/10 '10/11 '11/12 '12/13E

Production (Mt; lhs) Export (Mt; lhs)

Area (Mha; rhs)

November 2012


2011/12 2012/13E Chg. (y-o-y) Beginning stocks 450 630 40% Planted area ('000 ha) 4,750 4,890 3% Harvested area ('000 ha) 4,716 4,792 2% Yield (t/ha) 1.87 1.65 (12%) Harvest 8,819 7,907 (10%) Imports 6 6 - SUPPLY 9,275 8,542 (8%) Crushing 8,100 7,500 19% Other use 25 25 0% Seeds 30 30 0% Exports 450 497 1% Losses 40 40 0% DEMAND 8,645 8,092 18% Ending stocks 630 450 40%

Ukraine Sunflower Seed Supply & Demand Balances (kt; Oct. ’12)

Note: *data differs from aforementioned official statistics due to discrepancies in acreage reported by farmers and officially. Source: Dragon Capital estimates

Ukraine Sunflower Seed Harvest and Yields (2007/08-2012/13E)

Sources: UkrAgroConsult, Dragon Capital estimates

The soybean harvest increased by 35% y-o-y in 2011

Despite all the advantages of sunflower production, local agricultural producers have been increasing acreage under soybean and rapeseed due to natural constraints on further expansion of sunflower cultivation. The problem is that sunflower production exhausts soil and the same land can only be used for sunflower cultivation every 6-7 years. At the same time, land under soy and oilseed rape requires much less time for renewal (two and three years respectively). In 2011/12 MY, soybeans in Ukraine were sown on 1.1 Mha (+7% y-o-y; vs. 0.6 Mha in 2009/10). Oilseed rape occupied 0.8 Mha in 2011/12 MY (-3% y-o-y), reflecting decreased demand for biodiesel. Ukraine harvested 2.3 Mt of soybeans in 2011, boosting the harvest by 35% y-o-y thanks to both increased average yields (+26% y-o-y to 2.0 t/ha) and larger area planted (+7% y-o-y). This implies sufficient supply of the crop for local processors such as Creativ Group. The company processes soybean into high-protein fodder and fats used in the food processing industry.

Ukraine Rapeseed Production and Export


Ukraine Soybean Production and Export


About 95% of sunflower seed produced in Ukraine is processed domestically…

Only a small volume of the sunflower seed harvested in Ukraine is exported (est. 5% of total in 2011/12 MY). The rest is processed domestically for sunflower oil and oil cake.

4.7 6.5 7.2 7.6

8.8 7.9

0.00.20.40.60.81.01.21.41.61.82.0

0.0

2.0

4.0

6.0

8.0

10.0

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13E

Sunflower Seed Harvest (Mt; lhs) Sunflower Seed Yield (t/ha; rhs)

0

0.3

0.6

0.9

1.2

1.5

0.00.51.01.52.02.53.03.5

'03/0

4

'04/0

5

'05/0

6

'06/0

7

'07/0

8

'08/0

9

'09/1

0

'10/1

1

'11/1

2E

Production (Mt)Export (Mt)Area (Mha)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0.0

0.5

1.0

1.5

2.0

2.5

'03/0

4

'04/0

5

'05/0

6

'06/0

7

'07/0

8

'08/0

9

'09/1

0

'10/1

1

'11/1

2E

Production (Mt)Export (Mt)Area (Mha)

November 2012


Prior to Ukraine’s WTO accession in May 2008, sunflower seed exports from the country were limited by a high export duty of 17%, in effect from 2001 (23% previously), and by minimum indicative export prices set by the government. These export barriers were intended to support local vegetable oil producers and encourage exports of higher value-added products (i.e. vegetable oil instead of sunflower seed). While such restrictions benefited oil producers, they hurt agricultural companies’ margins. According to government officials, as part of its WTO accession package Ukraine undertook to reduce the sunflower seed export duty by 1.0pp annually until it reached 10% in 2015. The government also abolished minimum indicative export prices for sunflower seeds starting from 2008. The export duty on sunflower seed was set at 13% in 2012 and will decline to 12% in 2013.

…as exports are taxed

Unlike sunflower seed, more than 90% of rapeseed crops harvested in Ukraine are exported to satisfy international demand for biofuel. However, most soybeans grown in Ukraine are processed domestically (exports in 2011/12 MY were estimated at 22% of production).

Soybeans are mostly processed domestically and over 90% of

rapeseed is exported

Kernel Holding is the largest sunflower oil producer in Ukraine, operating 36% of Ukraine’s total sunflower seed crushing capacity, and is also the largest domestic seller of bottled sunflower oil seller, with a 32% share in 2011. Kernel accounted for a quarter of Ukraine’s sunflower oil exports in 2011/12 MY, while Cargill had a 14% share.

Kernel is the largest sunflower oil producer and exporter in

Ukraine

Sales of Bottled Sunflower Oil in Ukraine (%; 2011/12E)


Sunflower Oil Crushing Capacity in Ukraine (%; 2011/12E)


India was the largest importer of Ukrainian sunflower oil with 37% a share of total exports in September 2011-June 2012. Egypt and Algeria followed with 11% and 7%, respectively.

India was the most significant importer of Ukraine’s sunflower

oil in 2011/12

Bulk Sunflower Oil Exporters in Ukraine (2011/12E)*

Note: *data for September 2011-July 2012. Source: Grain Ukraine

Ukraine Bulk Sunflower Oil Exports (volume; 2011/12)*

Note: *Sep. ’11 to Jun. ’12 cumulative data. Source: SSS, Dragon Capital estimates

Kernel Holding 32%

Bunge 22%

Korolivsky smak 7%

Others 39%

Kernel Holding 36%

Cargill 14%

Bunge 6%

Others 44%

Kernel Holding 25%

Cargill 14%

Majola 6% MHP

6% ViOil 5%

Others 44%

India 36.6%

Egypt 11.0%

Algeria 6.6%

Turkey 6.6%

Iran 5.5%

Spain 3.9%

China 3.4% Netherlamds

2.6% Poland 2.2%

Others 21.6%

November 2012


Sunflower oil prices are projected to decline by 10% y-o-y in 2012

Domestic sunflower oil prices declined by 15% y-o-y to $1,139/t (incl. VAT) as of end-2011 and averaged $1,320/t for the year (+36% y-o-y). In 10M12, prices averaged $1,193/t (-12% y-o-y), recovering slightly in the summer to $1,219/t by end-August from $1,138/t at end-June (+7% over the period). Ukraine’s sunflower oil market is driven mainly by processors, who use international bids (which are in turn a representation of global demand for vegetable oils) to calculate net-back bid prices for sunseed producers (such as WSE-listed Agroton), in order to maintain a stable EBIT margin on processing (about 25-27%). Thus, the domestic sunseed price closely follows the sunflower oil price (see chart below). However, in times of reduced sunseed supply (e.g. the 2012 harvest is foreseen to decline by 10% y-o-y) sunseed producers might win better prices for seeds while processors fight for it. In 2012, we expect Ukraine to follow the trend in global sunflower oil prices on the back of increased sunflower oil supply and resulting weaker prices (global sunflower oil ending stocks were projected to increase by 53% y-o-y as of end-2011/12 MY). We estimate this will cause local sunflower oil prices to decline by about 10% y-o-y to $1,190/t in 2012 and sunseed prices to follow the same trend, reaching $500/t on average (-8% y-o-y) for the year.

Ukraine Sunflower Seed and Oil Avg. Weekly Prices (Jan. ’09-Oct. ’12)


Global sunflower oil ending stocks are forecast to decline by 27% y-o-y in 2012/13 MY, pushing prices higher

As of October 2012, global sunflower oil ending stocks in 2012/13 MY (September-August) were projected to decrease by 27% y-o-y to 1.42 Mt, still remaining above their 10-year average of 1.08 Mt. We conservatively forecast Ukrainian sunflower oil will average $1,190/t in 2013, flat y-o-y.

Sunflower seed producers are entitled to government subsidies

Domestic sunflower seed producers, similar to grain growers, continue to enjoy government support, including tax benefits (Fixed Agricultural Tax) and subsidized loans. As for oil crushers, we expect no new restrictions on exports of sunflower oil from Ukraine in the long run. However, the government still keeps an eye on the industry and prevents sunflower oil processors from increasing prices. In late 2010, all major sunflower oil producers signed a memorandum with the state promising to keep local sunflower oil prices unchanged in exchange for the government’s pledge not to interfere with exports. The same agreement was reached in 2011 for the 2011/12 marketing year (September-August).

0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Bulk Crude Sun Oil Prices ($/t; incl. VAT, EXW) Sunflower Seed Prices ($/t; incl.VAT; EXW)

November 2012


State Regulation GOVERNMENTAL SUPPORT FOR AGRICULTURE IN UKRAINE

Agriculture in Ukraine continues to rely on state subsidies. Soon after the global financial crisis struck in 2008, Ukrainian parliament approved a package of laws to further support the sector. The operation of some of these laws was discontinued in 2010, including obligatory bank debt prolongation for agro producers. However, the state still agreed to partly compensate interest on bank loans issued to agricultural producers, with compensation equal to the NBU discount rate (currently 7.75%). In reality, listed agricultural companies reported receiving no interest rate compensation in 2010. The government also intervenes in the grain market with purchases and collateralized loans to support prices. Last year, the state Agrarian Fund was allocated UAH 1.5bn ($189m) for forward grain purchases to help farmers finance spring sowing in March-April. In 2012, the government planned to allocate UAH 2.2bn ($270m) to buy 1.3 Mt of grain or 3% of this year’s estimated total harvest. Still, we do not expect the government to pay grain growers any direct subsidies per hectare of land in 2012-15.

The state continues to support agricultural producers but pays

no direct subsidies

Under Ukrainian law, agricultural producers may choose between general and special regimes of taxation with respect to certain state levies. Specifically in accordance with the Law on Fixed Agricultural Tax (FAT), companies engaged in the production, processing and sale of agricultural products may choose to be registered as payers of FAT, provided that sales of goods they themselves produce account for more than 75% of their gross revenue. FAT is paid in lieu of corporate income tax (currently 23%), land tax, duties for special use of bodies of water, municipal tax, duties for geological survey works and duties for trade patents. The amount of FAT payable is calculated as a percentage of the cadaster value of all land plots (determined as of Jul. 1, 1995) leased or owned by the individual taxpayer. Annual FAT payment usually does not exceed 1% of NIBT for listed companies. Agricultural producers are allowed to use the FAT regime indefinitely provided they meet the annual criteria set by the Tax Code.

Fixed Agricultural Tax (FAT)

Ukrainian VAT legislation allows agricultural companies to retain the difference between VAT paid on items purchased for operations and VAT charged on sales (current VAT rate is 20%). The amount retained is transferred to a special bank account and may be reinvested into operations. This measure is effective until 2018.

VAT benefits…

As the new Tax Code entered into effect on Jan. 1, 2011, some VAT preferences for both agricultural producers and exporters were canceled as part of the government’s commitments to the IMF. Starting from July 1, 2011, VAT is not levied on agricultural producers selling grain, meaning they neither pay the tax to the state budget (as was the case before) nor keep it in their bank accounts for reinvestment. However, they will still pay VAT on purchased raw materials and production services. Grain traders (e.g. Kernel) buying crops directly from producers and exporting do not deal with VAT at all. Intermediaries, however, have to pay VAT on grain purchased from producers and sold to exporters.

…were largely cancelled in 2011

November 2012


STATE SUPPORT TO INDIVIDUAL AGRICULTURAL COMPANIES

Public companies enjoy substantial state support through retained/refunded VAT…

Ukraine’s public agricultural companies enjoy substantial government support through retained VAT, which is the difference between VAT obtained on revenues and VAT paid on COGS that can be reinvested. Selected exporters of agricultural produce (e.g. sunflower oil) are also entitled to VAT refunds on exported volumes.

…but the sector overall has relatively low support

Listed agricultural companies account for only about 20% of the domestic agricultural sector’s total turnover and thus are not fully representative of governmental support. Compared to the EU, for example, where farmers receive direct subsidies per hectare of cultivated land, Ukrainian small farmers receive only indirect subsidies through retained VAT.

LSE-listed MHP: VAT refunds and government grants

MHP, as a company whose sales of own agricultural produce account for more than 75% of gross revenue, is entitled to the aforementioned VAT retention regime. In view of that, and also considering its fruit and vine cultivation business, MHP received VAT refunds and other government subsidies in previous years. MHP’s VAT refunds have on average comprised 8% of net sales and 25% of EBITDA. In 2011, the company reported $88m of government grants — 22% of last year’s EBITDA and 7% of revenues.

LSE-listed Avangard gets about 5% of revenues through retained VAT

LSE-listed Avangard, the largest shell egg producer in Ukraine, also enjoys special VAT treatment and reports retained VAT as part of other operating income that on average comprises 5% of the company’s net sales and almost 12% of EBITDA. As of end-2011, Avangard retained $38m of VAT (7% of revenues and 16% of EBITDA) and reported $318m of other governmental grants or subsidies. Moreover, in 2010 Avangard received $233m of VAT refunds for development of its poultry business (this VAT compensation scheme was canceled last year).

WSE-listed Astarta Holding, the largest sugar producer in the country, also enjoys a favorable VAT regime

Astarta Holding, Ukraine’s largest sugar producer and one of the largest grain growers, is another example of preferential VAT treatment. However, starting from 2010 the company changed its accounting policy regarding retained VAT and started to recognize sales and purchases on a gross basis, i.e. including VAT, while previously the retained difference was included into other operating income in the P&L. Based on our estimates, Astarta received net VAT gains of approx. $30m in 2010 and $42m in 2011 to finance its agricultural activities, while the company also reported $6.7m and $1.1m of government subsidies, respectively, related to cattle farming and crop production.

Company 2009 2010 2011

MHP VAT retained ($m) 65.6 82.1 88.0 (% of sales) 9.2% 8.7% 7.2% (% of EBITDA) 24.2% 25.3% 21.9%

Avangard

VAT retained ($m) 12.3 21.9 38.0 (% of sales) 3.8% 5.0% 6.9% (% of EBITDA) 8.1% 11.3% 15.5%

Astarta Holding VAT retained ($m) 8.0 29.6 41.6 (% of sales) 4.4% 7.0% 8.3% (% of EBITDA) 11.8% 19.1% 28.0%

VAT Retained by Agricultural Companies Source: Companies, Dragon Capital estimates

November 2012


For Kernel Holding, while VAT refunds are not significant (in 2011FY Kernel gained $7.9m of retained VAT and other farming-related subsidies, or 0.4% of full-year net sales and 2.6% of EBITDA), the company is entitled to VAT refunds on exports of sunflower oil (grain exports, the company’s other major sales item, are exempt from VAT). But considering Ukraine’s policy of VAT refunds to exporters, Kernel faces accumulation of significant amounts of VAT recoverable due to delayed refunding by the state. As of end-2011FY, the company accumulated $218m of VAT recoverable, or 27% of its total current assets and 14% of total assets. VAT recoverable mainly represents VAT credits in relation to purchases of agricultural products on the domestic market. In the absence of previous impairment losses, the company does not charge reserves on VAT, meaning VAT is actually refunded from the state, but with delays.

WSE-listed Kernel Holding, Ukraine’s largest sunflower oil

crusher receives VAT refunds as the biggest sunoil exporter

November 2012


Capital Raising and M&A Deals

Sector CAPEX has been partially financed by equity offerings and debt raising

Surging prices of agricultural commodities, as well as expected continued growth of international food demand provides impetus for Ukrainian agribusinesses to expand. Rapid expansion has been financed by retained earnings and credit resources, as well as through private and public share placements. Bullish commodity and equity markets in previous years further inspired companies to raise capital from both equity and debt markets.

Capital raising activity intensified in 2010…

After a quiet period during the economic crisis in 2009, we observed a resumption of activity on capital markets. The total value of agribusiness deals amounted to an estimated $618m in 2010. Avangard, the country’s largest egg producer, attracted $208m in an IPO (21.7% stake) on the London Stock Exchange (LSE). Kernel Holding, the largest sunflower seed and oil producer, raised $81m (6.25% stake) on the Warsaw Stock Exchange (WSE) in an SPO. MHP, the country’s top poultry producer, attracted $190m in an SPO on the LSE. Another large agribusiness, Agroton, raised $54m through an IPO on the WSE in October 2010. AgroGeneration, a French oilseed producer operating in Ukraine, obtained $16m through an IPO in March 2010. In the M&A market, a notable transaction was Kernel Holding’s acquisition of Allseeds, one of the largest domestic sunflower oil crushers, at an estimated EV of $230m in January 2010.

...and continued in 2011 Five placements by Ukrainian agricultural companies through either IPO or private placements (AgroGeneration) occurred in 2011, with these deals jointly raising $138m, including two deals in spring (KSG Agro and Industrial Milk Company) and three deals in summer (Ovostar, Continental Farmers Group and AgroGeneration). All of them were placed on foreign stock exchanges. Regarding debt markets, a notable transaction was WSE-listed Agroton’s placement of a $50m Eurobond in July 2011, paying a 12.5% coupon and maturing in 2014. Kernel was active in the M&A market in 2011, acquiring two oilseed crushers (Black Sea Industries and Russian Oils for a total consideration of $200m) and Ukrros (Ukraine’s fourth largest sugar producer at an estimated EV of $147m). Another notable deal was acquisition of local agricultural producer Landkom by Swedish Alpcot Agro AB, at an estimated EV of $39m.

November 2012


Company Time of placement Stake sold Proceeds Market Cap Market Cap Type of Stock Exchange (%) ($m) ($m) (current; $m)* Placement

AgroGeneration July 2011 16% 16 99 80 PP Alternext (NYSE) Continental Farmers Group June 2011 39% 24 61 53 IPO LSE AIM/ISE Ovostar June 2011 25% 34 136 159 IPO WSE Industrial Milk Company April 2011 24% 24 127 146 IPO WSE KSG Agro April 2011 33% 40 120 75 IPO WSE MHP December 2010 11% 190 1,827 1,400 SPO LSE Milkiland December 2010 22% 69 314 170 IPO WSE Agroliga December 2010 17% 1.4 8.4 6 IPO WSE/NewConnect Agroton October 2010 26% 54 206 75 IPO WSE Avangard April 2010 22% 208 959 632 IPO LSE Kernel Holding April 2010 6% 81 1,296 1,753 SPO WSE AgroGeneration March 2010 25% 16 64 80 IPO Alternext (NYSE) Agroton November 2009 25% 42 168 75 PP FSE Sintal Agriculture October 2009 17% 13 76 19 SPO FSE Landkom Int. March 2009 10% 4 35 suspended SPO LSE AIM Sintal August 2008 15% 35 230 19 PP FSE Mriya Agro Holding June 2008 20% 90 450 661 PP FSE MHP April 2008 19% 323 1,662 1,400 IPO LSE MCB Agricole March 2008 24% 56 233 5 PP FSE Landkom Int. March 2008 5% 22 407 suspended SPO LSE AIM Kernel Holding March 2008 9% 84 933 1,753 SPO WSE Land West December 2007 20% 43 215 13 PP FSE Kernel Holding November 2007 38% 218 574 1,753 IPO WSE Landkom Int. November 2007 55% 111 202 suspended IPO LSE AIM Creativ Group November 2007 23% 30 130 103 PP FSE Ukrros July 2007 20% 42 210 13 PP PFTS/FSE Dakor May 2007 20% 21 103 3 PP PFTS/FSE Astarta Holding August 2006 19% 32 168 482 IPO WSE Ukrproduct February 2005 32% 9 41 7 IPO LSE AIM

Ukrainian Agricultural Sector Equity Capital Market Deals (2006-2011) Note: *based on prices as of Aug. 14, 2012. Sources: DealWatch, Bloomberg, Dragon Capital estimates

Acquiring Company Target Date Stake (%) Deal Value ($m) Est. EV ($m) EV/EBITDA Ukrproduct Zhyvyi Kvass April 2012 100% 0.5 na na Alpcot Agro AB Landkom January 2012 83% 20 39 na Sintal Agriculture Agrica October 2011 100% 4 15 na Kernel Holding Russian Oils September 2011 100% 60 60 3.0 Kernel Holding Black Sea Industries June 2011 100% 140 140 na Kernel Holding Ukrros March 2011 71% 42 147 3.8 Ukrlandfarming Dakor Agro Holding January 2011 76% $15-20 na na Ukrlandfarming Rise January 2011 100% $40-50 na na Kernel Holding Allseeds January 2010 94% 70 230 4.6

Ukrainian Agricultural Sector M&A Deals Sources: DealWatch, Bloomberg, Dragon Capital estimates

Company Volume ($m) Coupon (%) Placement Yield (%) Issuance Date Maturity Date Agroton 50 12.50% 12.5% 07/14/2011 07/14/2014 Mriya Agro Holding 250 10.95% 11.25% 3/30/2011 3/30/2016 Avangard 200 10.00% 10.5% 10/29/2010 10/29/2015 MHP 330 10.25% 9.875% 4/29/2010 4/29/2015 MHP* 250 10.25% 10.25% 11/30/2006 11/30/2011

Ukrainian Agricultural Sector Public Debt Issuance Note: *the issue was exchanged for new Eurobonds maturing in April 2015. Sources: DealWatch, Bloomberg, Dragon Capital

estimates

November 2012


Bank Loans for Agriculture

Agricultural loans account for about 7% of overall corporate debt…

Provision of debt financing for Ukrainian agricultural companies recovered steadily at a CAGR of 15% in 2009-12 after the credit squeeze in 2008 when lending activity virtually ceased. As of end-September 2012, domestic banks allocated UAH 37.0bn of loans ($4.5bn) in hryvnia and other currencies to agricultural enterprises (+9.6% y-o-y), or about 7% of the banking sector’s overall corporate loans. Due to limited sources of F/X revenues and significant F/X risks, loans to the agricultural sector in Ukraine are about 70% UAH-denominated. But starting from mid-2011 the share of F/X- denominated loans in newly attracted debt started to increase, especially for short-term borrowings. This could be explained by higher interest rates on hryvnia loans as well by exporters probably borrowing more in F/X.

…with interest rates having declined by 2-3pp since 2008 but remaining high

Interest rates on agricultural loans decreased from close to 25% for UAH-denominated debt in 2008-2009 to about 20% in 2010, and as of September 2012 averaged 16.6% for UAH-denominated and 8.1% for F/X-denominated debt, compared to average rates for the corporate sector of 18.5% and 8.5% respectively.

Breakdown of Total Agricultural Loans by Currency

(UAH bn; 2010-12) Source: NBU

Breakdown of New Agricultural Loans by Currency


NPL risks NPLs in Ukraine’s agricultural sector remain stable at UAH 3.0bn (-7.5% y-o-y), representing 8.1% of total portfolio (as of September 2012). Accounting for 4.5% of total credits allocated to enterprises in Ukraine, agricultural NPLs amounted to 5.5% of total NPLs in the country, implying high-risk exposure.

Mainly short-term financing In terms of maturity, the total portfolio of loans allocated to Ukraine’s agricultural sector is mainly represented by short-term debt of up to one year (46.3% of total portfolio) and debt with maturity of 1-5 years (45.6% of total portfolio). In recent years the share of short-term loans (within one-year maturity) surged significantly and amounted UAH 16.2bn (+20.2% y-o-y; $2.0bn) in September 2012. The volume of medium-term debt (with maturity from one to five years) totaled UAH 17.6bn (+4.7% y-o-y; $2.2bn), while the volume of long-term credits fell to UAH 3.2bn (-8.0% y-o-y; $0.4bn).

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12

UAH-denominated (lhs) F/X-denominated (lhs)

Interest rate (UAH; rhs) Interest rate (F/X; rhs)

0

1

2

3

4

5

6

Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12

UAH-denominated F/X-denominated

November 2012


In 2009, the government launched a program of state support for agricultural companies through partial interest rate compensation for short-term and long-term loans. The program envisaged interest compensation equivalent to double the NBU discount rate (currently 7.5%) for UAH-denominated loans and up to 7% for F/X-denominated loans, with a maximum limit for interest rates of 21% and 13% respectively. In 2012, the state budget provisioned UAH 0.5bn ($0.06bn) for this support program.

Special interest rate regime for farmers

Agricultural UAH-Denominated Loans by Maturity


Agricultural Foreign Currency Loans by Maturity


While currently banks in Ukraine are willing to provide short-term loans for agricultural companies for working capital financing purposes secured by inventories (e.g. grain) or PPE (machinery), the share of long-term credits is still low (8% of total portfolio). Despite strong need for long-term affordable financing, banks fail to satisfy this demand due to volatile soft commodities markets. Due to the generally weak financial state of Ukrainian agricultural companies, lack of collateral and volatile environmental conditions for agricultural activities, long-term financing is considered high risk for financial institutions, encouraging banks to provide financing mainly to the most stable vertically-integrated holdings. We believe land reform could create collateral in the form of land ownership or land lease agreements and facilitate bank financing.

Banks remain cautious but land reform could help

The State Land Bank is intended to act as a market player and consolidator of state-owned arable land and provide farmers with loans collateralized by land. In June 2012, Ukrainian parliament approved two bills creating a legal framework for the land bank, providing that it can issue loans to farmers at targeted annual interest rates capped at 3% plus the NBU discount rate (currently 7.5%) and collateralized by private or leased land. The bills deprive local authorities of control over state-owned land, transferring it to the land bank. The bank’s other objective is to consolidate all state-owned land so as to start auctioning it as early as January 2013, when the existing moratorium on land sales could be lifted. The state owned about 15% of total agricultural land in Ukraine as of end-2011. The State Land Bank will remain fully owned by state and is not to be offered for privatization or reorganized.

State land bank could provide cheaper financing for the sector

> 1 Year 46.3%

1-5 Years 45.6%

< 5 Years 8.1%

> 1 Year 36.0%

1-5 Years 54.1%

< 5 Years 9.9%

November 2012


International Accounting Standards: IAS 41 Agriculture

Why agricultural companies use IAS 41 Agriculture

The core assets employed into activities of all agricultural companies are biological assets, which are subject to growth, degeneration, production, and procreation during their production cycles. Due to these unique features of biological assets, specific accounting and reporting treatment is provided under IFRS. Under IFRS, companies involved into management of biological transformation of living animals or plants (biological assets) for sale, into agricultural produce, or into additional biological assets are required to comply with IAS 41 Agriculture. IAS 41 prescribes the accounting treatment, financial statement presentation, and disclosures related to agricultural activity. It also prescribes the accounting treatment for biological assets during their production cycle, and for the initial measurement of agricultural produce at the point of harvest. IAS 41 does not deal with processing of agricultural produce after harvest.

Increases in value are recognized as the asset grows

IAS 41 Agriculture applies to companies that are involved into growing or rearing of biological assets for profit. The principle of the standard is that increases in value are recognized as the asset grows and not solely on harvest or sale. The scope of IAS 41 regulation is relevant to:

· biological assets - a living animal or plant; · agricultural produce (the harvested product of the entity’s biological assets) at

the point of harvest; · government grants related to biological assets.

Hence, all agricultural activities connected with crop production, raising livestock, fish or poultry, forestry, etc. are subject to IAS 41 treatment.

Biological assets are recognized at fair value less estimated point-of-sale costs at each balance sheet date

In order to avoid financial reporting biases due to mismatch of production cycles and financial reporting periods, under IAS 41 biological assets are required to be measured on initial recognition and recognized at fair value less estimated point-of-sale costs at each balance sheet date except the cases when the fair value cannot be estimated with reasonable assurance. Agricultural produce harvested from an entity’s biological assets should be measured at its fair value less costs to sell at the point of harvest. The company should recognize a biological asset or agriculture produce only when it controls the asset as a result of past events, it is probable that future economic benefits will flow to the company, and the fair value or cost of the asset can be measured reliably.

Fair value should represent a market price for the biological asset based on current expectations

Under IFRS there is a presumption that fair value can be measured reliably for a biological asset. Fair value should represent a market price for the biological asset based on current expectations. Based on this presumption, IAS 41 requires biological assets to be measured on initial recognition and at each balance sheet date at their fair value less costs to sell, except in limited circumstances when fair value of biological assets cannot be reliably assessed. Under IAS 41, there are two occasions when the presumption can be rebutted:

· at the early stage of an asset’s life; · when fair value cannot be measured reliably on initial recognition.

The IAS 41 allows that cost may approximate fair value where little biological transformation has taken place since the initial cost was incurred (for example, for tree seedlings planted immediately before the balance sheet date). Due to the lack of observable market prices for crops under cultivation in their condition at midyear reporting dates, the fair value of such biological assets is estimated by present value of the net cash flows expected to be generated from the assets discounted at a market-determined pretax rate.

November 2012


Such fair values of biological assets are based on the following key assumptions:

· the expected crop yield is based on the past crop yield adjusted for weather conditions;

· prices for grains are obtained from externally verifiable sources; · cultivation and production costs are projected based on actual historical

information; · the discount rate is usually calculated as the company’s weighted average cost

of capital estimated by independent appraisers.

The second exemption is only applicable to initial recognition for a biological asset for which market prices or values are not available and for which alternative estimates of fair value are deemed to be clearly unreliable. In that case biological asset is measured at its cost less any accumulated depreciation and any accumulated impairment losses.

Assumptions for calculating fair value of biological assets are

straightforward

Under IAS 41, all agricultural produce should be measured at fair value less estimated costs to sell at the point of harvest. Because harvested produce is a marketable commodity, there is no “measurement reliability” exception for produce. The gain or loss arising from the variation in fair value of the agricultural products, after deduction of the cost of sales, is incorporated into the company’s financial statements for the year. In addition, at the reporting date the company has to assess the need to adjust the carrying amount of inventories to their net realizable value. The measurement of impairment is based on the analysis of market prices for similar inventories existing at the reporting date. Such assessments can have a significant impact on the carrying amount of inventories.

Agricultural produce fair value should be measured at harvest as

well

Under IAS 41, a gain or loss arising on initial recognition of a biological asset or due to change in their fair value should be incorporated into the company’s income statement. In particular, the gain or loss on initial recognition of biological assets is included in profit or loss in the period in which it arises. And all subsequent changes in fair value should be included in profit or loss in the period they arise. With respect to agricultural produce the gain or loss on initial recognition is included in the profit or loss in the period in which it arises.

Gain or loss arising on initial recognition of a biological asset should be incorporated into the

company’s income statement

Recognition of Fair Value of Biological Assets and Agricultural Produce

Sources: IFRS, Dragon Capital

For example, biological assets of plant breeding include crops which have been planted but not yet harvested. In accordance with IAS 41, in order to measure the fair value of such biological assets company needs to recognize that, at the reporting date, a certain amount of biological transformation of the assets had taken place since the initial recognition and incurrence of cost – usually it’s when not less than about 20% of overall biological transformation of the crop or animal on grow-out occurred at the reporting date. The carrying amount of biological assets is determined at each balance sheet date as their fair value less estimated selling and distribution expenses. For example, winter crops are assessed at fair value starting Dec. 31 (if the company reports quarterly for example), spring crops — starting June 30 (again if the company reports quarterly or semi-annually for example). Prior to those dates, the crops under cultivation are recorded at cost incurred up to date due to very low percentage of biological transformation taking place. Gains or losses from movements in the fair value of biological assets, less estimated selling and distribution expenses, are recorded in the period they were incurred.

Biological transformation gives grounds for fair value estimate of

biological assets

Acquisition of biological assets

Development costs Harvest and initial

recognition of agricultural produce

Additional costs to complete production

process

November 2012


Biological assets are, for example, crops which have been planted but not yet harvested

For example, for spring wheat grown on an area of 1,000 ha with an expected yield of 5.0 t/ha and expected costs of UAH 1,200 and UAH 1,800 incurred in subsequent periods, the measurement and recognition of fair value of biological assets can be illustrated in the following way (see table below). For measurement purpose the price of wheat was assumed at UAH 1,200/t at the initial recognition of assets, UAH 1,050/t at the moment of harvest and UAH 1,250/t at the moment of sale.

Recognition of Fair Value of Biological Assets and Agricultural Produce Methodology Sources: Mriya Agro Holding, IFRS

Planting or growing

March 31

June 30

July 15 Harvest

September 10 Sale

December 31

Biological transformation

Biological assets are booked at fair value (UAH 3,500)

Biological assets are booked at fair value (UAH 6,000)

Agricultural produce booked at

fair value (UAH 5,250)

Cost of sales (UAH 5,250)

Closing inventory (UAH 0)

Fair value of future cash flows – estimated using DCF (UAH 3,500)

Fair value of future cash flows – estimated using DCF (UAH 6,000)

Biological assets were booked at

fair value (UAH 6,000)

Revenue obtained (UAH 6,250)

Retained earnings (UAH 3,250)

Expense incurred in period

(UAH 1,200)

Expense incurred in previous period

(UAH 1,200)

Net loss from initial recognition

of agricultural produce

(UAH 750)

Gross profit (UAH 1,000)

Revenue (UAH 6,250)

Net gain on changes in fair

value of biological assets recognized

in P&L (UAH 2,300)



in prior period (UAH 2,300)

Net gain from initial recognition

of agricultural produce and

changes in fair value of biological

assets (UAH 2,250)



in P&L (UAH 700)

Gross profit on sale

(UAH 3,250)

Expenses incurred in period

(UAH 1,800)

Cost of sales (UAH 5,250)

Net result (UAH 3,250)

November 2012


By its impact on the income statement, the sale of agricultural produce is clearly revenue as defined by IAS 18 Revenue. According to IFRS framework, biological assets fair value gains are income and fair value losses are expenses. Fair value gains may be shown as part of total income but separately from revenue. Income under IAS 41 can be classified into: initial gain or loss on biological assets; changes in fair value less costs to sell of biological assets; initial gain or loss on agricultural produce. Upon all aforementioned items IAS 41 requires all gains and losses arising to be disclosed on an aggregated basis on the face of the income statement or in the notes.

November 2012


Biofuel Production Potential

Strong potential for biofuel production

As a country with all the necessary conditions for major agricultural sector development, Ukraine has significant prospects for biofuel production, supported by a need to provide self-sufficiency in fuel supply. With specific conditions of production and use, biofuels allow to significantly reduce oil and gas consumption, decrease fuel price uncertainty and mitigate negative environmental consequences of fossil fuel consumption. The most common types of biofuel used worldwide are bioethanol, biodiesel and biogas.

The EU plans to reach a 20% share of energy produced from renewable sources by 2020

Reflecting its desire to reduce fossil fuel consumption, in December 2010 the EU implemented Directive 2009/28/EC on renewable energy that set ambitious targets for all member states, aiming for the bloc to reach a 20% share of energy from renewable sources by 2020 and a 10% share of renewable energy specifically in the transport sector. Due to the continuing high oil prices and dependence on imported fuel, use of agricultural potential for production of biofuels is of high interest to Ukraine.

We consider bioethanol production to be the most feasible option for Ukraine…

Of the three most widely used first-generation biofuels — bioethanol, biodiesel and biogas — Ukraine is best prepared to develop bioethanol production. Bioethanol in Ukraine could be produced from molasses (a by-product of sugar refining) at existing distilleries, whose current capacity utilization is less than 50%. Although alcohol production in Ukraine is currently monopolized by the state, three private production sites are expected to receive bioethanol production license by end-2012. Due to low CAPEX required to set up distilleries for bioethanol production, we consider bioethanol to be the most feasible option for Ukraine compared to other biofuels. Recently enacted legislation making 5-7% bioethanol fuel blends mandatory in Ukraine starting from 2014 offers additional incentive to develop local bioethanol production.

…as there is no sufficient capacity for biodiesel production…

Ukraine also has significant potential for biodiesel production as its annual production of rapeseed, the main raw material for biodiesel, is about 1.5 Mt. This amount is sufficient to replace all Ukrainian diesel consumption with 5% biodiesel/95% diesel blend. However, the country lack the capacity to process such significant rapeseed volumes, meanwhile continuing to export more than 90% of domestically grown rapeseed to the EU, the world’s top biodiesel producer. Moreover, unlike ethanol, the use of biodiesel blends is not mandated in Ukraine.

…and developing biogas production is CAPEX-intensive

Biogas is not hugely popular among domestic agricultural producers because of its significant CAPEX requirements and long payback and the need for sustainable supply sources. Biogas production sites in Ukraine can therefore be found mostly at large agricultural holding companies which use this fuel as a means of satisfying their in-house energy needs and diversifying energy supplies.

Below we consider each type of biofuel in more detail.

November 2012


Bioethanol is biologically produced alcohol that can be used in petrol engines as a partial replacement for gasoline (up to 15% blends). In 2011 global bioethanol production reached almost 110,000 Ml. The biggest bioethanol producers are the USA (48% of total production) and Brazil (20%), accounting for up to 70% of total output. The two countries use different crops as sources of ethanol (corn in the USA and sugar cane in Brazil). The EU’s contribution to global bioethanol production is only 5%.

Bioethanol is biologically produced alcohol

In June 2010, Ukrainian parliament passed a bill on the required content of bioethanol in gasoline in order to facilitate biofuel production and use in the country. The bill set recommended biofuel content in gasoline at 5% in 2013, and made it mandatory in 2014 and 2015, with an increase to 7% starting from 2016. Considering Ukraine’s mostly outdated vehicle fleet, blends with up to 6% bioethanol content could be used. Given Ukrainian consumption of petrol of 4.4 Mt in 2011, production of 5% blends would require about 220 kt of bioethanol annually.

Ukraine’s parliament passed a bill on minimum content of

bioethanol

The most efficient crops for bioethanol production are corn, cassava, sweet sorghum, sugar beet and sugar cane. Among these crops, sugar beet and corn are cultivated in Ukraine. Significant bioethanol production capacity in Ukraine could be provided by molasses, a by-product of sugar production. Use of molasses in bioethanol production is stipulated by the technology of alcohol production in Ukraine, approx. 50% of which is produced from molasses.

Corn and sugar beet can be used for bioethanol production in

Ukraine…

Molasses normally accounts for up to 4% of processed sugar beet volume or about 25% of sugar output. About 300 liters of bioethanol can be received from a tonne of molasses. Hence, the required 5% bioethanol content in gasoline can be provided by processing 22.9 Mt of sugar beet (above Ukraine’s 2012E harvest of 17.1 Mt). Assuming a sugar beet yield of 40 t/ha, the additional needed volume of sugar beet for bioethanol will require a 105% increase in sugar beet plantings (up to 1.1 Mha vs. 466,000 ha planted for the 2012 harvest).

…as well as molasses

Bioethanol production capacity in Ukraine is made up of alcohol plants, and is limited and controlled by the state. Ethanol plants controlled by state monopoly Ukrspyrt have combined annual capacity of 3.0 Mhl (with maximum potential of 6.5 Mhl) but are currently less than 50% utilized, producing only 1.4 Mhl p.a. At the same time, producing 5% bioethanol blend would require 2.8 Mhl of alcohol, or approx. 90% of Ukrspyrt’s existing capacity. Thus, bioethanol production could increase Ukrainian alcohol plant utilization to 65% of capacity in the long term. In 2011, bioethanol production in Ukraine totaled 9.7 kt (+1,500% y-o-y), and Ukrspyrt plans to increase output to 200 kt in 2013.

Ukraine has enough existing capacities for bioethanol

production

2008/2009 2009/2010 2010/2011 2011/2012 2012/2013E

Sugar beet production, Mt 14.8 10.3 13.7 18.7 17.0

Sugar production, Mt 1.6 1.3 1.5 2.3 1.9

Molasses output, Mt 0.59 0.41 0.55 0.75 0.68

Potential ethanol output, Ml 178 124 164 224 204

Molasses export, Mt 0.17 0.17 0.15 0.26 - Potential Production of Bioethanol from Molasses in Ukraine (2008/09-12/13E)


November 2012


Ukraine is a net exporter of molasses

Bioethanol production at existing distilleries or sugar refineries does not entail significant technological modernization. The biggest concern is the shortage of molasses. Approximately 200 kt of molasses is exported annually at an average price of $120/t, while local prices range from $103-107/t. However, Ukrainian producers could potentially unlock higher value by selling molasses to state monopoly Ukrspyrt for bioethanol production.

Bioethanol production from molasses in Ukraine could have a minimum gross margin of 14%

Assuming raw materials comprise 60% of bioethanol production costs and applying the domestic molasses price of $110/t and output rate of 300 liters of bioethanol per tonne of molasses, we estimate bioethanol production costs at UAH 5 ($0.61)/liter. The current CBOT price for bioethanol stands at $0.71/liter, which implies profit margin potential for Ukrainian bioethanol producers of approx. 14% on the gross margin level assuming sales in Ukraine at CBOT prices. Compared to the current price of RON-95 petrol in Ukraine of approx. $1.4/liter, that implies profit potential of up to 56% on the gross margin level if bioethanol is sold at the same price as petrol. Costs of bioethanol production depend significantly on the prices of molasses and natural gas (key cost components), thus profitability margins could differ.

Bioethanol production from corn is less profitable

A possible alternative source for bioethanol production in Ukraine is corn. While 4.3 tonnes of molasses is needed for production of one tonne of bioethanol, the same volume of bioethanol can be produced from 3 tonnes of corn. Production of the aforementioned 220 kt of bioethanol will thus require an additional 660 kt of corn. Considering current prices of molasses ($103-107/t) and corn ($230-250/t), raw material costs per tonne of bioethanol would be 55% higher compared to molasses. Higher energy costs of bioethanol production from grain also contribute to molasses’ competitiveness as a bioethanol source.

Sweet sorghum can be used for bioethanol production but is very soil exhaustive

Another potential raw material for bioethanol production in Ukraine is sweet sorghum. It is a high-yield and drought-resistant crop, but its cultivation leads to significant soil depletion. Considering one tonne of bioethanol can be produced from 28 tonnes of sweet sorghum, with the crop yielding 3-5 t/ha, 1.5 Mha of arable land will be depleted each year in order to produce 220 kt of bioethanol. That makes molasses the most promising source of bioethanol production in Ukraine, potentially giving a boost to the domestic sugar production industry and alcohol producers and providing partial self-sufficiency in light oil products.

Licensing of bioethanol producers in Ukraine

The issue of bioethanol production licenses is yet to be decided. Despite relevant legislation allowing bioethanol production at both state-owned and private enterprises, licenses have been issued solely for the 12 alcohol plants owned by state-owned Ukrspyrt. While the government has proposed issuing licenses for 26 more state-owned alcohol plants and three private entities, the resolution is still to be passed. Additionally, when Ukraine finally signs a free trade agreement with the EU, the country will be able to export up to 100 kt of duty-free bioethanol to the EU.

November 2012


While bioethanol production can improve Ukraine’s self-sufficiency in light oil products and generally follows developed countries’ practice, some concerns remain:

Ñ Oil price fluctuation determines profitability of bioethanol production, with oil prices lower than $50-70/barrel making bioethanol production unprofitable, which may necessitate governmental support for bioethanol producers.

Ñ While pricing of bioethanol in other countries, including Russia, is tied to global gasoline prices (based on Platts system), pricing in Ukraine is based on the domestic price of RON-95 gasoline, making imported bioethanol more competitive for national oil product producers (approx. $1,500/t vs. $1,300/t) unless the difference is offset by import tariffs.

Ñ Bioethanol technologies in Ukraine are less efficient compared to those used in developed countries in terms of energy saving and quality, making Ukrainian bioethanol uncompetitive compared to world analogs.

Ñ Considering unstable weather conditions, crop yields in Ukraine fluctuate significantly, implying uncertainty regarding crop prices and supply.

Ñ Although it is considered that 6% bioethanol content in gasoline does not require vehicle modifications, there are concerns about the impact of biofuel usage.

Constraints on bioethanol production

Light Oil Product Prices (UAH/t, FCA)

Source: Energobusiness

Biodiesel is an environmentally friendly biofuel produced from vegetable oil or animal fat and used as a substitute for diesel consumption. Biodiesel is the second most commonly produced biofuel. World output in 2011 totaled 24.3 Ml, with the EU being the main producer (48% of total volume). Biodiesel in the EU is mainly produced from rapeseed (which the EU imports from Ukraine).

Biodiesel is a biofuel produced from vegetable oil or animal fat

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

29/01/2009 30/11/2009 30/09/2010 25/07/2011 31/05/2012

Petrol (RON-95)

Diesel

November 2012


Rapeseed can be processed into biodiesel

Ukraine also cultivates rapeseed — the same raw material for biodiesel production as in the EU. Assuming total replacement of common diesel by B20 mix (20% biodiesel and 80% oil diesel), Ukraine would require 1.2 Mt of biodiesel to be produced (or 20% of last year’s domestic diesel consumption of 6.1 Mt). This volume of biodiesel requires 4.5 Mt of oilseed crops and 2.7 Mha of arable area for cultivation. Assuming 100% consumption of the rapeseed currently produced, the area for rapeseed cultivation would need to be expanded by 170%. Ukraine planted 567,000 ha with rapeseed for the 2012 harvest and collected 1.2 Mt of the crop this year (-15% y-o-y). Currently almost all rapeseed produced in Ukraine is exported due to high foreign demand and attractive prices as well as a lack of domestic processing capacities. The main importer of Ukrainian rapeseed is the EU (up to 90% of total exports). At the moment Ukraine does not use all potential rapeseed production capacities. In 2011/12, rapeseed was seeded on approx. 1 Mha of arable land, while almost 75% of all arable land in Ukraine is suitable for rapeseed cultivation. Due to the unique characteristics of rapeseed, it can also be produced in abandoned areas such as Chernobyl. Factoring in relevant radiation safety requirements, we estimate radiation-safe rapeseed could be cultivated on 100,000 ha of abandoned areas for use in biodiesel production.

Ukraine produces more than enough rapeseed to meet its agricultural sector’s diesel needs

The Ukrainian agricultural sector consumes 1.5 Mt of diesel annually. Considering that most diesel vehicles used in agribusiness can consume B20 mix, production of 1.5 Mt of B20 will require 300 kt of biodiesel. This volume is obtainable from 1.0 Mt of rapeseed (83% of last year’s domestic rapeseed harvest), suggesting that Ukraine is potentially capable of producing enough B20 mix to supply its total agricultural diesel needs.

Biodiesel production from rapeseed is economically viable…

Modern technologies allow for producing biodiesel at a cost of UAH 3 ($0.37) per liter, whereas old technologies using rapeseed bought at a market price UAH 3,000/t yield a biodiesel price of UAH 10 ($1.22)/liter. With diesel in Ukraine currently selling for UAH 9.7 ($1.18)/liter, the country is capable of producing economically viable biodiesel, being self-sufficient in relevant inputs.

…but demand is low and crushers prefer sunflower

Rapeseed is not used for oil or biodiesel production in Ukraine due to the main role of sunflower as an oil crop and no governmental support for biodiesel producers. Moreover, there is limited demand for biodiesel in Ukraine. Currently only one oil crushing plant in Ukraine processes rapeseed, meaning virtually no capacity for industrial biodiesel production. We therefore expect no significant production of this biofuel in Ukraine until the government takes supportive measures or sufficient production capacity is built.

(July/June, kt) 2008/09 2009/10E 2010/11 2011/12E 2012/13E

Opening stocks 6 10 4 5 5 Sown areas ('000 ha) 1,410 1,060 907 872 962 Areas for harvesting ('000 ha) 1,380 1,014 863 833 567 Yield (t/ha) 2.1 1.9 1.70 1.73 2.15 Crop 2,873 1,873 1,470 1,438 1,218 Import 5 5 5 5 5 SUPPLY 2,884 1,888 1,479 1,448 1,228 Crushing 208 100 100 100 100 Seeds 10 9 10 10 10 Export 2,651 1,770 1,359 1,328 1,108 Losses 5 5 5 5 5 DEMAND 2,874 1,884 1,474 1,443 1,223

Closing stocks 9 4 5 5 5 Ukraine Annual Rapeseed Balances


November 2012


Biogas originates from bacteria during the process of bio-degradation of organic material under anaerobic conditions. There is a wide range of organic substrates for biogas production such as cattle and pig manure, chicken dung, and various wastes (e.g. from plants, slaughterhouses, food industry, waste water).

Cattle and pig manure main biogas production sources

With 4.5 million head of cattle, 7.9 million pigs and 255 million head of poultry as of August 2012, Ukraine also has promising potential for biogas production. However, ensuring secure supply of raw materials (animal waste) is a problem due to most cattle, pigs and fowl in the country being grown by small owners (households and small farms). For example, households account for approx. 34% of cattle, 42% of pigs and 50% of poultry in the country.

Ukraine has promising potential for biogas production

With the feedstock available in Ukraine such as pig and cattle manure, chicken dung and corn silage, the country could annually produce up to 5.5 billion m3 of biogas. Converting this into electrical energy implies about 11.1 billion kWh, or 4-7% of Ukraine’s annual electricity production. Biogas plants operating on pig and cattle manure are viewed as a more attractive investment compared to facilities using chicken dung and corn silage, which are profitable only if their capacity is at least 1 MWh.

Biogas production could equal 4-7% of annual electricity output in

Ukraine

Ukraine has set a favorable price setting regime for electricity production from renewable sources (wind, biomass, sun and water). The “green tariff” is a feed-in tariff differentiated for 1) each company that produces electricity from alternative sources of energy, 2) each type of alternative energy and 3) each single facility. For example, the tariff for electric energy from biomass (hay burning technology) is UAH 1.34/kWh (incl. VAT; $0.16) compared to current regular tariffs of UAH 0.28-0.96/kWh for households ($0.03-0.12) and over UAH 1.50/kWh ($0.18) in peak consumption periods for industrial consumers. The green tariff for energy produced from biogas has not been approved yet.

If approved, the green energy tariff will favor biogas producers

Public agricultural holdings have started to invest in biogas production, primarily for in-house needs. In September 2012, WSE-listed Astarta Holding, Ukraine’s largest sugar producer, attracted a $12m loan from the EBRD for construction of a biogas plant. The plant will process 120,000 tonnes of beet pulp p.a. yielding 14.4 million cubic meters of biogas, which would lower Astarta’s annual gas consumption by 7.7 million m3 (est. $3.8m at current gas price, or 2-3% of Astarta’s annual EBITDA). Once the project is implemented, it will enable Astarta’s main sugar plant to decrease natural gas consumption by 46%, water consumption by 10% and achieve a reduction in greenhouse gas emissions to around 15,000 tonnes of CO2 in the first year and subsequently to up to 35,000 tonnes. LSE-listed Avangard, Ukraine’s largest egg producer, also plans to build a biogas plant with capacity of 20.4 MWh, fully meeting demand from its new poultry complex Chornobaivske. LSE-listed MHP, the country’s largest chicken meat producer, is carrying out a $20m biogas project at its Oril-Leader farm in Dnipropetrovsk region. MHP expects the farm’s biogas facility, to be launched in November, to produce 30.4 million kWh of electricity p.a., or more than its annual demand of 21 million kWh, and the investment to be recouped within four years.

Listed agricultural producers are investing in biogas production,

thus far for internal needs

November 2012


Risks

Political risk — high Agricultural markets and agricultural production generally are subject to prevailing political and social policies. At times, governments impose production and selling restrictions and limitations in the form of quotas, tariffs and other mechanisms to protect national producers both at international and domestic levels. These restrictions and limitations can affect volumes and prices in national, regional and world markets. Any change in government regulations or legislation concerning the agricultural market, the markets in which the traded companies compete, or in the markets of competitors could adversely affect the business, results of operations and financial condition of the traded companies.

Weather risk — high Weather conditions are a significant operating risk affecting agricultural producers’ grain growing operations, especially where climate conditions are not always conductive to maximizing crop yields. Weather does not only have a direct effect on grain yields but also on the ability to and cost of harvest. Weather and other aspects of growing conditions may also lead to a greater use of fertilizers and other chemicals, which may also increase costs.

Price fluctuation risk — high Business and financial results of agricultural companies are very dependent on demand and price levels for grain commodities globally and in Ukraine. Fluctuations in prices of grains and related products may materially affect companies’ earnings. Prices of agricultural commodities are influenced by a variety of unpredictable factors that cannot be controlled by any individual agricultural company, among them weather conditions and changes in global supply and demand.

Raw material supply and pricing risk — medium

The performance of agricultural processors such as Kernel Holding or Creativ Group is linked to stable supplies of raw materials, primarily sunflower seed and soybean, and prices for those commodities. Any negative change in those factors would pose a risk to our financial forecasts. Another example of raw material supply and pricing risk is Avangard, which unlike its closest peer MHP does not cultivate grain in any significant quantities and does not have plans to do so. Thus, any fluctuations in feed grain prices on the market significantly affect the company’s profitability. Additionally, there is a risk of further growth in raw milk prices in Ukraine, stemming from a possible revision of state subsidies to the dairy sector, negatively affecting producers such as Milkiland.

Geopolitical risk in dairy sector — high

Russia remains the main consumer of Ukrainian cheese, accounting for 86% of total Ukrainian cheese exports, and this implies additional geopolitical risk for domestic cheese producers. This risk has to date materialized twice, in 2006 and 2011, when Russia banned imports of any dairy products from Ukraine due to alleged violations of veterinary and sanitary standards. As a result of imposed import curbs only producers cleared by the Russian Veterinary and Phytosanitary Authority were allowed to export to Russia. Although Russia recently joined the WTO and is expected to follow WTO procedures, it still can examine the quality of Ukrainian milk products for compliance with Russian standards and ban imports of low-quality produce.

Reporting risk — medium Under IFRS, companies involved into management of biological transformation of living animals or plants (biological assets) for sale, into agricultural produce, or into additional biological assets are required to comply with the IAS 41 Agriculture standard. There are no strict rules to calculate gains on revaluation of biological assets for agricultural producers and calculation is based on market assumptions which often may be under/overstated. Thus, we believe a reporting risk exists for agricultural companies when including gains from revaluation of biological assets and initial recognition of winter crops, as underlying assumptions are never made public.

November 2012


Company Profiles

November 2012


Agroton: Strong 2012 Wheat Yield Price Target (PLN) 13.75 Price Target ($) 4.20

Highlights Upside (%) 23%

Ñ Profile Agroton is the largest sunflower seed producer in Ukraine with a close to 1% share of total domestic sunflower seed output in 2011, and also cultivates wheat, corn and other crops in line with crop rotation best practice. Agroton currently controls 209,000 ha of land, all located in the Luhansk region.

Ñ Valuation implies 23% upside We recommend Agroton as a Hold based on a 12-month price target of $4.20/share (23% above current market price). Our valuation factors in a solid operating outlook on one hand, and corporate risks and the yet-to-be-resolved issue of 2011 receivables on the other.

Ñ Strong 2012 wheat yield brightens 2012 outlook… In 2012, Agroton harvested 140.3 kt of winter wheat (+17% y-o-y) from an area of 43,327 ha, recording an average yield of 3.24 t/ha (+19% y-o-y and 22% above the national average of 2.65 t/ha. Both the harvest volume and yield fell in line with our expectations (139.1 kt and 3.2 t/ha). The company also projected a strong sunflower seed yield of 2.0 t/ha (flat y-o-y) notwithstanding challenging weather conditions in Ukraine this year. We thus expect Agroton to increase its 2012 revenues by 3% y-o-y to $102.4m, the increase being attributable to a larger planted area as we assume the company will report higher y-o-y sunflower seed inventories as of end-2012 for sale at better prices next year. We estimate Agroton’s 2012 EBITDA at $25.8m (+153% y-o-y due to discontinued pig breeding last year and a lower comparison base), implying an EBITDA margin of 18.1%.

Ñ …but 1H12 results were weaker y-o-y Agroton reported 1H12 net sales of $41.3m (-35% y-o-y, including gains from revaluation of biological assets totaling $31.4m), EBITDA of $38.8m (-3%), for an EBITDA margin of 53.3% (+11.1pp y-o-y), and net income of $30.5m (-11%). Agroton’s outstanding trade receivables stood at $25.4m as of June 30, including almost $24.0m of unsettled receivables highlighted by the company’s previous auditors, Baker Tilly Ukraine, in the 2011 annual report. According to Agroton’s founder and CEO Yuriy Zhuravlov, outstanding receivables were reduced to $11.7m as of Aug. 31 and were going to be fully settled by end-September. Agroton plans to issue 9M12 results on Nov. 28, potentially shedding more light on the receivables issue.

Ñ Expansion to be financed with internal cash flow and Eurobond proceeds Agroton reported acquiring 10-year lease rights to 38,000 ha of land in 1H12, paying $25.4m (or $668/ha). The company previously announced plans to increase its land bank to 290,000 ha by 2015. Concurrently, by 2014, Agroton plans to boost its storage capacity to 544 kt p.a. We expect the company to finance its CAPEX projects with internally generated cash and proceeds from a $50m three-year Eurobond sold in July 2011 and paying a 12.5% coupon.

Ñ Risks Key risks for Agroton are potential negative weather impact and volatility of crop prices. We also note the company’s weak corporate governance standards.

Sell Hold Buy

Company Data Market Price (PLN) 11.14 Market Price ($) 3.41 Market Cap ($m) 73.9 Enterprise Value (12E; $m) 104.4 Free Float (%) 48.96% Free Float ($m) 36.2 Shares Outstanding 21,670,000 Nominal Value (EUR) 0.021 Bloomberg Code AGT PW DR Ratio - Number of Employees 4,280

Shareholder Structure

12-month Price Performance ($)

12-month Performance ($) (49%) 12-month Rel. Perform. (KP-Dragon) (39%) 12-month Low/High ($/share) 2.24/7.73 All-time Low/High ($/share) 2.24/15.44 12-month Trading Volume ($m) 36.3

Valuation Summary 2012E Revenues ($m)

Year 2009 2010 2011 2012E 2013F

Net Sales ($m) 55.3 57.3 99.7 102.4 126.5 EBITDA ($m) 21.2 35.3 10.2 25.8 41.7 Net Income ($m) 4.5 15.7 (2.1) 11.5 25.8 P/E 16.5 4.7 nm 6.4 2.9 EV/EBITDA 4.3 2.2 10.6 4.1 2.6 EV/Sales 1.65 1.34 1.08 1.02 0.85 P/Book 2.71 1.71 1.80 1.40 0.94

IFG Directors Ltd - 51.04%

Free Float - 48.96%

0

2

4

6

8

10

Nov-11 Feb-12 May-12 Aug-12 Nov-12

Agroton KP-Dragon (rel.)

Crops 61%

Livestock & Milk 10%

Poultry 29%

November 2012


Investment Highlights

Agroton is a diversified vertically integrated agricultural producer in eastern Ukraine. The company’s core business is crop production, principally comprising cultivation of sunflower seeds and wheat. Agroton is also involved in livestock business (poultry and production of milk). The company currently harvests 155,000 ha of land out of 209,000 ha it controls (up from 41,000 ha in 2001), all located in the Luhansk region. Agroton operates storage facilities with a combined capacity of 285,000 tonnes, which enables it to store all of its current crop production and thereby achieve better pricing terms.

Agroton is a diversified agro producer with 209,000 ha of

land in eastern Ukraine

Crop production accounted for 76% of Agroton’s 1H12 revenues while livestock business contributed 24%. Thanks to its crop production segment Agroton is 100% self-sufficient in wheat, corn and barley used for feed by its livestock segment. Vertical integration (self-sufficiency in fodder for poultry and livestock operations) reduces the company’s dependence on suppliers, ensuring quality of inputs such as feed for its livestock operations.

Crop production accounts for over 75% of sales

Agroton Land Bank Location (1H12)

Source: Company

Agroton Revenue Breakdown (value terms; 1H12)

Source: Company

The company harvested 262 kt of grain and oilseeds in 2011 (+9% y-o-y). Last year’s harvest included 121 kt of winter wheat (+6% y-o-y), 73 kt of sunflower seeds (-21% due to 28% lower acreage) and 45 kt of corn (+125% thanks to favorable weather and higher yield). Production of other crops (rapeseed, barley, sorghum and rye) was up 50% y-o-y, to 24 kt. Agroton’s sunflower seed yield outperformed the Ukrainian average by 6% and stood at 1.9 t/ha in 2011. Winter wheat and corn yields totaled 2.7 t/ha and 4.5 t/ha, underperforming the respective domestic averages of 3.4 t/ha (wheat) and 6.4 t/ha (corn). But yields on barley (2.8 t/ha) and rapeseed (2.0 t/ha) were better than across the country (see chart below).

Grain and oilseed harvest reached 262 kt in 2011

Agroton Cropland Breakdown (2011 harvest)

Note: *barley, rye, rapeseed, sorghum, oats. Source: Company Agroton Crop Yields vs. Ukrainian Averages (t/ha; 2011)

Sources: Company, SSS

Crop Production

76% Livestock

Production 24%

Wheat 33%

Sunflower 29%

Corn 7%

Feed crops 5%

Other crops 7%

Fallow land 19%

2.7 1.9

4.5

2.8 2.0 2.0

3.4

1.8

6.4

2.5 2.1 1.7

0.01.02.03.04.05.06.07.08.0

Winter wheat Sunflowerseed

Corn Barley Rye Rapeseed

Agroton (t/ha) Ukraine (t/ha)

November 2012


Wheat and sunflower account for 55% of 2012 total acreage

Agroton planted 52,000 ha of winter crops for the 2012 harvest (+4% y-o-y), including 48,553 ha under wheat (+8% y-o-y), 2,000 ha under rye (+122%), 1,000 ha under barley (-41%) and 400 ha under rapeseed (-79%). The company seeded an additional 103,000 ha in the spring, with 49,000 ha earmarked for sunflower (+26% y-o-y), 14,500 ha for corn (+56%) and 7,000 ha for sorghum (+59%), bringing its total acreage for the 2012 harvest to 155,000 ha (+10% y-o-y; excl. fallow/newly consolidated land).

We expect Agroton to produce 317 kt of grain and oilseeds in 2012 (+21% y-o-y)

We expect Agroton’s 2012 harvest to increase by 21% y-o-y to 317 kt, thanks to increased acreage and a shift towards higher-yield crops (corn). The winter wheat harvest reached 140.3 kt (+17% y-o-y), largely unimpaired by weather conditions, with the yield averaging 3.24 t/ha (+19% y-o-y and 22% above the national average). The company also reported signing a forward contract with the State Agrarian Fund to sell 60 kt of wheat at $235/t (incl. VAT). Agroton’s outlook for the 2012 sunflower seed harvest is also strong with yield projected at 2.0 t/ha (flat y-o-y). As of end-August, Agroton harvested 7,000 ha out of the total area of 40,000 ha under sunflower seeds, confirming an average yield of 2.0 t/ha.

Agroton Cropland Breakdown (2012E harvest)

Note: *barley, rye, rapeseed, sorghum, oats. Source: Company, Dragon Capital estimates

Agroton Crop Production (kt; 2005-12E) Sources: Company, Dragon Capital estimates

Poultry output to almost double in 2012

Agroton launched a breeder farm (Myrny) in 2011, with its first four poultry houses for young breeding stock put into operation by the end of April 2011 and the other four launched at the beginning of 2012. We expect the farm to reach its full capacity of 14.8 million hatching eggs in 2016. Given Agroton’s successful poultry capacity expansion, we expect the company to report 2012 chicken meat output of 15.4 kt (up from 7.5 kt in 2011), with its share of total revenues to expand to 28% (+15pp y-o-y). We expect Agroton to produce 26.6 kt of chicken meat in 2016 when its Myrny breeder farm is expected to reach full capacity.

Livestock and milk to contribute 10% to 2012 revenues (flat y-o-y)

Agroton’s dairy and beef operations comprise 20 cattle farms, all located in the Luhansk region. Agroton’s 2011 milk production stood at 10 kt, flat y-o-y. The company plans to increase its milking cow herd by 8% y-o-y to 3,334 head in 2012, which should provide for 13 kt of milk output (+27% y-o-y). Beef output reached an estimated 2.3 kt in 2011 (+32% y-o-y as its total number of cattle increased by 32% to almost 6,000 head) and is expected to remain flat y-o-y in 2012 as beef is a non-core segment for the company. Thus, we expect both milk and livestock production to contribute 10% to Agroton’s 2012 revenues (flat y-o-y).

Sunflower 33%

Wheat 29%

Corn 10%

Feed crops 8%

Other crops* 9%

Fallow land 11%

148 131 134

257 237 241 262

317

0

50

100

150

200

250

300

350

400

2005 2006 2007 2008 2009 2010 2011 2012E

Wheat (kt) Sunflower (kt) Other (kt)

November 2012


Agroton Chicken Meat Production (kt; 2008-12E)

Sources: Company, Dragon Capital estimates

Agroton Milk Production (kt; 2008-12E) Sources: Company, Dragon Capital estimates

Crop production costs account for an est. 51% of Agroton’s total COGS in 2012 and are roughly 50% linked to the dollar. Poultry and livestock costs followed with a 34% share of total COGS, with feed grain contributing about 40% to total costs in the segment. We estimate milk production costs accounted for 15% of Agroton’s 2011 COGS.

Crop production accounts for 51% of COGS

Agroton COGS Breakdown by Business Segment (2011)

Source: Company, Dragon Capital estimates

Agroton Poultry Cost Structure (2011) Note: *non-grain fodder includes vitamins, lysine, etc. Source: Company

We analyze Agroton’s production cost structure based on winter wheat and sunflower, the company’s largest revenue contributors. Fertilizers represent the largest cost item in both wheat and sunseed production, accounting for 22-28% of the total, followed by seeds with 15-29%. Increased land lease payments (est. +76% in 2012) rank third with an approx. 20% share. Agroton capitalizes on the economies of scale when buying crop production inputs by conducting its purchases centrally from suppliers.

Fertilizers, land lease and seeds are the largest contributors to

crop production costs

Agroton Winter Wheat Production Costs (value; 2012E) Note: *repairs, organic fertilizers, electricity costs, amortization etc. Source:

Dragon Capital estimates

Agroton Sunflower Seed Production Costs (value; 2012E) Note: *repairs, organic fertilizers, electricity costs, amortization etc. Source:

Dragon Capital estimates

7 7 5

8

15 17

0

5

10

15

20

2008 2009 2010 2011 2012E 2013F

12 14

11 10 13 13

0

5

10

15

20

2008 2009 2010 2011 2012E 2013F

Crops 61.9%

Poultry & Livestock 23.1%

Dairy 14.8%

Other 0.2%

Grain 33%

Salaries 16%

Non-grain fodder

components* 15%

Utilities 12%

Protein 10%

Veterinary services

5%

Renewal of parental stock

3% Other 6%

Fertilizers 28%

Land Lease 22%

Fuel 20%

Seeds 15%

Labor 2%

Other* 13%

Seeds 29%

Fertilizers 22%

Land Lease 21%

Fuel 16%

Labor 2%

Other* 10%

November 2012


2011 results were below expectations

Agroton reported 2011 gross revenues of $122.1m (+25% y-o-y), including $22.3m of gains from changes in the fair value of crops. EBITDA totaled $18.6m (-47% y-o-y), for an EBITDA margin of 15.3% (-20.8pp y-o-y), and the bottom line showed a loss of 2.3m (vs. $15.5m net income in 2010). Reported net sales fell generally in line with our forecast but profitability underperformed significantly, with gross profit falling below our projection due to a $14m net loss on IAS 41. Agroton’s reported 2011 EBITDA also came in below our forecast, which was attributable to lower than expected gross profit and $15m of other operating expenses (mainly impairment related to trade and other receivables of $9.4m). Adjusted for $8.4m of non-recurring items, Agroton’s 2011 EBITDA was $10.2m.

Auditors’ qualified opinion included in the 2011 financial report…

Auditors Baker Tilly Ukraine, which audited Agroton’s 2011 results, added a qualified opinion stating that no adequate documentary evidence was provided for $66.2m of revenues (66% of 2011 total net revenues), of which $41.1m of receivables remained unpaid as of April 30, 2012 (the 2011 report’s publication date). According to Agroton, the outstanding receivables concerned sales of crops (wheat, rapeseed, sunflower and corn) to two of the company’s customers.

…was only partially resolved with issuance of 1H12 results

Agroton’s outstanding trade receivables stood at $25.4m as of June 30, 2012, including almost $24.0m of the unsettled receivables highlighted by Baker Tilly (Agroton hired new auditors, KPMG, in 1H12). According to Agroton’s founder and CEO, Yuriy Zhuravlov, outstanding receivables were reduced to $11.7m as of Aug. 31, and were going to be fully settled by end-September. The 1H12 cash flow statement showed a gross change in accounts receivable of $18.6m (vs. $3.0m in 1Q12). Agroton reported 1H12 net sales of $41.3m (-35% y-o-y, including gains from revaluation of biological assets totaling $31.4m), EBITDA of $38.8m (-3%), for an EBITDA margin of 53.3% (+11.1pp y-o-y), and net income of $30.5m (-11%). The yet-to-be-settled receivables issue poses a risk to our financial forecast for Agroton, though the company states this was a one-off.

We expect 2012 EBITDA to improve to $26m from $10m in 2011…

We expect Agroton to increase its 2012 revenues by 3% y-o-y to $102.4m, the increase being attributable to a larger planted area as we assume the company will report higher y-o-y sunflower seed inventories as of end-2012 for sale at better prices next year. We estimate Agroton’s 2012 EBITDA at $25.8m (+153% y-o-y due to discontinued pig breeding last year and lower comparison base), implying EBITDA margin of 18.1% for the year.

…and to $41.7m in 2013, factoring in hryvnia depreciation impact

Agroton generates about 30% of revenues in UAH, including sales of poultry, raw milk and cattle breeding. The company sells grain (67% of 2013F revenues) at dollar-linked prices to local grain traders. Poultry production costs (est. 23% of 2013F total COGS) are 90% hryvnia-linked, while cattle breeding costs (9%) are 70% USD-linked due to fodder inputs which correlate with global grain prices. Grain production costs (53% of total) are roughly 50% linked to the dollar. Thus, about 35% of Agroton’s overall COGS are dollar-linked. We currently assume the hryvnia will depreciate to UAH 8.8:USD by end-2013 (vs. UAH 8.2:USD estimated previously). As Agroton’s revenues in UAH terms will increase faster than COGS, we expect a positive effect on operating profitability. Thus, we estimate Agroton’s 2013 revenues at $126.5m (vs. $129.6m at UAH 8.2:USD) and EBITDA at $41.7m (vs. $41.2m at UAH 8.2:USD).

Land bank expansion to 290,000 ha by 2015…

Agroton reported acquisition of 10-year lease rights to 38,000 ha of land in the Luhansk region in 1H12, paying $25.4m (or $668/ha), which brought its total land bank to 209,000 ha. The company previously announced plans to increase its land bank to 290,000 ha by 2015, with 40,000-45,000 ha additions in 2013 and 2014.

November 2012


Agroton is proceeding with construction of a modern silo that will increase its annual storage capacity by 82 kt (or 29%), with CAPEX estimated at $8.5m and completion scheduled for this year. By 2014, Agroton plans to boost its storage capacity to 544 kt p.a. in order to support planned land bank expansion. Storage expansion will be achieved through both acquisitions and construction of new silos.

…to be supported with grain storage capacity growth to

544 kt p.a. by 2014

We expect Agroton to finance its CAPEX projects with internal cash flow and last year’s Eurobond proceeds. The company reported end-1H12 debt of $48.7m, including the $48.2m of bonds net of issue costs. Agroton’s end-1H12 Net Debt/EBITDA stood at an est. 0.4 (vs. the covenant of 3.0).

End-1H12 debt at $48.7m

November 2012


Valuation COMPARATIVE VALUATION

Company Price Currency MC* EV/EBITDA (x) P/E (x) $m 2012E 2013F 2012E 2013F

Agroton 3.41 USD 74 4.1 2.6 6.4 2.9 Premium/(discount) to Ukrainian peers (82%) (16%) (36%) 17% (45%) Premium/(discount) to Russian peers (71%) (28%) (54%) 67% (38%) Ukrainian Peers Mriya Agro Holding 6.23 USD 662 4.4 4.1 4.7 5.2 Astarta Holding 18.85 USD 471 4.9 4.5 5.2 5.2 MHP 14.40 USD 360 4.8 3.9 6.5 5.4 Industrial Milk Company 4.44 USD 139 5.0 2.9 5.4 3.5 Ukrainian Peers’ Median 408 4.8 4.0 5.3 5.2 Russian Peers Rusgrain 14.5 RUB 20 2.0 2.0 0.5 - Razguliay 12.36 RUB 62 5.6 5.6 2.3 1.4 Trigon Agri 5.70 SEK 110 7.5 7.8 90.0 4.3 Ros Agro 7.00 SEK 835 4.3 4.5 5.4 4.9 Black Earth Farming 12.35 USD 229 12.6 10.5 neg. 16.8 Russian Peers’ Median 251 5.6 5.6 3.9 4.6 Notes: *average for market capitalization; prices as of Nov. 9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS/FAIR VALUES Agroton (AGT PW)

Note: *fair values were calculated between Feb. 2, 2009 and Jan. 23, 2011

0.0

5.0

10.0

15.0

20.0

Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12

Market Price ($/share)

PT ($/share)

November 2012


Financial & Operating Summary Operating Summary

Period 2009 2010 2011 2012E 2013F Wheat (kt) 136.1 113.7 120.6 139.1 189.5 Growth (%) 3% (16%) 6% 15% 36% Sunflower Seed (kt) 76.5 91.7 72.8 98.0 125.4 Growth (%) 13% 20% (21%) 35% 28% Poultry (kt) 6.7 5.3 7.5 15.4 17.3 Growth (%) (3%) (21%) 42% 106% 12% Milk (kt) 13.6 10.8 10.1 12.9 12.9 Growth (%) 12% (21%) (6%) 27% 0%

Profit & Loss Statement (IFRS; $m)

Period 2009 2010 2011 2012E 2013F Net Sales 55.3 57.3 99.7 102.4 126.5 EBITDA 21.2 35.3 10.2 25.8 41.7 Depreciation (4.6) (5.6) (4.4) (3.7) (4.2) EBIT 16.6 29.7 5.8 22.1 37.5 Net Financial Income (Loss) (9.9) (9.9) (5.6) (6.4) (6.4) NIBT 5.1 16.1 0.3 11.6 26.0 Income Tax Benefit (Expense) 0.0 (0.1) (0.0) (0.1) (0.2) Net Income (Loss) 4.5 15.7 (2.1) 11.5 25.8

Balance Sheet (IFRS; $m)

Period 2009 2010 2011 2012E 2013F Total Assets 126.0 144.3 179.9 191.5 217.8 Fixed Assets 42.3 49.1 58.3 61.2 63.5 PPE 40.1 38.3 31.2 34.0 36.3 Current Assets 83.8 95.2 121.6 130.3 154.3 Inventories 31.0 62.7 52.4 43.4 53.8 Accounts Receivable 7.5 7.8 39.7 44.9 55.5 Cash & Cash Equivalents 35.1 13.6 17.6 20.8 17.9 Total Liabilities & Equity 126.0 144.3 179.9 191.5 217.8 Total Liabilities 69.6 22.2 60.1 60.1 60.6 Accounts Payable 2.0 1.2 1.9 2.0 2.5 S/T Debt 51.8 13.6 3.8 0.0 0.0 L/T Debt 0.5 2.8 47.6 51.4 51.4 Equity 27.3 43.3 41.1 52.7 78.5

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) (27%) 4% 74% 3% 24% EBITDA Growth (y-o-y) 103% 67% (71%) 153% 62% Net Income Growth (y-o-y) nm 251% nm nm 124% EBITDA Margin 27.9% 36.3% 8.3% 18.1% 24.1% Net Margin 8.1% 27.5% (2.1%) 11.2% 20.4% Net Debt/Equity 63% 6% 82% 58% 43% ROE 16.4% 36.4% neg. 21.9% 32.9% EBITDA Coverage 2.1 3.6 1.8 4.0 6.5 Net Debt/EBITDA

0.8 0.1 1.8 1.2 0.8

November 2012


Astarta Holding: Grain Price Growth Helps while Sugar Prices Retreat

Price Target (PLN) 73.10 Price Target ($) 22.32

Upside (%) 18%

Highlights

Ñ Profile Astarta Holding is the largest sugar producer in Ukraine with a 16% share of total output in 2011. The company cultivates 245,000 ha of land in central Ukraine and harvested 660 kt of crops in 2011 (1% of Ukraine’s total).

Ñ Valuation implies 18% upside Our DCF and comparative valuation models yield a 12-month price target of $22.32/share, suggesting a 18% upside to the stock’s current market price and justifying a Hold recommendation.

Ñ Sugar oversupply in Ukraine is expected to restrain prices in 2012 and 2013 Sugar prices remained suppressed in 9M12 ($661/t; incl. VAT; -37% y-o-y) following overproduction in 2011. We expect total sugar supply of 2.2 Mt in 2012/13 MY (September-August) including about 280 kt of ending stocks from the 2011 processing season, while annual domestic consumption is estimated at 1.9-2.0 Mt. This implies sugar surplus in the country for the second consecutive year and potentially more downward pressure on local sugar prices. We keep our 2012 sugar price forecast at $660/t (-31% y-o-y; incl. VAT), which matches the 9M12 average, and project next year’s average price at $600/t (flat y-o-y in UAH but -8% y-o-y in USD accounting for expected hryvnia depreciation).

Ñ Higher volume sales and grain prices in 2012 help offset sugar price decline... Astarta boosted 1H12 crop sales in volume terms by 75% y-o-y, with sugar sales up 42% and milk sales rising 33%. We think Astarta will be able to offset weaker sugar prices this year with higher grain prices in 2H12 and also higher y-o-y volume sales, given its significant leftover stocks of 2011-produced sugar (70% of last year’s output) and grain (approx. 50%). We thus forecast Astarta’s 2012 sales will increase by 18% y-o-y (to $498.7m) but expect EBITDA to decline by 2% y-o-y to $152.1m, for an EBITDA margin of 30.5% (-6.0pp y-o-y).

Ñ 2013 outlook depressed by sugar oversupply and hryvnia depreciation We expect Astarta to post 2013 revenues of $512.6m (+3% y-o-y). Our estimate factors in negative impact of projected hryvnia depreciation, on one hand, and higher expected sugar volume sales (+21% y-o-y) thanks to strong 2012E output of 400 kt (+8% y-o-y) and assumed flat y-o-y sugar prices in UAH terms, on the other. We forecast 2013 EBITDA will decline to $135.2m (-11% y-o-y), implying an EBITDA margin of 26.4% (-4.1pp y-o-y), due to higher contribution of low-margin sugar to 2013E sales.

Ñ Soybean facility to be launched in 2013 Astarta started construction of a soybean processing plant with daily crushing capacity of 700 tonnes (about 220 kt annually) this year. The facility, to be launched in 2013, will be able to produce up to 160 kt of meal, 40 kt of soybean oil and 9 kt of granulated husk. The project also includes construction of a 42 kt silo, with total CAPEX estimated at $35m. Astarta has already attracted $50m of financing from the International Finance Corporation.

Ñ Risks Price volatility on the local sugar market and global grain markets as well as shifting global weather patterns constitute major risks for Astarta

Sell Hold Buy

Company Data

Market Price (PLN) 61.60 Market Price ($) 18.85 Market Cap ($m) 471.3 Enterprise Value (12E; $m) 724.7 Free Float (%) 37.02% Free Float ($m) 174.5 Shares Outstanding 25,000,000 Nominal Value (EUR) 0.01 Bloomberg Code AST PW DR Ratio - Number of Employees 7,350



12-month Performance (1%) 12-month Rel. Perform. (KP-Dragon) 18% 12-month Low/High ($/share) 12.89/22.31 All-time Low/High ($/share) 2.13/35.85 12-month Trading Volume ($m) 54.1


Year 2009 2010 2011 2012E 2013F

Net Sales ($m) 181.9 293.4 423.8 498.7 512.6 EBITDA ($m) 68.1 132.5 154.7 152.1 135.2 Net Income ($m) 40.5 105.2 122.2 93.8 76.4 P/E 11.6 4.5 3.9 5.0 6.2 EV/EBITDA 8.7 4.7 4.7 4.7 5.2 EV/Sales 3.25 2.11 1.70 1.44 1.36 P/Book 2.82 1.69 1.19 1.00 0.90

Mr. V. Ivanchyk - 36.99%

Mr. V. Korotkov - 25.99%

Free float - 37.02%

10

15

20

25

30


Astarta Holding KP-Dragon (rel.)

Sugar 52%

Crops 39%

Cattle farming

8% Other 1%

November 2012



Astarta Holding remains the largest sugar producer in Ukraine with a 16% share of total output in 2011 and is expected to account for 18% of total sugar output in 2012. The company cultivates 245,000 ha of land in central Ukraine and harvested 660 kt of grain crops (1% of Ukraine’s total) and 2.1 Mt of sugar beet (12% of Ukraine’s total) last year. We estimate Astarta’s 2012 grain harvest at 556 kt (-16% y-o-y due to negative weather impact on yields).

The largest sugar producer in Ukraine

Astarta Land Bank Location (June 2012) Source: Company

Astarta Land Bank Growth (’000 ha; 2005-12)

Source: Company

Sugar and by-products (molasses and dry pulp) normally serve as the main revenue contributors for Astarta in the first half of the year, while the company sells grain crops mostly in the second half after completing harvesting in September-October. In 2011, sugar and by-products accounted for 49% (-9pp y-o-y) of Astarta’s revenues while the share of crops grew to 43% (+8pp y-o-y), reflecting higher sales of grain inventories in the wake of export curbs (Oct. ‘10-May ’11). In 1H12, Astarta generated 55% (-12pp y-o-y) of revenues from sales of sugar and by-products and 32% (+9pp y-o-y) from grain sales. For the full year, we expect sugar and by-products to account for 52% of Astarta’s total revenues.

Sugar and by-products account for half of revenues

Astarta Revenue Breakdown (value terms; 2011)

Source: Company

Astarta Revenue Breakdown (value terms; 2012E)

Source: Company

Astarta enjoyed increased sugar beet yields in 2011 (50 t/ha; +43% y-o-y and 39% above Ukrainian average) thanks to favorable weather, and its sugar extraction rate also improved to 14.5% (+1.7pp y-o-y). Combined with increased area under sugar beet, Astarta harvested 2.1 Mt of sugar beet (+58% y-o-y) and purchased an est. 0.5 Mt from local farmers, thus processing 2.6 Mt in total last year (+65% y-o-y). Astarta’s self-sufficiency in sugar beet remains the highest in the sector. The bumper sugar beet harvest and higher sugar extraction rate enabled Astarta to produce 370 kt of sugar last year (est. 93% capacity utilization), recording output growth of 88% y-o-y.

2011 sugar output up 88% y-o-y to 370 kt thanks to improved

yields and land bank expansion

67 90

135 166 175

210 245 245

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2011 2012

Sugar Production

49%

Crops 43%

Cattle farming 7%

Other 1%

Sugar Production

51%

Crops 39%

Cattle farming 9%

Other 1%

November 2012


Astarta Sugar Extraction Rate vs. Ukrainian Avg. (%) Source: Company, Dragon Capital estimates

Astarta Sugar Beet Yields (t/ha; 2007-13F) Sources: Company, Dragon Capital estimates

Sugar beet processing capacity rose by 21% last year

Astarta acquired Novoivanivsky and Savinsky sugar plants in 2011, which possess combined processing capacity of 5 kt/day of sugar beet. Accounting for these acquisitions and modernization of the company’s other sugar plants, Astarta’s total daily processing capacity increased to c. 33 kt of sugar beet (+21%) last year.

No raw cane processing planned in 2012

As of end-2011, the company had processed 31 kt of raw cane sugar at its Yaresky plant, producing 30 kt of white sugar. The company processed the aforementioned raw cane sugar volume on a tolling basis and did not own the final product, thus earning only on processing services. In 2012, we think Astarta will not process any raw cane sugar as Ukraine is enjoying sugar oversupply.

Sugar output is set to increase 8% y-o-y in 2012 on strong sugar beet yield

We expect Astarta to produce 400 kt of sugar in 2012 (+8% y-o-y), projecting a sugar beet yield of 50 t/ha, in line with management guidance and flat y-o-y. The company planted 50,000 ha (+18% y-o-y) with sugar beet in 2012, and we project in-house sugar beet output to reach 2.5 Mt (+19% y-o-y; in line with management guidance), accounting for 79% of total expected processing volume in the 2012 production season (flat y-o-y). For 2013, we expect a sugar beet yield of 41 t/ha, Astarta’s average for the past five years, thus forecasting 2013 sugar output at 361 kt (-10% y-o-y).

Astarta Annual Sugar Beet Production (’000 tonnes) Source: Company, Dragon Capital estimates

Astarta Annual Sugar Production (kt; 2007-13F)

Source: Company, Dragon Capital estimates Sugar price outlook for 2012-13 We expect 2012 sugar output in Ukraine at 1.95 Mt (-16% y-o-y), which implies total

sugar supply of 2.2 Mt in 2012/13 MY (Sep.-Aug.), while annual domestic consumption is estimated at 1.9-2.0 Mt. These estimates imply continued sugar surplus in the country and downward pressure on local sugar prices. We keep our 2012 sugar price forecast at $660/t (-31% y-o-y; incl. VAT), which matches the average of $661/t in 9M12 (-37% y-o-y) and project the 2013 average at $600/t (flat y-o-y in hryvnia terms but down 8% in dollar terms accounting for expected hryvnia depreciation).

13.8% 14.8% 12.8% 14.5% 13.6% 13.6% 12.8% 13.5%

10.9%

13.1% 11.5% 11.5%

0%

5%

10%

15%

20%

2008 2009 2010 2011 2012E 2013F

Astarta (%) Ukraine average (%)

37 48

41 31

50 50 41

29 36 32 28 36 37 36

0

10

20

30

40

50

60

70

2007 2008 2009 2010 2011 2012E 2013F

Astarta (t/ha) Ukraine average (t/ha)

950

1,560 1,530 1,330

2,100

2,500 2,258

0

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012E 2013F

Sugar Beet Production (kt)

156

236 225 200

370 400

361

0

100

200

300

400

500

2007 2008 2009 2010 2011 2012E 2013F

Sugar Production (kt)

November 2012


We estimate sugar beet accounted for around 63% of Astarta’s 2011 sugar production costs, followed by natural gas with a 15% share. Fertilizers, seeds and crop protection products jointly accounted for over 40% of Astarta’s sugar beet production costs last year. Astarta decreased natural gas consumption by 10% y-o-y to around 30 m3 per tonne of processed sugar beet in 2011 and is proceeding with an energy saving program, aiming to cut gas consumption to 25 m3/tonne by 2015.

Sugar beet accounts for 63% of Astarta’s sugar production

costs

Astarta Sugar Production Costs (value terms; 2011)


Astarta Sugar Beet Production Costs (value terms; 2011) Source: Company, Dragon Capital estimates

The company’s grain and oilseed harvest doubled y-o-y to 660 kt in 2011, thanks to both improved yields (+8-64% y-o-y) and increased land bank (+17% y-o-y). Astarta increased arable land under grain and oilseeds by 15% y-o-y to 236,000 ha for the 2012 harvest, but expects yields to decline on unfavorable weather conditions (June and July were extremely dry and hot). We forecast Astarta’s 2012 grain harvest will decline 10% y-o-y to 600 kt.

Grain harvest doubled last year but will decline in 2012 on

falling yields

Astarta Planted Area Breakdown (2012) Source: Dragon Capital estimates

Astarta Crop Yields vs. Ukrainian Averages (t/ha; 2010-2012E)

Source: Company, Dragon Capital estimates for Ukrainian average Astarta started construction of a soybean processing plant with daily crushing capacity of 700 tonnes (about 220 kt annually) in the Poltava region (Globyno) in June this year. The facility, to be launched in 2013, will be able to produce up to 160 kt of high-protein toasted meal, 40 kt of soybean oil and 9 kt of granulated husk. Astarta’s farming division operations are expected to make the future plant more than 60% self-sufficient in soybeans. The project, with estimated total costs of $35m, also includes construction of a 42 kt silo. The company attracted $50m of financing from the International Finance Corporation in August 2012 to partially finance the soybean project.

New soybean processing facility

Sugar beet 63%

Natural gas 15%

Salaries 6% Transportation

4%

Repairs 3%

Other processing

costs 9%

Fertilizers 20%

Seeds 12%

Crop protection 11%

Services 8%

Fuel 6%

Salaries 6%

Amortization 4% Land lease

3%

Other 30%

Sugar beet 19%

Wheat 13%

Soybeans 27%

Corn 16%

Forage crops 13%

Barley 5%

Sunflower 7%

6.5

3.4 2.6 1.6

9.5

4.5 3.0 2.3

7.0

3.5 3.0 1.8

4.3 2.65 2.1 1.7

0

2

4

6

8

10

Corn Wheat Barley Soybean

Astarta 2010 (t/ha)

Astarta 2011 (t/ha)

Astarta 2012E (t/ha)

Ukrainian Average 2012E (t/ha)

November 2012


Raw milk to contribute 9% to 2012 revenues

Astarta had 14,000 milking cows as of end-2011 (+28% y-o-y), while its total livestock herd reached 28,000 head (+17% y-o-y). We estimate Astarta’s 2011 raw milk selling price increased by 5% y-o-y to UAH 4.18/kg and expect its 2012 milk price to remain flat y-o-y. Raw milk prices in Ukraine were restrained in 7M12 following partial reinstatement of state subsidies to the sector and the Russian cheese import ban that created milk oversupply, but our projection of flat y-o-y raw milk prices accounts for rising grain prices that should boost milk prices. We expect milk sales to contribute 8% to Astarta’s 2012 revenues (flat y-o-y).

Astarta Milk Yield vs. Ukrainian Average (kg/cow/year; 2006-11) Source: Company

Strong 1H12 results Astarta increased 2Q12 revenues by 17% q-o-q and 7% y-o-y, to $100.9m, and boosted EBITDA to $68.5m (+182% q-o-q and +14% y-o-y) and net income to $57.1m (+401% q-o-q and +12% y-o-y). The company’s 1H12 sales stood at $187.3m (+14% y-o-y), EBITDA at $92.8m (-2%) and net income at $68.5m (-13%), implying EBITDA and net margins of 49.5% (-8.2pp y-o-y) and 36.6% (-11.4pp), respectively. The company boosted 1H12 crop sales in volume terms by 75% y-o-y, with sugar sales up 42% and milk sales up 33%. Notably, exports increased to 31% of total revenues in 1H12. With foreign currency revenues accounting for over 40% of Astarta’s 1H12 sales (including 10% from grain sales locally, but at USD-linked prices, and 31% from direct exports) and about 40% of its COGS being USD-linked, we highlight the stock’s lower exposure to hryvnia devaluation risk.

Declining sugar prices should be partially offset by higher grain prices and volume sales in 2012

Almost 70% of Astarta’s 2011 sugar output and about 60% of grain harvest have been carried over for sale in 2012. We estimate higher volume sales and stronger grain prices in 2H12 will help to offset lower sugar prices this year ($660/t avg.; -31% y-o-y; incl. VAT), supporting the top line. We thus forecast Astarta’s 2012 sales will increase by 18% y-o-y (to $498.7m) but expect EBITDA to decline by 2% y-o-y to $152.1m, for an EBITDA margin of 30.5% (-6.0pp y-o-y). In 2013, we expect the company to increase revenues by 3% y-o-y to $512.6m thanks to higher sales volumes (we forecast flat y-o-y sugar prices).

Astarta Net Sales and Profitability (2007-12E) Source: Company, Dragon Capital estimates

3,900 4,068 3,914

4,380 5,000 5,100

3,562 3,665 3,793 4,049 4,142

4,200

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010 2011

Astarta Holding Ukrainian Average

122

183 182

293

424 499 513

164 187

(20%)

0%

20%

40%

60%

80%

0

100

200

300

400

500

600

2007 2008 2009 2010 2011 2012E 2013F 1H11 1H12

Net sales ($m; lhs) EBITDA margin (%; rhs) Net margin (%; rhs)

November 2012


We expect Astarta to post 2013 revenues of $512.6m (+3% y-o-y). Our estimate factors in negative impact of projected hryvnia depreciation (to UAH 8.8:USD by end-1Q13), on one hand, and higher expected sugar volume sales (+21% y-o-y) thanks to strong 2012E output of 400 kt (+8% y-o-y) and assumed flat y-o-y sugar prices in UAH terms, on the other. We forecast 2013 EBITDA will decline to $135.2m (-11% y-o-y), implying an EBITDA margin of 26.4% (-4.1pp y-o-y), due to higher contribution of low-margin sugar to 2013E sales.

Astarta Holding generates 62% of revenues in UAH, including sales of sugar and byproducts, sugar processing services, raw milk and cattle breeding. The company sells grain (25% of 2013F revenues) and soybean products (13% of 2013F revenues) at dollar-linked prices to local grain traders. Sugar production costs (est. 64% of total COGS) are 80% paid in hryvnia, while gas costs (15-16% of sugar production costs and 11-13% of total costs) are linked to USD. Grain and soybean production costs (29% of total) are roughly 50% linked to the dollar. Thus, about 35% of Astarta’s overall COGS are USD-linked. This implies that in case of hryvnia depreciation Astarta’s revenues will decrease in line with its COGS, shrinking in absolute dollar terms but not affecting the EBITDA margin.

2013 outlook depressed by sugar oversupply and hryvnia

depreciation

November 2012


Valuation

COMPARATIVE VALUATION Company Price Currency MC* EV/EBITDA (x) P/E (x)

$m 2012E 2013F 2012E 2013F Astarta Holding 18.85 USD 471 4.7 5.2 5.0 6.2 Premium/(Discount) to Mriya Agro Holding (29%) 7% 25% 7% 20% Premium/(Discount) to Rusagro 558% (17%) (9%) 86% 292% Premium/(Discount) to DM Peers (96%) (36%) (32%) (61%) (50%) Mriya Agro Holding 6.23 USD 662 4.4 4.1 4.7 5.2 Russian Market Peers Rusagro 7.00 USD 835 4.3 4.5 5.4 4.9 Developed Market Peers Suedzucker (DE) 30.40 EUR 7,318 5.1 5.6 14.0 10.2 Agrana Beteiligungs (AS) 92.56 EUR 1,671 3.6 5.7 7.9 8.1 Ebro Puleva (SP) 13.82 EUR 2,702 8.3 7.9 13.4 12.4 Tate & Lyle (GB) 748.50 GBp 5,552 7.7 8.3 11.4 12.9 Associated British Foods (GB) 1,379.00 GBp 17,371 7.0 7.8 19.9 14.7 Du Pont (E.I.) de Nomours (US) 43.66 USD 40,712 7.8 7.3 12.6 11.7 DM Peers’ Median - - 12,554 7.4 7.5 13.0 12.4 Notes: *averages shown for market capitalizations; prices as of Nov.9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS/FAIR VALUES Astarta Holding (AST PW)


0.0

10.0

20.0

30.0

40.0

50.0

Aug-06 Jul-07 Jun-08 May-09 Mar-10 Feb-11 Dec-11 Nov-12


PT/FV ($/share)

November 2012



Period 2009 2010 2011 2012E 2013F Sugar (‘000 t) 225.0 200.0 370.0 400.0 361.2 Growth (%, y-o-y) (4%) (11%) 85% 8% (10%) Sugar Byproducts (‘000 t) 92.3 83.0 102.0 120.0 108.4 Growth (%, y-o-y) 8% (10%) 23% 18% (10%) Grain Crops (‘000 t) 388.7 330.2 660.3 595.8 664.6 Growth (%, y-o-y) (1%) (15%) 100% (10%) 12%


Period 2009 2010 2011 2012E 2013F Net Sales 181.9 293.4 423.8 498.7 512.6 EBITDA 68.1 132.5 154.7 152.1 135.2 Depreciation (11.4 ) (17.6 ) (24.4 ) (30.3 ) (33.4 ) EBIT 56.7 114.9 130.3 121.8 101.8 Net Financial Income (Loss) (15.7 ) (15.7 ) (22.3 ) (32.0 ) (29.7 ) NIBT 41.2 104.5 125.6 94.8 77.2 Taxes (0.7 ) 0.7 (3.4 ) (0.9 ) (0.8 ) Net Income (Loss) 40.5 105.2 122.2 93.8 76.4


Period 2009 2010 2011 2012E 2013F Total Assets 330.0 469.1 739.0 824.1 821.4 Fixed Assets 179.0 216.4 304.4 334.8 339.7 PPE 170.9 206.4 287.5 318.2 323.3 Current Assets 151.0 252.7 412.9 468.4 461.9 Inventories 124.8 210.8 318.8 355.7 379.2 Accounts Receivable 11.2 16.6 37.8 39.5 42.1 Short-term Bank Deposits

0.0 1.4 16.2 39.0 7.6 Cash & Cash Equivalents 2.8 1.5 6.6 1.8 1.7 Total Liabilities & Equity 330.0 469.1 739.0 824.1 821.4 Total Liabilities 158.1 182.6 341.4 353.0 295.4 Accounts Payable 5.7 7.5 11.8 13.2 14.0 S/T Debt 46.8 75.6 132.5 143.6 142.6 L/T Debt 75.8 74.2 139.4 144.0 92.5 Equity 166.9 278.1 397.6 471.1 526.1

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) (0%) 61% 44% 18% 3% EBIT Growth (y-o-y) 81% 94% 17% (2%) (11%) Net Income Growth (y-o-y) nm 159% 16% (23%) (19%) EBITDA Margin 37.5% 45.2% 36.5% 30.5% 26.4% Net Margin 22.3% 35.9% 28.8% 18.8% 14.9% Net Debt/Equity 72% 53% 67% 61% 44% ROE 32.5% 47.3% 36.2% 21.6% 15.3%

November 2012


Avangard: Capacity Increases Planned

Price Target ($/DR) 13.50 Upside (%) 32%

Highlights

Ñ Profile Avangard is the largest vertically integrated Ukrainian producer of eggs and dry egg products. The company accounted for 53% of Ukrainian industrial shell egg production and 93% of dry egg products output in 1H12.

Ñ Valuation implies 32% upside Our DCF and comparative valuation models yield a 12-month price target of $13.50/DR, implying a 32% upside to the stock’s current market price and suggesting a Buy recommendation.

Ñ Good 1H12 operating results… Following 35% y-o-y shell egg production growth (to 6.0 billion eggs) in 2011, Avangard continued to increase output in 1H12, reporting production of 3.1 billion shell eggs (+8% y-o-y) and 7.1 kt of dry egg products (+22% y-o-y) We expect its full-year shell egg output to increase by 5% y-o-y to 6.2 billion pieces, with dry egg product output forecast at 12.1 kt (almost flat y-o-y). The company increased its average egg price by 26% y-o-y in 1H12 to UAH 0.67/egg, and based on current egg price dynamics we forecast the company will increase its 2012 sales price by 10% y-o-y to UAH 0.70/egg (net of VAT).

Ñ …suggest a solid 2012 outlook We expect Avangard to post 2012 net sales of $639m (+16% y-o-y) and EBITDA of $257m (+4%), implying an EBITDA margin of 40.1% (-4.3pp y-o-y due to increased feed prices affecting profitability). In 2013, we estimate Avangard’s sales at $723m (+13% y-o-y on 12% production growth and 3% egg price growth) and EBITDA at $263m (+2%), implying an EBITDA margin of 36.3% (-3.8pp y-o-y; again due to expensive feed as Avangard will use 2012-harvested grain for feed in 1H13).

Ñ 2012-2013 CAPEX Avangard is in the process of expanding capacities at its Avis and Chornobaivske egg production complexes, which are expected to boost the company’s total shell egg production capacity to 8.2 billion pieces p.a. and egg producing flock to 28.9 million birds in 2013. The company plans to complete both projects in 2013. Total CAPEX is estimated at $611m over 2008-2013, with $449m already spent in 2008-2011, and the remaining $162m to be allocated in 2012 ($142m) and 2013 ($20m). Avangard is also increasing capacities at its egg processing plant Imperovo Foods, planning to double processing capacities to 6 million eggs per day in January 2013, and then to boost this figure to 10 million eggs per day in July 2013. CAPEX for Imperovo Foods is estimated at $160m over 2012-2013 (incl. $158m to be spent in 2012). We expect Avangard’s 2012-2013 CAPEX program to be financed mostly with own cash.

Ñ Risks Feed price volatility and unpredictable weather conditions are the major risks.

Sell Hold Buy

Company Data Market Price ($/DR) 10.20 Market Cap ($m) 651.5 Enterprise Value (12E; $m) 861.4 Free Float (%) 22.51% Free Float ($m) 146.7 Shares Outstanding 6,387,185 Nominal Value (EUR) 0.1 Bloomberg Code AVGR LI DR Ratio 1:10 Number of Employees 4,798


12-month Performance ($/DR)

12-month Performance ($) 31% 12-month Rel. Perform. (KP-Dragon) 55% 12-month Low/High ($/DR) 6.00/14.23 All-time Low/High ($/DR) 6.00/21.00 12-month Trading Volume ($m) 160.2


Year 2009 2010 2011 2012E 2013F


Oleg Bakhmatyuk - 77.49%

Free Float - 22.51%

3

6

9

12

15


Avangard KP-Dragon (rel.)

Shell Eggs 73%

Egg Products

17%

Other 10%

November 2012



Avangard is the largest vertically integrated egg and dry egg products producer in Ukraine. The company held a 53% share of Ukrainian industrial production of shell eggs and a 93% share of dry egg products output in 1H12. The company operates 19 poultry farms for laying hens, three breeder farms, nine grow-out farms, six fodder mills, three egg storage facilities and an egg processing plant, Imperovo Foods. Avangard’s production facilities are located throughout Ukraine.

The largest shell egg producer

in Ukraine

Avangard Business Locations (1H12)

Source: Company

Avangard increased its hen flock to 25.9 million birds as of end-1H12, up from 25.1 million birds as of end-2011 and 24.3 million in 2010. The company plans to complete construction of two new egg production complexes, Avis (western Ukraine) and Chornobaivske (southern Ukraine), in 2012-2013 that will allow for a total flock of 28.9 million birds.

Avangard’s current flock totals

25.9 million birds

Avangard’s Laying Hen Flock (millions)


Ukraine’s Industrial Shell Egg Production (billions)

Sources: Company, Pro-consulting

12.2 14.0 18.7 20.5 18.8 20.6

1.8 2.1

5.6 4.7 5.6

5.3

0

5

10

15

20

25

30

2008 2009 2010 2011 1H11 1H12

Laying Hens Young Laying Hens

2.4 3.6 4.4

6.0

3.1

6.0 5.6

5.8 5.3

2.8

29%

39% 43%

51% 53%

0%

10%

20%

30%

40%

50%

60%

0

2

4

6

8

10

12

2008 2009 2010 2011 1H12

Avangard (lhs) Other (lhs)Avangard's Share (rhs)

Khmelnytskiy Lviv

Uzhgorod

Ternopil

Rivne Lutsk

Zhytomyr Kyiv

Vinnytsia

Chernihiv

Sumy

Poltava

Cherkasy

Kirovohrad

Mykolayiv

Odesa Kherson

Crimea

Zaporizhya

Kharkiv

Luhansk

Donetsk Chernivtsi Dnipropetrovsk Ivano-Frankivsk

Farms for laying hens Fodder mills Egg processing plant Breeder farms Grow-out farms Projects (Avis & Chornobaivske) Long-term storage facilities

November 2012


Shell egg output to reach 6.2 billion pieces (+5% y-o-y) in 2012

Following 35% y-o-y shell egg production growth (to 6.0 billion eggs) in 2011, Avangard continued to increase output this year. The company produced 3.1 billion shell eggs (+8% y-o-y) in 1H12, thereby accounting for 53% of Ukraine’s total industrial shell egg production. Avangard also produced 7.1 kt of dry egg products in 1H12 (+22% y-o-y). We expect the company to increase shell egg output by 5% y-o-y to 6.2 billion pieces in 2012, with dry egg product output forecast at 12.1 kt (almost flat y-o-y).

Avangard Production of Shell Eggs and Dry Egg Products


Ukraine’s Industrial Dry Egg Product Output (kt)

Sources: Company, Pro-consulting, Dragon Capital estimates

Avangard plans for exports to account for 30% of revenues in 2012

Avangard exported about 1.1 billion eggs and dry egg products (in egg equivalent) in 2011, which accounted for 18% of total sales and brought the company’s share of Ukrainian shell egg and egg product exports to an est. 77% (value terms). The company exported 342 million eggs and dry egg products (in egg equivalent) in 1H12, and plans to bring the share of exports to 30% of total revenues in 2012 or 1.9 billion pieces of eggs and dry egg products in egg equivalent. Dry egg products were mainly exported to Jordan, Turkey and Egypt, which jointly accounted for 72% of Avangard’s 1H12 total egg powder exports (volume terms). Shell eggs were mainly exported to Iraq, which accounted for 76% of the company’s total shell egg exports in 1H12. Avangard also exported eggs and dry egg products to Azerbaijan, Moldova, Pakistan, South Korea, Turkmenistan and Taiwan.

Focus on domestic sales expansion through modern retail outlets

Avangard is focusing on the expansion of its presence in modern Ukrainian retail chains (supermarkets) through promotion of its shell eggs under an umbrella brand Kvochka. The company managed to increase the share of organized retail in its volume revenues to 30% of total in 2011 and to 31% in 1H12, compared to 16% in 2010. Avangard’s major customers included Fozzy Group and ATB, each accounting for 18% of the company’s sales through modern retail in 2011, followed by Metro (9%), Velyka Kyshenya (5%), Eko (3%), Karavan (2%) and Vopak (1%). The company aims to be present in 2,500 retail outlets by end-2012, and to bring the share of modern trade in its total volume sales to 35%.

Ukraine’s Shell Egg and Egg Product Exports (value terms)

Sources: Company, Pro-consulting, Dragon Capital estimates

Avangard Sales by Distribution Channel (volume terms)


2.4 3.6 4.4

6.0 6.2 7.0

2.9 3.1 0.5 2.2

10.2 12.2 12.1

13.9

5.8 7.1

0246810121416

012345678

2008 2009 2010 2011 2012E 2013F 1H11 1H12

Shell Egg Output (bln pieces; lhs) Dry Egg Product Output (kt; rhs)

0.5 2.2

10.2 12.2 7.1 9%

52%

79% 87% 93%

0%

20%

40%

60%

80%

100%

0

5

10

15

2008 2009 2010 2011 1H12

Avangard (lhs) Others (lhs)Avangard's Share (rhs)

36.6

81.6 102.9

11.5

15.1

31.1 76%

84% 77%

0%

50%

100%

0

50

100

150

2009 2010 2011

Avangard ($m; lhs) Other ($m; lhs)

Avangard's Share (%; rhs)

9% 23% 23% 30%

100% 89% 61% 47% 35%

2% 16%

30% 35%

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012E

Export Domestic Wholesale Domestic Supermarkets

November 2012


Fodder accounts for 75% of Avangard’s egg production costs. The content of fodder depends on the age of birds. On average, it contains about 55-65% of grain spread almost equally between corn and wheat and about 25-30% of protein spread between sunflower and soya meal. Other ingredients include limestone, soya or sunflower oil, vitamin and mineral mixes and other elements. Avangard does not use animal origin feedstuffs in its animal feed. Raw materials accounted for 81% of the company’s 2011 COGS.

Fodder accounts for 75% of Avangard’s egg production

costs

Avangard COGS Structure (2011)

Source: Company

Avangard SG&A Cost Structure (2011) Source: Company

Avangard’s 1H12 results were solid, with net sales rising 27% y-o-y to $283.6m thanks to higher average selling price (shell egg prices were up 26% y-o-y in 1H12) and growth in volume sales due to launch of new production capacities. EBITDA reached $122.1m (+34% y-o-y), for an EBITDA margin of 43.1%, with the surge attributed to early fodder grain purchases from the 2011 harvest at reduced prices (-15% y-o-y).

Avangard posted strong 1H12

results

Our EBITDA margin estimate is highly dependent upon Avangard’s grain purchase prices. The company claims it obtains a discount in grain purchase prices thanks to its long-term established relations with farmers and suppliers and pre-financing of sowing campaigns. Fodder accounts for over 65% of Avangard’s annual COGS, thus if the company for any reason would not be able to pre-finance agrarians in advance and secure sufficient grain volumes and lower prices for the season, this would yield a strongly negative effect on profitability. Expecting stronger grain prices in 2H12 based on global trends, we decided to stay on the conservative side. Thus, our current 2012 corn price estimate for Avangard is $170/t EXW, assuming the company used grain purchased in 2011 at reported $155/t and will purchase grain at market prices in 2H12.

Profitability is heavily

dependent upon grain purchase prices

Avangard’s mature laying hen flock is expected to increase by 11% y-o-y to 22.7 million head this year. Based on current egg price dynamics, we forecast the company will increase its 2012 average egg price by 10% y-o-y to UAH 0.70/egg (net of VAT). Expecting Avangard to increase its shell egg output by 5% y-o-y to 6.2 billion pieces in 2012 thanks to partial launch of new poultry complexes, Avis and Chornobaivske, and based on 1H12 trends, we forecast the company’s 2012 net sales at $639m (+16% y-o-y) and EBITDA at $257m (+4%), implying an EBITDA margin of 40.1% (-4.3pp y-o-y). ). In 2013, we estimate Avangard’s sales at $723m (+13% y-o-y on 12% output growth and 3% egg price growth) and EBITDA at $263m (+2%), implying an EBITDA margin of 36.3% (-3.8pp y-o-y; again due to expensive feed as Avangard will use 2012-harvested grain for feed in 1H13).

2012-13 outlook

Raw Materials 81%

Utilities and Wages

6%

Depreciation 4%

Other 9%

Wages 32%

External Services

27%

Transportation 26% Depreciation

2%

Repairs and maintenance

0%

Other 13%

November 2012


Avangard Net Sales and Profitability (2007-12E)


Production expansion plan

In 2007-08, Avangard began construction of the Avis and Chornobaivske egg production complexes in order to meet expected growth in demand. These new sites are being built in addition to the company’s existing facilities at Avis and Chornobaivske, boosting Avangard’s total shell egg production capacity to 8.2 billion pieces p.a. (vs. 6.0 billion pieces in 2011) and egg producing flock to 28.9 million birds in 2013. The company plans to complete both projects in 2013. Total CAPEX was estimated at $611m, with $271m invested prior to the company’s IPO (April 2010), $178m spent in 2010-11, $142m to be allocated in 2012 and the remaining $20m to be invested in 2013. Additionally, Avangard is also proceeding with increasing production capacities at its egg processing plant Imperovo Foods, planning to allocate $160m to the project over 2012-2013 (incl. $158m to be spent in 2012), targeting to double processing capacities to 6 million eggs per day in January 2013, and then to boost this figure to 10 million eggs per day in July 2013. We expect Avangard’s 2012-2013 CAPEX program to be financed mostly with own cash.

Avangard’s Capacity Expansion Plans

Sources: Company

Avangard’s CAPEX for Avis and Chornobaivske ($m)

Source: Company

End-1H12 debt stood at $328.5m

Avangard’s 1H12 debt stood at $328.5m, mostly comprised of long-term debt (62% of total) attributable to a $200m bond issued in October 2010. As of end-1H12, the company’s net debt stood at -$4.1m due to a high cash balance ($332.6m), with the cash accumulated for Avangard’s investment program. The company’s Net Debt/LTM EBITDA stood at -0.02x, the lowest ratio among domestic peers. We expect Avangard’s net debt position to increase substantially to $221m, attributable to major CAPEX plans that would decrease the company’s net cash position by $160-170m. Thus, we estimate Avangard’s 2012E Net Debt/EBITDA at 0.8x, which is still low compared to local peers such as MHP (2012E Net Debt/EBITDA of 1.4x), Astarta Holding (1.9x) and Mriya Agro Holding (1.2x).

128 302

320

440 553 639

723

224 284

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

600

700

2007 2008 2009 2010 2011 2012E 2013F 1H11 1H12

Net Sales ($m; lhs) EBITDA margin (%; rhs)Net margin (%; rhs)

15.7 18.9 18.9 24.9

28.0 28.9

5.2 5.2 5.2

6.8 8.0 8.2

0123456789

0

5

10

15

20

25

30

2008 2009 2010 2011 2012E 2013F

Laying Hens Capacity (million heads; lhs)

Shell Eggs Production Capacity (billion pieces; rhs)

124

54 59 70

147

14 51 72

20

0.0

0.3

0.5

0.8

1.0

Before IPO 2010 2011 2012E 2013E

Avis Chornobaivske

November 2012


Avangard Net Debt ($m)


Avangard Debt Structure (1H12)

Source: Company

Our current macroeconomic forecast for Ukraine assumes the hryvnia will depreciate to UAH 8.8:USD by end-1Q13 (vs. UAH 8.2:USD estimated previously). We expect Avangard to generate 42% of 2013F revenues from exports and the remainder in UAH. At the same time, its shell egg production costs account for 75% of total COGS, with 64% contributed by grain costs (50% USD-linked). This suggests that about 24% of Avangard’s total production costs are dollar-linked (vs. 42% for revenues). Thus, Avangard’s costs would shrink faster than revenues in USD-terms if the hryvnia depreciated, implying higher profitability.

Hryvnia depreciation would be

positive for Avangard’s 2013F margins

258 221

103 78 80

212 6.7

1.9

0.7 0.4 0.3 0.8

0.0

2.0

4.0

6.0

8.0

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012E

Avangard (lhs)

Net Debt/EBITDA (rhs)Long-term debt

62%

Short-term debt 38%

November 2012


Valuation COMPARATIVE VALUATION Company Price Currency MC EV/EBITDA P/E ($m) 2012E 2013F 2012E 2013F Avangard 10.20 USD 651 3.4 3.1 3.2 3.2 Premium (Discount) to MHP (UA) (58%) (30%) (21%) (51%) (41%) Premium (Discount) to Cherkizovo (RU) (18%) (33%) (46%) (21%) (24%) Premium (Discount) to Calmaine (US) (36%) (55%) (50%) (72%) (76%) Premium (Discount) to DM Peers (63%) (46%) (50%) (77%) (68%) Premium (Discount) to GEM Peers (90%) (74%) (79%) (79%) (77%) Closest Peers MHP (UA) 14.40 USD 1,562 4.8 3.9 6.5 5.4 Cherkizovo Group (RU) 12.12 USD 799 5.0 5.7 4.0 4.2 Calmaine (US) 42.36 USD 1,013 7.5 6.2 11.3 13.2 Developed Market Peers Atria Group (FI) 6.58 EUR 236 7.1 6.9 18.2 9.4 HKSCAN (FI) 3.85 EUR 269 6.0 5.6 23.6 9.4 Bell Holding (CH) 1943.00 CHF 819 5.4 4.7 10.3 9.8 Campofrio Alimentacion SA (MX) 5.62 EUR 730 6.3 6.2 13.8 11.7 L.D.C. (FR) 76.01 EUR 788 2.8 2.9 10.1 9.8 Sanderson Farms (US) 45.45 USD 1,044 8.7 7.7 21.4 29.3 Tyson Foods (US) 16.59 USD 6,008 4.4 4.2 9.0 10.6 Hormel Foods (US) 29.75 USD 7,821 8.7 8.1 15.6 15.0 DM Peers’ Median* - - 1,748 6.3 6.2 13.8 9.8 Emerging Market Peers Perdigao (BZ) 36.59 BRL 15,563 14.1 14.5 36.7 17.7 Charoen Pokphand Foods (TH) 36.00 THB 9,097 12.9 14.7 16.9 14.2 Astral Foods (SA) 10,245.00 ZAr 495 6.7 7.3 13.0 13.7 EM Peer Median* - - 6,671 12.9 14.5 15.0 13.9 Notes: *average for market capitalization; prices as of Nov. 9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS/FAIR VALUES Avangard (AVGR LI)


5

10

15

20

25

30

Apr-10 Sep-10 Jan-11 Jun-11 Oct-11 Feb-12 Jun-12 Nov-12

Market Price ($)

12-month PT ($)

November 2012



Period 2009 2010 2011 2012E 2013F Shell Eggs (billions) 3.6 4.4 6.0 6.2 7.0 Growth (%, y-o-y) 50% 22% 35% 5% 12% Egg Powder (‘000 t) 0.7 10.2 12.1 12.1 13.9 Growth (%, y-o-y) 54% 1277% 19% 0% 15%


Period 2009 2010 2011 2012E 2013F Net Sales 319.9 439.7 553.3 639.4 722.8 EBITDA 152.1 193.5 245.8 256.5 262.6 Depreciation (12.3) (12.6) (14.3) (16.9) (26.3) EBIT 139.8 180.9 231.5 239.6 236.3 Financial Income (5.0) 4.1 (31.4) (31.0) (27.2) Financial Loss (46.2) (29.9) (33.1) (33.0) (29.4) NIBT 134.8 185.0 200.1 208.6 209.1 Taxes (1.2) (0.3) (3.8) (3.9) (4.0) Net Income (Loss) 133.7 184.8 196.3 204.6 205.2


Period 2009 2010 2011 2012E 2013F Total Assets 844.1 1,079.0 1,305.7 1,486.5 1,661.4 Fixed Assets 414.1 516.0 652.0 936.2 1,046.2 PPE 375.4 396.2 512.7 795.8 904.5 Current Assets 430.0 563.0 653.7 550.3 615.2 Inventories 137.7 230.3 261.2 301.8 341.2 Accounts Receivable 47.3 54.7 51.4 59.4 67.2 Short-term Bank Deposits 155.9 0.0 0.0 0.0 0.0 Cash & Cash Equivalents 1.7 183.1 237.8 81.9 95.8 Total Liabilities & Equity 844.1 1,079.0 1,305.7 1,486.5 1,661.4 Total Liabilities 483.6 332.8 366.3 342.6 312.3 Accounts Payable 68.0 23.2 17.9 20.7 23.4 S/T Debt 173.2 30.5 104.6 78.1 45.1 L/T Debt 92.1 230.8 213.8 213.8 213.8 Equity 360.6 746.2 939.3 1,143.9 1,349.1

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) 6% 37% 26% 16% 13% EBITDA Growth (y-o-y) 34% 27% 27% 4% 2% Net Income Growth (y-o-y) 73% 38% 6% 4% 0% EBITDA Margin 47.6% 44.0% 44.4% 40.1% 36.3% Net Margin 41.8% 42.0% 35.5% 32.0% 28.4% Net Debt/Equity 30% 10% 9% 18% 12% ROE 55.8% 33.4% 23.3% 19.6% 16.5% EBITDA Coverage 3.3 6.5 7.4 7.8 8.9 Net Debt/EBITDA 0.7 0.4 0.3 0.8 0.6

November 2012


Creativ Group: Capacity Growth and Improving Profitability

Price Target ($) 16.77 Upside (%) 97%

Highlights

Ñ Profile Creativ Group is a leading Ukrainian vegetable oil and fats producer. The company accounts for 18% of total bottled oil output and 17% of soybean crushing volumes in Ukraine. Creativ Group is the largest producer of vegetable fats in Ukraine with a 33% volume share of total output.

Ñ Valuation implies 97% upside Our DCF and comparative valuations yield a price target of $16.77/share or 97% above the stock’s current price, suggesting a Buy recommendation. However, we note Creativ’s low stock liquidity compared to local peers.

Ñ Production capacity boost in 3Q12 as oilseed and fat plants commissioned In 2011-2012, Creativ invested in the construction of a brown-field sunflower seed crushing plant and launched the facility in 3Q12 adding 651 kt of crushing capacity p.a. Creativ’s overall sunseed crushing capacity thus reached 1,077 kt p.a. (+153% y-o-y and 11% of Ukraine’s total). In 3Q12, the company also launched a new workshop at its existing plant to produce vegetable fat spreads (annual capacity 70 kt p.a.), bringing its total fat and margarine production capacity to 214 kt p.a. (+49% y-o-y). Creativ invested more than $95m in 2011.

Ñ Soybean processing capacity to triple by end-2012 Creativ operates a brand-new soybean processing plant with 88 kt p.a. of crushing capacity and estimated 91% capacity utilization in 2011. The company plans to launch a second line with 182 kt p.a. capacity at the plant this year, tripling its annual soybean crushing capacity to 270 kt.

Ñ Financial outlook for 2012-13 We expect Creativ to increase its 2012 revenues by 16% y-o-y to $439m and report EBITDA of $95m (+10% y-o-y due to a lower sunseed harvest and possible margin squeeze on processing). In 2013, we estimate Creativ’s revenues at $530m (+21% y-o-y thanks to new production capacities) and EBITDA of $111m (+17%).

Ñ Debt As of end-2011, Creativ Group had $242.6m of long-term bank debt and $152.2m of short-term loans, or $394.8m in total. In October, the company negotiated a $255m syndicated credit line to finance its working capital needs, with the funds available until Aug. 31, 2015. Creativ’s 2011 Net Debt/EBITDA stood at 4.0x, being quite high vs. the sector average of 2.5x. The reason for the high ratio for sunflower oil producers is that they need significant working capital at the end of the calendar year to purchase sunflower seeds for crushing.

Ñ Risks Sunseed and soybean market price volatility is a key risk for Creativ.

Sell Hold Buy

Company Data Market Price ($) 8.52 Market Cap ($m) 87.3 Enterprise Value (12E; $m) 425.6 Free Float (%) 23.4% Free Float ($m) 20.4 Shares Outstanding 10,250,000 Nominal Value (EUR) 0.2 Bloomberg Code CRGR UK, 4C8A GR DR Ratio 1:1 Number of Employees 2,200



12-month Performance ($) 6% 12-month Rel. Perform. (KP-Dragon) 21% 12-month Low/High ($/share) 8.10/12.47 All-time Low/High ($/share) 2.22/16.15 12-month Trading Volume ($m) 0.2


Year 2009 2010 2011 2012E 2013F


Management - 76.6%

Free float - 23.4%

69

121518

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Creativ Group

KP-Dragon (rel.)

Fats & margarine

37% Sunflower oil

50% Meal & soybean

13%

November 2012



Creativ Group is a leading Ukrainian vegetable oil and fats producer. The company accounts for about 5% of domestic bulk sunflower oil output, 18% of the bottled oil market and 17% of soybean crushing volumes. Creativ Group is the largest producer of vegetable fats and margarines in Ukraine with a 33% volume share of total output.

Creativ is the largest Ukrainian producer of vegetable fats and

margarines

Creativ Group Revenue Breakdown (value; 2011) Source: Company

Creativ Group Revenue Breakdown (value; 2012E) Sources: Company, Dragon Capital estimates

In 2011, sunflower oil accounted for a major chunk of Creativ’s revenues in value terms (46%; -3.3pp y-o-y). Fat and margarine sales represented 39% (-8.9pp y-o-y) of 2011 net sales. In 2012, we expect sunflower oil to contribute 50% to Creativ’s revenues (+3.9pp y-o-y) while fats and margarines’ share is forecast to decline to 37% (-1.9pp y-o-y).

Sunflower oil to increase its share of 2012 revenues thanks

to new capacities

Over 2011-2012, the company has invested in construction of a brown-field sunflower seed crushing plant located opposite its existing crushing facility that was launched in 2009. The new plant was launched in 3Q12, adding 651 kt of seed crushing capacity p.a. Creativ’s overall sunseed crushing capacities thus reached 1,077 kt p.a. (+153% y-o-y and 11% of Ukraine’s estimated total). Capacity expansion was more rapid than expected compared to earlier plans to add about 300 kt p.a. to crushing output. We expect Creativ to increase its 2012 sunflower oil revenues by 26% y-o-y to $218.2m (at 50% capacity utilization).

Creativ boosted sunflower seed crushing capacities by

153% in 3Q12, to 1,077 kt p.a…

Creativ Group Sunflower Oil Production Source: Company

Creativ Group Fat and Margarine Production Source: Company

Creativ produces margarines and fats for the food processing industry (mainly confectionary and dairy), and sells margarines directly to the end-consumer under “Sonola” and “Divnoe” brands. The company launched production of new spreads in 3Q12 with capacity of 70 kt p.a., bringing its total fat and margarine production capacity to 214 kt (+49% y-o-y). More importantly, the company uses in-house sunflower oil for fats production and thus earns about 30% gross margin — the highest among all of Creativ’s business segments.

…and increased its fats and margarines production

capacities by 49%...

Sunflower oil & feed

46.1%

Fats & margarines

39.1%

Meal & soybean products

8.3%

Other 6.6%

Sunflower oil & Fodder 49.7% Fats &

margarines 37.0%

Meal & soybean products 11.3%

Other 2.0%

24 48 62 44 77

108 119 167

234

050100150200250300350

0

50

100

150

200

2005 2006 2007 2008 2009 2010 2011 2012E 2013F

Production in volume terms (kt; lhs)Production in value terms ($m; rhs)

24 33 42 66 113 124 128 132 132

0

50

100

150

200

0

50

100

150

200

2005 2006 2007 2008 2009 2010 2011 2012E 2013F

Production in volume terms (kt; lhs)

Production in value terms ($m; rhs)

November 2012


Creativ Group Fat and Margarine Production Capacities (kt p.a.) Source: Company

Creativ Group Fat and Margarine Revenues ($m) Source: Company

…paving the way for higher fat and margarines sales in 2012-13

We expect Creativ to increase fat and margarine sales this year by 10% y-o-y to $162.3m, thanks to increased volumes and prices, accounting for 37% of total projected revenues. In 2013, we expect the company to earn $161.3m (or 30% of total revenues) from the vegetable fats segment (-1% y-o-y due to assumed hryvnia depreciation as vegetable fats are sold in Ukraine).

Soybean crushing capacity is expected to triple in 2012…

Creativ also operates a brand-new soybean processing plant in which it holds a 51% stake (49% is owned by a Russian partner). The plant has annual crushing capacity of 88 kt p.a. and was 91% utilized in 2011. Creativ plans to launch a second production line with 182 kt p.a. capacity in 2012, bringing the total to 270 kt p.a. The plant produces fodder meal, oil and high-protein products for the food processing industry.

Creativ Group Sunflower Oil Segment Source: Company

Creativ Group’s New Oil Extraction Plant Source: Company

…implying higher soybean sales in 2012-13

We estimate Creativ will increase sales of soybean products (oil and protein cake, which are highly demanded by food processors) by about $30m this year (flat y-o-y). Should the company complete the second production line at its soybean crushing facility, it could triple soybean product sales as early as 2013, to $90m. Staying conservative, we did not incorporate this possible growth into our valuation model.

New businesses: crop cultivation, biofuel pellet production, and pig breeding

Creativ started cultivation of sunflower seeds, soybeans, rapeseed and grains in 2011, with the agro-farming segment so far contributing an insignificant share to revenues (0.5% in 2011). The company cultivated 20,000 ha of land last year, and plans to grow its land bank to 100,000 ha by end-2014. Creativ also started biofuel pellet production last year. The first plant with 40 kt p.a. capacity was launched in July 2011, followed by a husk pellet workshop with 93 kt p.a. capacity at the new oil-extraction plant (launched in 3Q12). The company plans to add another 40 kt p.a. of pellet production capacity in early 2013. Creativ also expanded into pig breeding with a 60,000 head farm launched at full capacity in March 2012.

36 36 36 36 72 72

144 144 144 144 144

214 214

0

50

100

150

200

25020

01

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

Capacities in volume terms (kt)

107 138 126

147 165

178

0

50

100

150

200

2008 2009 2010 2011 2012E 2013F

Revenues ($m)

91

426 426 426

1,077 1077 70 77

129 173

218

306

0

50

100

150

200

250

300

350

0

200

400

600

800

1,000

1,200

2008 2009 2010 2011 2012E 2013E

Crushing capacities (kt p.a.; lhs)

Revenues ($m; rhs)

November 2012


Creativ Group Soybean Crushing Segment Source: Company, Dragon Capital estimates

Creativ Group’s First Oil Extraction Plant Source: Company

As of end-2011, Creativ Group had $242.6m of long-term bank debt and $152.2m of short-term loans (incl. $80.3m current portion of long-term debt), bringing the total to $394.8m. The company’s Net Debt/Equity ratio totaled 285%, which is quite high and outperformed the 54% ratio reported by the company’s closest peer Kernel Holding as of end-1H12FY (Dec. 31, 2011). The reason for the high ratio for sunflower oil producers is that they need significant working capital at the end of the calendar year to purchase sunseed for crushing. Sunflower is harvested in September-October and the second half of the year is the best time to increase inventories. Crushers’ short-term debt levels are therefore lowest in summer, before the new harvest arrives. Thus, moving the fiscal year to July-June, in line with Kernel, would produce much lower leverage ratios for Creativ. In October, Creativ agreed a $255m credit line to finance its working capital needs. The facility will be disbursed in two tranches paying 1mLIBOR+7% and 1mLIBOR+7.4%, respectively, with the funds available until Aug. 31, 2015.

Debt position

In 2012, Ukraine’s sunflower seed crushing capacity totaled more than 8.5 Mt, with Kernel being the largest seed crusher with 3.0 Mt capacity. At the same time, the 2012 sunflower seed harvest in Ukraine is forecast at 7.9 Mt (-10% y-o-y). The excess of processing capacities over sunflower seed production implies tighter competition for sunflower seed purchases. We believe this may push sunflower seed prices higher in the long run and squeeze crushers’ gross margins.

Raw material supply risk

Creativ Group Sunflower Seed Purchase Schedule (volume terms; 2012E)

Source: Company

Creativ Group Debt Structure (end-2011) Source: Company

Creativ sells fats and margarines in Ukraine, obtaining hryvnia-denominated revenues (30% of total net sales). However, 70% of its revenues (sunflower and soybean products, which are exported) are USD-linked. Creativ’s vegetable fat segment costs are about 80% USD-linked (i.e. sunflower oil and palm oil costs), and sunseed and soybean processing costs are approx. 90% dollar-linked. Thus, about 85% of Creativ’s overall COGS are USD-linked (vs. 70% for revenues), meaning negative impact of potential hryvnia depreciation. This implies a margin squeeze in 2013 if our new F/X rate forecast of UAH 8.8:USD (vs. UAH 8.2:USD previously) materializes.

Hryvnia depreciation negative for Creativ’s EBITDA

88 88

270 270 6.7

31.3 30 31

0

10

20

30

40

0

100

200

300

400

2010 2011 2012E 2013F

Crushing capacities (kt p.a.; lhs)

Revenues ($m; rhs)

2% 5% 6% 7% 7%

5% 3%

1%

18%

12%

16% 18%

0%

5%

10%

15%

20%


Share of annual sunflower seed purchases

Long-term debt 61.5% Short-term debt

38.5%

November 2012



Price Currency MC EV/Sales EV/EBITDA P/E $m 2012E 2013F 2012E 2013F 2012E 2013F Creativ Group 8.52 USD 87 0.97 0.78 4.5 3.7 1.9 1.4 Premium (Discount) to Kernel Holding (94%) (3%) (17%) (33%) (42%) (76%) (82%) Premium (Discount) to GEM Peer Median (97%) 42% 17% (57%) (61%) (85%) (90%) Kernel Holding 19.71 USD 1,570 1.00 0.94 6.7 6.4 7.9 7.4 GEM Peers China Agri-Industries (CH) 4.6 HKD 2,412 0.43 0.41 11.3 9.8 11.0 8.3 IOI Corporation (KL) 5.0 MYR 10,553 2.08 2.07 13.6 11.9 18.2 15.8 China Foods (HK) 7.7 HKD 2,778 0.56 0.55 9.2 9.0 23.7 19.0 Thai Vegetable Oil (TH) 24.9 THB 657 0.81 0.78 9.7 9.3 10.7 11.5 GEM Peer Median* 3,301 0.68 0.66 10.5 9.6 12.2 13.6 Notes: *averages shown for market capitalizations; prices as of Nov. 9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS/FAIR VALUES Creativ Group (CRGR UZ)


0

10

20

30

40

Nov-07 Jul-08 Apr-09 Dec-09 Sep-10 May-11 Jan-12 Oct-12

Market Price ($) PT/Fair Value ($)

November 2012



Period 2009 2010 2011 2012E 2013F Fats and Margarine (kt) 112.8 124.1 127.8 131.7 131.7

Growth (%; y-o-y) 70% 10% 3% 3% 0% Sunflower Oil (kt) 77.4 108.3 119.1 166.8 233.5 Growth (%; y-o-y) 77% 40% 10% 40% 40% Soy Products (kt) - - 59.8 62.8 66.0 Growth (%; y-o-y) - - 5% 5%


Period 2009 2010 2011 2012E 2013F Net Sales 222.2 264.9 378.1 438.8 529.9

EBITDA 50.2 61.7 86.5 95.3 111.2 Depreciation 4.5 6.1 8.7 13.2 13.3 EBIT 45.7 55.6 77.8 82.1 97.9 Net Financial Income (Loss) (18.8 ) (25.9 ) (34.8 ) (34.5 ) (32.2 ) NIBT 26.9 29.8 43.0 47.6 65.8 Taxes (0.9 ) (0.0 ) (0.8 ) (0.9 ) (1.3 ) Net Income (Loss) 26.0 29.7 42.2 46.7 64.5


Period 2009 2010 2011 2012E 2013F Total Assets 248.5 360.0 566.6 600.1 656.0

Fixed Assets 143.0 171.5 272.5 274.3 276.0 PPE 134.3 169.9 256.5 258.3 260.0 Current Assets 105.5 188.6 294.1 325.8 380.0 Inventories 52.3 88.4 138.7 164.4 199.8 Accounts Receivable 42.7 98.0 107.2 124.4 150.3 Cash & Cash Equivalents 10.5 2.1 48.2 37.0 30.0 Total Liabilities & Equity 248.5 360.0 566.6 600.1 656.0 Total Liabilities 198.2 280.4 457.0 443.9 435.3 Accounts Payable 14.2 31.3 52.6 62.3 75.8 S/T Debt 64.4 95.5 152.2 152.2 152.2 L/T Debt 102.9 144.1 242.6 222.6 202.6 Equity 50.3 79.6 109.6 156.2 220.7

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) 11% 19% 43% 16% 21%

EBIT Growth (y-o-y) 119% 23% 40% 10% 17% Net Income Growth (y-o-y) nm 14% 42% 11% 38% EBITDA Margin 22.6% 23.3% 22.9% 21.7% 21.0% Net Margin 11.7% 11.2% 11.2% 10.6% 12.2% Net Debt/Equity 312% 298% 316% 216% 147% ROE 51.7% 37.4% 38.5% 29.9% 29.2%

November 2012


IMC: Aiming for a Place Among Top Ukrainian Agribusinesses

Price Target (PLN) 22.30 Price Target ($) 6.80 Upside (%) 53%

Highlights

Ñ Profile IMC is an integrated agricultural producer operating in northern and central Ukraine. The company’s core business is grain farming (more than 80% of 2012E revenues), particularly corn, sunflower seed and wheat growing, as well as crop storage and processing. In addition, IMC is involved in cattle breeding and milk production, being one of Ukraine’s top-10 industrial milk producers. IMC currently operates a land bank of 82,700 ha and storage capacities of 223 kt.

Ñ Valuation implies 53% upside and a Buy recommendation The average of our DCF and comparative valuations yield a 12-month price target (PT) of $6.80/share —implying a 53% upside to the stock’s current market price. We recommend IMC as a Buy.

Ñ Strong operating results… We expect IMC’s increased land bank under cultivation (+117% y-o-y for the 2012 harvest) to underpin a strong increase in grain and oilseed production this year (est. +82% y-o-y to 313 kt), even though we conservatively downgraded our 2012 yield estimate by 19% y-o-y to 4.0 t/ha in view of adverse weather impact.

Ñ …underpin expected tripling of 2012 revenue IMC’s crop mix makes the company well-placed to benefit from favorable domestic and global demand in 2012 underpinned by concerns about possible supply shortages due to unfavorable weather. Given IMC’s large 2012 opening grain stocks and solid harvest outlook for the year, we forecast its 2012 revenues to increase threefold (+227% y-o-y), to $95.2m, driven mostly by grain revenues (+341% y-o-y to $82.1m). We estimate 2012 EBITDA at $39.0m (+61% y-o-y) and EBITDA margin at 34.3% (-11.2pp y-o-y due to weather impact on yields), in line with the domestic sector average.

Ñ Further land bank expansion is a key medium-term target IMC’s strategic plan calls for land bank expansion to 120,000 ha by end-2012 and 285,000 ha by 2020. The company plans to remain predominantly a crop producer, while maintaining a livestock breeding division to provide smooth cash flows throughout the year. Driven mostly by the farming segment, IMC’s total sales are expected to grow at a 123% CAGR in 2012-13, to $144m in 2013, proceeding at a CAGR of 12% to reach $317m in 2020 ($360m of total revenues accounting for an IAS 41 effect of $44m).

Ñ Risks: weather, land reform and export restrictions Weather represents the main risk to our operating and financial assumptions for IMC.

Sell Hold Buy

Company Data Market Price (PLN) 14.51 Market Price ($) 4.44 Market Cap ($m) 139.0 Enterprise Value (12E; $m) 196.9 Free Float (%) 23.9% Free Float ($m) 33.2 Shares Outstanding 31,300,000 Nominal Value (EUR) 0.0018 Bloomberg Code IMC PW DR Ratio - Number of Employees 4,290





Year 2009 2010 2011 2012E 2013F


Agrovalley Limited - 68.19%

Management - 7.92%

Free Float - 23.9%

1.0

3.0

5.0

7.0

Nov-11 Feb-12 May-12 Jul-12 Oct-12

IMCKP-Dragon Index (rel.)

Corn 58%

Wheat 7%

Sunflower Seeds 17%

Potato 3%

Milk 9%

Other 6%

November 2012



IMC is an integrated agricultural company operating in northern and central regions of Ukraine (Chernihiv, Poltava and Sumy). The company operates a land bank of 82,690 ha and storage capacities of 223 kt, planning to bring its total farmland and storage to 120,000 ha and 551 kt respectively by end-2012, thus firmly positioning itself among the top Ukrainian agricultural producers. The company’s core business focuses on grain farming, particularly corn, wheat, sunflower, and potatoes, as well as crop storage and processing. In addition, IMC is involved in cattle breeding and milk production, being among Ukraine’s top-10 industrial milk producers. IMC is fully self-sufficient in storage facilities, which are located close to the company’s arable land and fodder facilities. Vertical integration (self-sufficiency in feed for milk production) reduces the company’s dependence on third-party suppliers.

IMC is a diversified agricultural producer…

IMC Land Bank in Ukraine Note: *land bank in thousands of hectares; **storage capacities in kt. Source: Company

IMC Revenue Structure (value terms; 2012E) Source: Dragon Capital estimates

Pursuing an aggressive expansion strategy after going public in April 2011, IMC has since more than doubled its land bank to 83,000 ha from the 38,000 ha it possessed pre-IPO. The company plans to increase its acreage to 120,000 ha by end-2012 and to 285,000 ha by 2019 via acquisition of existing farms and organic growth of existing land holdings (acquiring lease rights from neighboring landowners).

…with 83,000 ha of land…

For the 2012 harvest, IMC planted 7,800 ha of winter crops, particularly wheat (6,000 ha or 7% of cropland) and rye (1,800 ha; 2%), and 73,000 ha of spring crops (+137% y-o-y), including 40,500 ha (50% of total planted area) under corn (+170% y-o-y as corn occupied most of the new land), 18,100 ha (22%) under sunflower (+262%) and 5,300 ha (6%) under soybean (+8%). Potatoes were planted on 700 ha (2% of total).

...with corn plantings accounting for 50% of 2012

cropland

IMC Land Bank (’000 ha; 2007-13F)

Note: *year-end. Source: Company IMC Cropland Breakdown (2012E)

Source: Company

Livestock Breeding

9.2%

Storage & Processing

1.9%

Farming 88.8%

34 36 36 38

60

120 130

34 36 35 38

83

120

0

30

60

90

120

150

2007

2008

2009

2010

2011

2012

E

2013

F

Total* Cultivated

Corn 49%

Sunflower 22%

Winter wheat 7%

Soybean 6%

Potatoes 1%

Fodder crops 7%

Other crops 3% Fallow land

5%

26.8* (118**) 24.6

(34)

31.3 (87)

November 2012


Modern farming practices ensure above-average crop yields…

Employing modern farming practices (fertilizer mix, crop protection and high quality seeds) and optimum crop rotation, IMC routinely outperforms average domestic yields. In 2011, IMC’s reported corn yield of 8.0 t/ha was 25% above the Ukrainian average of 6.4 t/ha, while its wheat (4.2 t/ha) and sunflower (2.6 t/ha) yields were 27% and 47% above the respective country averages. Moreover, thanks to superior potato cultivation technology (in 2011 the company utilized a Fieldlook system of satellite monitoring for its potato fields in partnership with the IFC) and favorable weather, IMC also outperformed the average domestic potato yield by 48% last year (24.9 t/ha vs. 16.8 t/ha).

…with costs per hectare 20% below Ukrainian average

The company also demonstrated remarkable efficiency over 2009-11, reporting costs per tonne of harvest produced that were on average 20% below the respective domestic averages. This supports the argument about the company pursuing effective agricultural technologies and optimum crop rotation practices rather than overspending to achieve superior yields.

IMC Crop Yields vs. Ukrainian Averages (t/ha; 2011)

Sources: Company, SSS IMC Production Costs vs. Ukrainian Averages ($/t; 2011)


Yields are expected to decline in 2012 due to unfavorable weather…

Due to less favorable weather in 2012 (particularly dry and cold winter and a very hot summer), we anticipate IMC’s 2012 average crop yield will decline by 19% y-o-y to 4.0 t/ha, or 6.0 t/ha for corn (-25% y-o-y and 20% below IMC’s initial expectation), 2.0 t/ha for sunflower (-26% and -20%, respectively), 4.0 t/ha for wheat (-6%; based on actual bunker-weight yield of 4.43 t/ha reported by the company), 24.9 t/ha for potatoes (flat y-o-y as weather did not damage the crop).

…but the harvest volume (net of feed crops) is still anticipated at a strong 330 kt (+77% y-o-y)

Despite the projected decrease in yields, we estimate that IMC’s increased cropland (+117% y-o-y) will underpin a strong increase in this year’s grain and oilseed harvest of 82% y-o-y to 313 kt (vs. 172 kt in 2011). We forecast its potato harvest will rise by 13% y-o-y to 17 kt thanks to 13% cropland growth and expected flat yields as weather in the Chernihiv region (where IMC grows potatoes) was favorable for the crop. Meanwhile, IMC recently completed winter crop harvesting collecting 26.5 kt of wheat (5,981 ha) and 5.2 kt of rye (1,730 ha), with respective yields of 4.43 t/ha and 3.03 t/ha (both in bunker weight and in line with our expectations).

We forecast 2012 sales will surge by 227% y-o-y to $95.2m…

We forecast the company will boost 2012 revenues by 227% y-o-y to $95.2m, with the positive impact of increased acreage and end-2011 grain stock disposal being complemented by favorable prices (albeit offset by lower yields). Farming is thus expected to contribute 89% of total revenues (+21pp y-o-y). Corn, sunflower and wheat are expected to be the largest crop contributors to 2012 revenues with estimated shares of 58.1%, 16.5% and 7.5%, respectively. Dairy and service revenues are expected at $8.8m (+15% y-o-y; 9.2% of total revenues) and $1.8m (+15% and 1.9% of total), respectively.

8.0

4.2 2.6 3.0

24.9

6.4

3.4 1.8 2.1

16.8.

0.0

5.0

10.0

15.0

Corn Winter wheat Sunflower seed Rye Potato

IMC avg. yields (t/ha)

Ukrainian avg. yields (t/ha)

88 110

175

102 93 117

209

154

0

50

100

150

200

250

Corn Winter Wheat Sunflower seed Potato

IMC ($/tonne)

Ukrainian average ($/tonne)

November 2012


We expect IMC to report an $18.7m net gain from changes in the fair value of biological assets and agricultural products in 2012 (compared to $24.2m in 2011), implying gross revenues of $113.9m. We forecast 2012 EBITDA of $39.0m (+61% y-o-y), implying an EBITDA margin of 34.3% (-11.2pp y-o-y due to lower yields hit by unfavorable weather). The estimated EBITDA margin is slightly above the domestic sector average of 31.7% in the top percentile with Mriya and MHP, the domestic market leaders in terms of efficiency. IMC’s 2012E net margin of 22.6% is also broadly in line with the market average.

…estimating EBITDA margin at 34.3%

IMC Revenue Breakdown (2012E) Source: Dragon Capital estimates

IMC Net Sales and Profitability Margins (2007-12E) Source: Company

Supporting our full-year forecast, IMC reported strong 1H12 financial results posting revenues of $32.1m (+193% y-o-y), income from change in fair value of biological assets (IAS 41) of $33.9m (+51% y-o-y), normalized EBITDA (net of non-recurring items) of $29.3m (+42%) and net income of $24.2m (+43%), implying strong normalized EBITDA and net margins of 44.4% and 36.6%. The bulk of first-half revenues came from grain sales: corn accounted for 54% of total revenues or $17.4m (+242% y-o-y), sold at an average price of $237/tonne; sunflower contributed 17% or $5.5m (vs. $0.1m in 1H11), at $427/t on average; and wheat brought in 3% or $1.0m (+344%), at $189/t. Sales of milk contributed 10% of 1H12 revenues, or $3.3m (+20% y-o-y). Export sales (grain) accounted for 55% of total revenues over the period.

1H12 revenue surged by 193% y-o-y

We forecast IMC will boost 2013 revenues by 51% y-o-y to $144m on the back of land bank expansion (+44%) and higher yields (+28% on average), though lower expected crop prices (-10% on average from 2012 highs). Meanwhile, along with increased efficiency and lower costs per hectare, the company’s 2013 operating profitability should also be positively affected by projected hryvnia depreciation (to UAH 8.8:USD on average in 2013) as more than 80% of IMC’s revenues and only 40% of costs are foreign currency-linked. We thus forecast IMC’s 2013 EBITDA will reach $61.4m (+57% y-o-y) and net income total $40.0m (+56%), implying hefty EBITDA and net margins of 36.7% and 23.9%.

We forecast crop sales will drive IMC revenues up by 51%

in 2013

Livestock Breeding

9.2%

Storage & Processing

1.9%

Corn 58.1%

Sunflower Seeds 16.5%

Wheat 7.5%

Potato 2.6%

Other 4.1%

Farming 88.8%

20.2 34.8 29.1

95.2

7.6

10.2 24.2

18.7

0%

10%

20%

30%

40%

50%

0

25

50

75

100

125

2009 2010 2011 2012E

Net sales ($m; lhs) IAS 41EBITDA margin (%, y-o-y; rhs) Net margin (%, y-o-y; rhs)

November 2012


Valuation COMPARATIVE VALUATION Company Price Currency MC* EV/EBITDA (x) P/E (x)

$m 2012E 2013F 2012E 2013F IMC 4.44 USD 139 5.0 2.9 5.4 3.5 Premium/(discount) to Ukrainian peers (65%) 9% (28%) (7%) (33%) Premium/(discount) to Russian peers (45%) (10%) (48%) 40% (24%) Ukrainian Peers Mriya Agro Holding 6.23 USD 662 4.4 4.1 4.7 5.2 Astarta Holding 18.85 USD 471 4.9 4.5 5.2 5.2 MHP 14.40 USD 1,562 4.8 3.9 6.5 5.4 Agroton 3.41 USD 74 4.1 2.6 6.4 2.9 Ukrainian Peers’ Median 392 4.6 4.0 5.8 5.2 Russian Peers Rusgrain 14.5 RUB 20 2.0 2.0 0.5 - Razguliay 12.36 RUB 62 5.6 5.6 2.3 1.4 Trigon Agri 5.70 SEK 110 7.5 7.8 90.0 4.3 Ros Agro 7.00 SEK 835 4.3 4.5 5.4 4.9 Black Earth Farming 12.35 USD 229 12.6 10.5 neg. 16.8 Russian Peers’ Median 251 5.6 5.6 3.9 4.6 Notes: *averages shown for market capitalizations; prices as of Nov. 09, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS IMC (IMC PW)

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Jun-12 Aug-12 Oct-12

Market Price 12M PT

November 2012



Period 2009 2010 2011 2012E 2013F Land Cultivated (‘000 ha; e-o-p) 36 36 38 83 119 Growth (%, y-o-y) - (0%) 7% 117% 44% Grain and Oilseeds Production (‘000 t) 154 117 172 313 590 Growth (%, y-o-y) 21% (24%) 47% 82% 89% Potatoes Output (‘000 t) 4 6 15 17 18 Growth (%, y-o-y) 98% 54% 165% 13% 1%


Period 2009 2010 2011 2012E 2013F Net Sales 20.2 34.8 29.1 95.2 144.1 EBITDA 7.1 18.0 24.3 39.0 61.4 Depreciation (2.2) (3.5) (5.1) (7.5) (8.6) EBIT 4.9 14.5 19.2 31.5 52.8 Net Financial Income (Loss) (3.1) (1.9) (1.8) (5.8) (7.5) NIBT 1.8 12.6 17.4 25.7 40.0 Income Tax Benefit (Expense) (0.2) 2.1 (0.1) 0.0 0.0 Net Income (Loss) 1.6 14.8 17.3 25.7 40.0


Period 2009 2010 2011 2012E 2013F Total Assets 86.5 87.4 138.7 208.0 242.2 Fixed Assets 56.3 59.4 74.9 129.0 134.9 Current Assets 30.2 28.0 63.8 79.0 107.2 Inventories 14.2 13.0 40.6 52.6 66.9 Current Biological Assets 3.8 6.1 11.1 10.8 11.8 Accounts Receivables 1.3 3.8 1.4 5.2 7.5 Cash & Cash Equivalents 0.0 2.0 4.6 2.6 10.4 Total Liabilities & Equity 86.5 87.4 138.7 208.0 242.2 Total Liabilities 38.5 20.2 29.7 73.3 67.4 Accounts Payable 0.9 0.5 1.5 3.1 4.6 S/T Debt 20.5 3.5 8.0 7.9 22.9 L/T Debt 5.7 8.7 14.1 52.7 27.7 Equity 43.9 69.8 107.0 132.7 172.8

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) (19%) 72% (16%) 227% 51% EBITDA Growth (y-o-y) (69%) 154% 35% 61% 57% Net Income Growth (y-o-y) (88%) 818% 17% 48% 56% EBITDA Margin 46.9% 43.3% 48.2% 34.3% 36.7% Net Margin 5.8% 32.8% 32.6% 22.6% 23.9% Net Debt/Equity 59.7% 14.6% 16.3% 43.7% 23.3% ROE 4.0% 25.6% 19.7% 21.1% 25.9% EBITDA coverage

2.28 9.66 13.76 6.75 8.19 Net Debt/EBITDA

3.69 0.57 0.72 1.48 0.65

November 2012


Kernel Holding: Expanding into Russia


Highlights

Ñ Valuation upgraded on strong 1Q13FY and announced acquisition plan Our 12-month price target (PT) for Kernel Holding, factoring in announced details of acquisitions in Russia and Ukraine as well as strong 1Q13FY operating results, yields $21.90/share — suggesting 5% upside to the current market price, or a Hold.

Ñ Strong 1Q13FY operating results Kernel reported strong 1Q13FY (July-September 2012) operating results. The company boosted bulk sunflower oil sales by 89% y-o-y to 199.0 kt while increasing sunflower seed crushing volumes by 60% y-o-y to 458.1 kt, implying that it used carried-forward sunflower seed and oil inventories from 4Q12FY (April-June). In the grain export segment, Kernel reported an 89% y-o-y surge in port terminal throughput volumes, to 740.1 kt, and 509.5 kt of own grain exports (+22% y-o-y) shipped via the company’s terminal in Illichivsk (about 50% of total) and other Black Sea ports. Stronger grain exports from Ukraine underpinned the reported 89% y-o-y surge in terminal throughput. The company executed its first grain export contract in Russia in July 2012 following acquisition of the Taman Black Sea port (via a 50/50 JV with a Russian subsidiary of Glencore),

Ñ Acquisition pipeline for 2013FY-16FY Kernel’s Russian CAPEX for 2013-16FY includes investments of $100-120m to build a greenfield crushing plant; $100m to build or acquire silos; and $30-40m to boost Taman port’s grain handling capacity to 5-6 Mt p.a. vs. nameplate 3 Mt p.a. and current actual throughput of about 1.5 Mt p.a. In Ukraine over the same period, Kernel plans to spend $300-350m to acquire a crushing plant (500 kt p.a.) and an additional 120,000 ha of land (vs. current 330,000 ha). We believe Kernel’s CAPEX will be financed with own cash flows and, partially, new debt, with the company’s end-2012FY Net Debt/EBITDA of 1.9x outperforming the Ukrainian sector average of 2.5x.

Ñ Solid 2014FY outlook; 2013FY management guidance weaker than expected Kernel recently announced quite conservative 2013FY guidance with revenues projected at $2.4bn (+11% y-o-y), EBITDA at $350m (+8%) and net income at $215m (+8%) — all weaker than expected. Our 2013FY and 2014FY revenue forecasts for Kernel of $2.4-2.5bn reflect higher than expected grain export volumes (Ukrainian and Russian operations combined already in 2014FY). We thus increased our 2014FY export estimates from 2.1 Mt to 2.5 Mt (+20% y-o-y). Our 2013FY EBITDA forecast is $351m while 2014FY projection is $408m (+16% y-o-y). Kernel estimates its Russian operations will contribute $120m to EBITDA as early as 2016FY, when planned acquisitions have been completed.

Ñ Risks Weather and price volatility on soft commodities markets as well as potential government-imposed export curbs are the key risks for Kernel Holding.

Sell Hold Buy

Company Data Market Price (PLN) 64.40 Market Price ($) 19.71 Market Cap ($m) 1,570.5 Enterprise Value (13FYE; $m) 2,169.9 Free Float (%) 61.77% Free Float ($m) 970.1 Shares Outstanding 79,683,410 Nominal Value (EUR) - Bloomberg Code KER PW DR Ratio - Number of Employees 16,000



12-month Performance ($) (5%) 12-month Rel. Perform. (KP-Dragon) 18% 12-month Low/High ($/share) 14.76/23.83 All-time Low/High ($/share) 3.94/31.09 12-month Trading Volume ($m) 541.0

Valuation Summary 2012FY Revenues ($m)

Year 2010FY 2011FY 2012FY 2013FYE 2014FYF

Net Sales ($m) 1,020.5 1,899.1 2,169.2 2,399.2 2,502.9 EBITDA ($m) 190.0 309.6 324.6 351.4 408.2 Net Income ($m) 151.7 226.0 198.6 211.4 228.1 P/E 9.5 6.9 7.9 7.4 6.9 EV/EBITDA 9.1 6.0 6.7 6.4 5.4 EV/Sales 1.69 0.99 1.00 0.94 0.88 P/Book 2.38 1.57 1.28 1.12 0.97

Namsen Ltd. - 38.23%

Free float - 61.77%

10

15

20

25

30


Kernel Holding KP-Dragon (rel.)

Bulk Sunoil 57.9%

Bottled Sunoil 9.8%

Grain 29.1%

Silo Services 1.5%

Farming 1.3%

Grain Terminal

0.3%

November 2012



Kernel Holding is Ukraine’s largest sunflower oil producer (operating 36% of the country’s total sunflower seed crushing capacity), largest sunflower oil exporter (with a 25% share of total in 2011/2012), and is also the country’s largest bottled sunflower oil seller (with a 32% share over the period).

The largest sunflower oil producer and exporter in

Ukraine

Sales of Bottled Sunflower Oil in Ukraine (% share; 2012FY) Source: Company

Sunflower Seed Crushing Capacity in Ukraine (% share; 2012FY) Source: Company

Kernel crushed 2.5 Mt of sunflower seeds in 2012FY (+25% y-o-y; July 2011-June 2012) and produced and sold 828.4 kt of bulk oil (+1% y-o-y) and 131.9 kt of bottled oil (+12% y-o-y). Sunflower oil (bulk and bottled) contributed 67.7% to total revenues and 80.7% to EBIT in 2012FY, with the bulk oil operating margin remaining stable at 14% thanks to availability of sunflower seeds following a record high sunflower seed harvest in Ukraine that reached 8.8 Mt last year (+20% y-o-y).

Sunflower oil contributed 68% to revenues and 81% to EBIT in

2012FY

Kernel Holding Revenue Breakdown (value terms; 2012FY)* Note: *net of inter-segment revenues. Source: Company Kernel Holding EBIT Breakdown (value terms; 2012FY)*

Note: *net of inter-segment revenues. Source: Company

Kernel accounted for almost 10% of Ukraine’s total grain exports (-4.5pp y-o-y) in 2011/12 MY (July-June). The company exported 2.1 Mt of grain in 2012FY (+17% y-o-y; below the company’s original guidance of 2.5-3.0 Mt), with shipments through its terminal in Illichivsk reaching 1.8 Mt (-15% y-o-y). Overall grain export volumes from Ukraine suffered from export tariffs in July-October 2011 and severe winter which kept Black Sea ports frozen in January-February 2012. Thus, the share of grain trading in Kernel’s 2012FY revenues declined to 29.1% (-2.0pp y-o-y), and the segment’s EBIT contribution dropped to 10.6% (-14pp y-o-y). The grain trading segment’s EBIT margin was down by 7.1pp y-o-y (to 4.3%) in 2012FY, suffering in 2H12FY when local farmers became reluctant to sell their harvests in anticipation of an increase in prices fueled by expectations of a lower harvest in 2012 that forced traders to offer farmers higher prices and thus settle for lower profit margins. On top of this, the abolition of VAT refunds (which took effect from the beginning of 2012FY) also pressured margins.

Grain trading segment disappointed last year

Kernel 32.0%

Bunge 22.0% Korolivsky smak

7.0%

Others 39.0%

Kernel 36.0%

Cargill 14.0% Bunge

6.0%

Others 44.0%

Bulk Sunflower Oil

57.9%

Bottled Sun Oil 9.8%

Grain Exports 29.1%

Silo Services 1.5%

Farming 1.3%

Grain Terminal Transshipment

0.3%

Bulk Sunflower Oil

67.5%

Bottled Sunflower Oil

13.2%

Grain Exports 10.6%

Farming 4.2%

Silo Services 3.3%

Grain Terminal Transshipment

1.2%

November 2012


Largest Ukrainian Grain Exporters (2011/2012) Source: Companies, Dragon Capital estimates

Kernel Holding EBIT Margins by Segment (%; 2012FY) Source: Dragon Capital estimates

Kernel added 0.9 Mt of new crushing capacities through acquisitions in 2012FY...

Kernel currently owns seven crushing plants in Ukraine and Russia with total sunflower seed crushing capacity of 3.0 Mt. The company increased its crushing capacities by 0.9Mt in 2012FY thanks to acquisition of new capacities in Russia in September 2011 (400 kt crushing capacity; Russian Oils) and in Ukraine in July 2011 (500 kt; Black Sea Industries, a plant in the port of Illichivsk located next to the company’s grain terminal). Kernel had previously rented 50% of the latter plant’s capacities.

...and expanded its land bank to 330,000 ha

Kernel boasts the largest land bank among listed Ukrainian agricultural companies. The company had 330,000 ha of cropland ready for the 2012 harvesting season (July-October), having acquired sugar producer Ukrros (with 100,000 ha of land) in March 2011 and several farms with a combined 119,200 ha in April 2012, paying $909/ha on average (incl. lease rights, infrastructure and stocks). An expanding land bank is expected to support growth of in-house grain production, thereby benefiting Kernel’s farming segment in 2013FY.

Kernel Holding Crushing Capacities (kt p.a.) Source: Company

Kernel Holding Land Bank (’000 ha; 2008-2013FYE)

Source: Company

Kernel acquired a Russian grain terminal in September...

Kernel, jointly with global grain trader Glencore (50/50 joint venture), acquired a 100% interest in a deep water grain export terminal in Taman port (Russia) from EFKO Group in September 2012. Taman is strategically located in close proximity to southern Russia’s main grain producing region. The grain export terminal has installed throughput capacity of 3 Mt p.a. and will serve as a hub for Kernel’s Russian grain export business. The enterprise value was $265m, implying $88/tonne of throughput capacity. These estimates suggest a substantial premium compared to Kernel’s purchase of Ukrainian Illichivsk port, which was acquired for $95m with 4.5 Mt of throughput capacity, implying $21/tonne of throughput capacity in June 2008. We believe the company paid such a premium on this occasion as Russia has limited port infrastructure on the Black Sea coast and the Taman terminal’s capacities can be upgraded (doubled) with comparably minor funding (est. up to $50m).

Nibulon 15.6%

KhlibInvestBud 13.3%

Kernel Holding 9.8%

Louis Dreyfus 7.0%


Cargill 3.9%

Others 46.0%

0%

10%

20%

30%

40%

50%

Oil (bottled) Oil (bulk) ExportTerminals

Farming Grain Silo Services

2011FY 2012FY

260 260 430 430 430

510 510 510 430 430 430

250 250 500 400

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2008FY 2009FY 2010FY 2011FY 2012FY

Russian OilBlack Sea Industries (Illichivsk) - leasedMykolayiv - AllseedsKirovohrad Plant - AllseedsBandurka (launched May 2010)VolchanskPrykolotnePoltava

29 79 85

180 210

330

0

50

100

150

200

250

300

350

2008FY 2009FY 2010FY 2011FY 2012FY 2013FY

November 2012


Kernel is targeting further expansion into the Russian market. The company plans to invest about $0.5bn in the next two to three years into acquisitions and greenfield construction, including the Taman port purchase. Kernel plans to allocate $120m to build a greenfield sunseed crushing plant with annual crushing capacity of 600-650 kt, with construction work due to begin in the beginning of 2013 and take less than two years to complete.

...and plans to start construction of a greenfield crushing plant in Russia in

2013

Kernel reported 2012FY revenues of $2.2bn (+14% y-o-y), EBITDA of $324.6m (+5%) and net income of $198.6m (-12%). Kernel’s Chairman commented that the company experienced a number of external headwinds adversely impacting its operations in 2012FY including unprecedented volatility of weather conditions, regulatory initiatives in Ukraine, and global macroeconomic uncertainty.

Weak 2012FY results...

Kernel expects to crush 2.6 Mt of sunflower seeds in 2013FY (in line with our estimates) and export about 2.1 Mt (flat y-o-y) of grain through its Ukrainian and Russian terminal facilities. Kernel expects that higher international prices for sunflower oil and protein meal will keep its dollar margin in the bulk oil segment in absolute terms at levels comparable to 2012FY. In the farming division, the company expects 2012 crop yields to decline by 20% y-o-y on average due to challenging weather conditions (in line with our projections). In the sugar segment, Kernel anticipates oversupply on the market and has decided to reduce its 2013FY sugar production to an est. 60 kt (-50% y-o-y). Silo storage and the grain terminal in Illichivsk are the only segments enjoying a strong outlook for 2013FY and should outperform 2012FY volume figures as a result of Kernel’s continued progress in expanding grain storage capacities.

...combined with management’s cautious

guidance...

Accounting for flat y-o-y grain exports and more modest dollar margins in the sunflower oil segment as projected by Kernel management, we expect the company to generate 2013FY revenues of $2.4bn (+11% y-o-y and in line with management guidance), EBITDA of $351m (+8% y-o-y and matching management guidance of $350m), for an EBITDA margin of 14.6% (-0.4pp y-o-y), and net income of $211.4m (+6% y-o-y, in line with $215m forecast by the company). In October 2012, the company issued financial guidance for 2013FY (July-June), projecting net sales of $2.4bn, EBITDA of $350m and net income of $215m.

...lead to a conservative 2013FY outlook

Kernel Holding Net Sales and EBITDA ($m; 2008-2013FYE)

Source: Company, Bloomberg, Dragon Capital estimates for 2013FY

Kernel plans to divest its sugar business due to local currency risk exposure and longer working capital turnover compared to the company’s other core businesses. The recently acquired Ukrros sugar and agricultural company was bought mainly for the sake of farming assets (about 100,000 ha of land) and strengthening Kernel’s grain export business arm.

Sugar business divestment plans

0

400

800

1,200

1,600

2,000

2,400

2,800

2008FY 2009FY 2010FY 2011FY 2012FY 2013FYE

Net sales ($m; lhs)

EBITDA ($m; lhs)

Bloomberg Consensus on Sales ($m)

Bloomberg Consensus on EBITDA ($m)

November 2012


Kernel Holding is a defensive stock as far as hryvnia depreciation is concerned

Kernel generates over 90% of revenues (bulk sunflower oil and grain sales) in USD. Its silo services and bottled oil sales (9% of 2013F revenues) are UAH-based. However, over 95% of costs are USD-linked as the sunflower seed purchase price offered to local sunseed growers by processors is based on international benchmarks. Unlike other foreign-listed Ukrainian companies, Kernel uses USD as both its measurement and presentation currency, analyzing all its operational risks in USD terms (which implies the company will not incur any losses on revaluation of USD-denominated debt). Thus, hryvnia depreciation should have only a minor effect on Kernel’s financials and ratios.


Company Price* Currency MC EV/EBITDA P/E $m 2012FYE 2013FYF 2014FY 2012FYE 2013FYF 2014FY Kernel Holding 19.71 USD 1,570 6.7 6.4 5.4 7.9 7.4 6.9 Premium (discount) to Russian peers (9%) 111% (5%) 12% 53% 45% 48% Premium (discount) to DM peers (79%) 11% (3%) (10%) (40%) (35%) (46%) Premium (discount) to GEM peers (52%) (36%) (33%) (37%) (35%) (45%) (47%) Russian Peers

Novorrossiysk Trade Port (RU) 6.69 USD 1,718 3.2 6.8 4.8 5.2 5.1 4.7 Developed Market Peers

Graincorp (AU) 12.2 AUD 2,885 7.5 8.2 8.0 13.2 15.7 18.2 Vittera (CA) 15.8 CAD 5,849 9.0 8.7 8.0 18.6 17.6 16.0 Andersons (US) 40.9 USD 760 6.0 4.4 4.4 9.4 10.0 - Bunge (US) 71.6 USD 10,466 5.9 6.0 5.9 10.9 8.9 8.2 Archer-Daniels-Midland (US) 25.6 USD 16,871 5.8 6.6 6.0 13.8 11.4 9.4 DM Peer Median - - 7,366 6.0 6.6 6.0 13.2 11.4 12.7 Emerging Market Peers

China Agri-Industries 4.6 HKD 2,412 11.3 9.8 8.7 11.0 8.3 7.4 IOI Corporation 5.0 MYR 10,553 13.6 11.9 11.0 18.2 15.8 14.7 China Foods (HK) 7.7 HKD 2,778 9.2 9.0 7.3 23.7 19.0 15.5 Thai Vegetable Oil 24.9 THB 657 9.7 9.3 8.6 10.7 11.5 11.1 EM Peer Median - - 3,301 10.5 9.6 8.6 12.2 13.6 12.9

Note: *prices as of Nov. 9, 2012. Sources: Dragon Capital, Bloomberg, Companies

HISTORICAL PRICE TARGETS/FAIR VALUES

Kernel Holding (KER PW)


0.0

10.0

20.0

30.0

40.0

50.0

Nov-07 Jul-08 Feb-09 Sep-09 Apr-10 Dec-10 Jul-11 Feb-12 Sep-12

Market Price ($) PT/FV* ($)

November 2012



Period 2010FY 2011FY 2012FY 2013FYE 2014FY Bulk Crude Sunflower Oil (‘000 t) 411 821 828 1,049 1,076 Growth (%, y-o-y) 106% 100% 1% 27% 3% Bottled Oil (‘000 t) 112 118 132 130 130 Growth (%, y-o-y) 22% 5% 12% (1%) 0% Grain Trade (‘000 t) 2,225 1,810 2,123 2,100 2,520 Growth (%, y-o-y) (2%) (19%) 17% (1%) 20%

Profit & Loss Statement (IFRS; $m)*

Period 2010FY 2011FY 2012FY 2013FYE 2014FY Net Sales 1,020.5 1,899.1 2,169.2 2,399.2 2,502.9 EBITDA 190.0 309.6 324.6 351.4 408.2 Depreciation (22.5 ) (32.4 ) (68.8 ) (72.2 ) (106.2 ) EBIT 167.5 277.3 255.8 279.2 302.0 Net Financial Income (Loss) (26.8 ) (70.6 ) (66.9 ) (69.8 ) (76.1 ) NIBT 151.6 208.4 194.4 209.3 225.9 Taxes (0.1 ) (17.6 ) (4.2 ) (2.1 ) (2.3 ) Net Income (Loss) 151.7 226.0 198.6 211.4 228.1

Balance Sheet (IFRS; $m)*

Period 2010FY 2011FY 2012FY 2013FYE 2014FY Total Assets 1,124.8 1,561.9 2,100.5 2,391.5 2,574.7 Fixed Assets 526.1 752.2 958.2 1,322.1 1,504.5 PPE 110.9 111.8 112.6 113.5 114.4 Current Assets 598.7 809.7 1,142.3 1,069.4 1,070.2 Inventories 147.8 183.7 405.0 267.1 277.8 Accounts Receivable 65.5 111.6 143.5 158.7 165.5 Cash & Cash Equivalents 59.5 115.9 82.5 96.8 88.1 Total Liabilities & Equity 1,124.8 1,561.9 2,100.5 2,391.5 2,574.7 Total Liabilities 519.9 564.6 874.8 954.4 909.5 Accounts Payable 10.9 27.1 26.5 29.9 31.1 S/T Debt 209.9 265.9 267.8 412.0 425.4 L/T Debt 127.5 152.7 414.2 331.4 265.1 Equity 604.9 997.3 1,225.7 1,437.1 1,665.2

Financial Ratios

Period 2010FY 2011FY 2012FY 2013FYE 2014FY Sales Growth (y-o-y) (3%) 86% 14% 11% 4% EBIT Growth (y-o-y) (0%) 63% 5% 8% 16% Net Income Growth (y-o-y) 15% 49% (12%) 6% 8% EBITDA Margin 18.6% 16.3% 15.0% 14.6% 16.3% Net Margin 14.9% 11.9% 9.2% 8.8% 9.1% Net Debt/Equity 46% 30% 49% 45% 36% ROE 25.1% 22.7% 16.2% 14.7% 13.7%

Note: *Kernel’s fiscal year starts in July and ends in June

November 2012


MHP: Major Capacity Expansion Underway

Price Target ($) 21.86 Upside (%) 52%

Highlights

Ñ Profile MHP is the largest poultry producer in Ukraine with a 50% share of industrially produced chicken meat in 2011. Sales of chicken meat and related products account for about 75% of the company’s annual revenues. MHP also cultivates corn and sunflower in support of its poultry operations, and other grains (wheat, barley, rapeseed) for sale to third parties, operating 280,000 ha of land.

Ñ Valuation implies 52% upside Our DCF and comparative valuation models yield a price target of $21.86/share, which suggests a 52% upside to the stock’s current market price and warrants a Buy recommendation.

Ñ Strong outlook for 2012 In 2012, MHP expects to continue operating at full capacity. Accounting for the test-launch of a new poultry farm in the Vinnytsia region that will add an est. 10 kt of output, we project MHP’s 2012 poultry production will total 395 kt (+3% y-o-y). MHP reported average chicken meat price growth of 20% y-o-y to UAH 17.3/kg in 9M12, while we project a 15% y-o-y increase for full-year 2012, to UAH 17.3/kg. We estimate MHP is 135% self-sufficient in corn for fodder in 2012 and thus will sell surplus corn again this year, benefiting from rising prices. We expect a strong contribution from the grain segment in 2H12, enjoying over 50% EBITDA margin. Thus, we forecast MHP’s 2012 sales at $1.3bn (+7% y-o-y) and EBITDA at $462.4m (+15% as poultry price grew 20% y-o-y while costs rose only 3% in 9M12, and the grain segment also enjoyed faster sales growth compared to costs. This implies an EBITDA margin of 35.3% (+2.6pp y-o-y).

Ñ Capacity expansion underway MHP embarked on a major capacity expansion project in 2010, a poultry farm in Ladyzhyn (Vinnytsia region), which is expected to be launched over 2013-2015, increasing the company’s total poultry capacity to 580 kt (+220 kt) by 2016 from 360 kt in 2012. Two more lines with combined capacity of 220 kt p.a. may potentially be built over 2016-18 conditional on market demand. Thus, when fully completed, the Ladyzhyn poultry farm will add 440 kt of chicken meat production capacity, bringing the company’s total to 800 kt p.a. MHP reported Vinnytsia project-related CAPEX at $750m, to be invested over 2010-15, and has already spent $545m (73% of total). The company estimates its 2012 CAPEX at $350-370m, out of which $300m is earmarked for the Vinnytsia poultry complex, $25m is maintenance CAPEX and $20m is to be spent on a biogas project.

Ñ Solid outlook for 2013 thanks to new capacities MHP launched the first production line (110 kt p.a.) at its Ladyzhyn site in test mode in November and plans to bring it to full capacity by 2014. We expect MHP to increase 2013 revenues by 9% y-o-y to $1.5bn and post EBITDA of $511m (+10%).

Ñ Risks Weather risk for MHP’s grain business is key, as well as any kind of governmental restrictions on grain exports or the poultry market.

Sell Hold Buy

Company Data Market Price ($) 14.40 Market Cap ($m) 1,561.5 Enterprise Value (12E; $m) 2,229.0 Free Float (%) 26.86% Free Float ($m) 419.4 Shares Outstanding 104,374,856* Nominal Value (EUR) 2.0 Bloomberg Code MHPC LI DR Ratio 1:1 Number of Employees 19,000 Note: *MHP holds 6,395,144 treasury shares





Year 2009 2010 2011 2012FE 2013F

Net Sales ($m) 711.0 944.2 1,229.1 1,322.0 1,445.5 EBITDA ($m) 271.0 324.7 401.1 464.2 511.1 Net Income ($m) 160.0 215.4 259.4 229.5 278.5 P/E 10.0 7.2 6.0 6.5 5.4 EV/EBITDA 7.7 7.2 5.9 4.8 3.9 EV/Sales 2.93 2.48 1.92 1.69 1.39 P/Book 3.23 2.33 1.69 1.30 1.05

WTI Trading - 67.36%

Treasury shares - 5.78%

Free float - 26.86%

5

10

15

20


MHP KP-Dragon (rel.)

Poultry meat 53%

Sunoil 16%

Other agro operations

9% Grain 14%

Poultry products

6% Other 2%

November 2012



Domestic demand for chicken meat remained high throughout 2012 as consumers continued to substitute poultry for other types of meat. MHP thus sold close to 100% of its output in 9M12, keeping its market share of industrially produced chicken at 50% (+1.0pp y-o-y) over the period.

Market leader in industrial poultry production…

MHP, which had the largest domestic market share (34%) in volume terms in 2011, is expected to retain its leading position in 2012. All of MHP’s poultry production units continued to operate at close to 100% capacity in 2011 and 9M12 with the company selling 371 kt (+12% y-o-y) and 275 kt (-3% y-o-y) of chicken meat, respectively.

…and poultry sales in Ukraine

Breakdown of Ukrainian Poultry Sales (volume; 2011)

Source: Dragon Capital estimates

Industrial Producers of Poultry in Ukraine (volume; 2011)

Source: MHP MHP harvested 250,200 ha of land in 2012 (total land bank reached 280,000 ha as of end-2011), harvesting an estimated 1.6 Mt of grain (-7% y-o-y due to weather impact on yields). Despite concerns over unfavorable weather worldwide and weak early crop output in Ukraine, MHP’s early crop yields were 49-86% above the respective Ukrainian averages and better than we expected. MHP’s 2012 reported corn yield of 8.0 t/ha came in 86% higher than the Ukrainian average, the company’s wheat yield of 5.4 t/ha was 86% above the national average, while sunflower (3.0 t/ha) and rapeseed (3.4 t/ha) yields outperformed the domestic averages by 76% and 48%, respectively.

Crop yields were 48-86% above Ukrainian averages in 2012

Crop Yields: MHP vs. Ukrainian Averages (t/ha; 2012)


Early Crop Yields: MHP vs. Ukrainian Averages (t/ha; 2011) Sources: Company, SSS

MHP is also a leader in the Ukrainian meat processing market. The company produced 37 kt of processed meat products in 2011 (+12% y-o-y), thereby gaining around 10% output share over the period. In 9M12, MHP’s output of processed meat products stood at 26.6 kt, declining by 6% y-o-y to due to continuous product mix optimization, while the company retained its market share of 10%.

Market leader in meat processing

MHP 34%

Agromars 10%

Dniprovsky 5%

Other Industrial Producers

17% Households

20%

Imports 14%

MHP 50.0%

Agromars 15.0%

Dniprovski 8.0%

Agro Oven 6.0%

Others 21.0%

8.0

5.4

3.0 3.4 4.3

2.9 1.7 2.3

0.0

2.0

4.0

6.0

8.0

10.0

Corn Wheat Sunflower Rapeseed

MHP (t/ha)

Ukraine Average (t/ha)

9.5

5.1

2.7 2.8

6.4

3.4 1.9 1.7

0.0

2.0

4.0

6.0

8.0

10.0

Corn Wheat Sunflower Rapeseed

MHP (t/ha)

Ukraine Average (t/ha)

November 2012


MHP’s Meat Processing Volumes (kt; 2008-12) Source: Company

Major Ukrainian Meat Processors (2011) Source: Company

Vinnytsia region expansion project to add 220 kt of capacity by 2016…

MHP embarked on a major capacity expansion project in 2010, a poultry farm in Ladyzhyn (Vinnytsia region), which is expected to be launched over 2013-2015, increasing the company’s total poultry meat capacity to 580 kt (+220 kt) by 2016 from 360 kt in 2012. Two more lines with combined capacity of 220 kt may potentially be built over 2016-18 conditional on market demand. Thus, when fully completed, the Ladyzhyn poultry farm will add 440 kt of chicken meat production capacity, bringing the company’s total to 800 kt p.a. The project is proceeding on schedule, with production trials starting in June this year. MHP plans to launch industrial production at the Ladyzhyn facility in early 2013 and bring its first operating line to full capacity (110 kt p.a.) in early 2014.

…with total CAPEX estimated at $750m, including $350-370m to be spent this year

MHP reported Ladyzhyn project-related CAPEX at $750m, to be invested over 2010-15 and with over 50% of the total investment to be provided in the first two to three years to make the new plant’s first production line fully operational in 2013. MHP has already invested $545m (73% of total CAPEX) over 2010-1H12. The company estimates its 2012 CAPEX at $350-370m, out of which $300m is earmarked for the new poultry complex (1H12 CAPEX of $217m was mainly consumed by the new facility), $25m is maintenance CAPEX and $20m will be spent on a biogas project.

MHP Poultry Production Capacity and Utilization (2006-18F) Source: Company

MHP CAPEX: Actual Data and Forecast ($m; 2006-15F)* Note: *annual CAPEX includes maintenance expenses.


Strong 1H12 results MHP reported 1H12 revenues of $654.5m (+24% y-o-y), EBITDA of $230.6m (+46%) and net income of $170.2m (+97%). The poultry segment boosted its EBITDA by 60% y-o-y to $193m on revenues of $523m (+17% y-o-y and 80% of total sales) over the period, recording an EBITDA margin of 37% (+10pp y-o-y). MHP also sold 94.7 kt of sunflower oil in 1H12 (+12% y-o-y) at an average price of $1,109/t, which implies $105m of F/X revenues and fully covers the company’s annual F/X debt service needs.

16.0 24.7

32.9 37.0

17.3 16.5

0

10

20

30

40

2008 2009 2010 2011 1H11 1H12

MHP 10.0%

Favorit 9.0%

Globinskiy 6.0%

Yatran 6.0%

Gorlivskiy 6.0%

Luhanskiy 5.0%

Other 58.0%

133 173 225 285 360 410

520 580

800

0150300450600750900

2006

2007

2008

2009

2010

-2012

E

2013

F

2014

F

2015

F

2017

-18F

Existing Capacity ('000 t/year) Myronivka ('000 t/year)

Vinnytsia, Phase 1 ('000 t/year) Vinnytsia, Phase 2 ('000 t/year)

284

182

77 162 185

344 350

180

80 80 0

100

200

300

400

2006

2007

2008

2009

2010

2011

2012

E

2013

F

2014

F

2015

F

54%

34% 12%

November 2012


We estimate MHP is 135% self-sufficient in corn for fodder in 2012 and will thus again be able to sell surplus corn this year, benefiting from expected price growth in 2H12. MHP had about 400 kt of surplus corn left over from the 2011 harvest, out of which it sold about 150 kt in 2011 and planned to sell 250 kt in 2012 before the new harvest arrived in October. The company sold 200 kt of corn in 1H12 at $230/t, or an 11% premium to the average market price over the period of $207/t. Market prices for corn averaged $219/t in 3Q12, peaking at $244/t in mid-September.

MHP is self-sufficient in corn and is expected to benefit from

rising prices in 2H12…

We forecast MHP’s 2012 revenues at $1.3bn (+8% y-o-y) and EBITDA at $464.2m (+16%), implying an EBITDA margin of 35.1% (+2.5pp y-o-y). First-half sales growth was mainly driven by a much stronger average chicken meat price (+28% y-o-y to UAH 17.14/kg, on average), with sharp y-o-y price growth explained by a low comparison base. We expect this effect to disappear in 2H12, providing for almost flat y-o-y sales in the second half, thus bringing full-year revenue growth to 10-12% y-o-y (still slightly above our current forecast of 9% y-o-y). MHP’s 1H12 EBITDA margin of 35.2% fell largely in line with our full-year forecast of 35.1%. We note that the company’s 2H performance on the EBITDA level is usually stronger thanks to higher contribution from the grain segment (with over 50% EBITDA margin). We note an upside risk stemming from potentially higher than expected grain segment contribution in 2H12 thanks to rising global grain prices.

…supporting our positive outlook for 2012

MHP Net Sales and Profitability (2007-12E) Sources: Company, Dragon Capital estimates

MHP launched the first production line (110 kt p.a.) at its Ladyzhyn site in test mode in November and plans to bring it to full capacity by 2014. We expect MHP to increase 2013 revenues by 9% y-o-y to $1.5bn and post EBITDA of $511m (+10%).

Solid outlook for 2013 thanks to new capacities

MHP generates an estimated 70% of total revenues in UAH, including sales of poultry and processed meat. The company exports sunflower oil and husk, grain, and chicken meat receiving dollar-denominated revenues (30% of total). Dollar-linked costs account for about 10% of total feed costs for chicken breeding (as MHP uses own corn for in-house feed production), and about 50% of grain production costs (fertilizers, crop protection, fuel). UAH-denominated costs primarily refer to salaries, utilities and land lease. We estimate MHP’s USD-linked costs amount to 22-25% of total. Thus, we expect the decline in MHP’s revenues in dollar terms due to hryvnia depreciation will be matched by reduced costs (due to a large share of UAH-linked costs), thus leaving operating margins roughly unchanged.

Operating margins expected to be little-changed if hryvnia

depreciates

With a 2011 EBITDA margin of 33%, MHP was the most profitable poultry producer in Ukraine. The company also outperformed international peers such as Russian Cherkizovo Group (EBITDA margin of 17% in 2011) and Brazilian BRF (13%). MHP was also the best performer on the EBITDA margin level over 2008-2011 with an average of 36% over the period compared to 17% for Cherkizovo and 9% for BRF.

MHP is the most profitable producer of chicken meat in

Ukraine and compares favorably with international

peers

474

803 711

944

1,229 1,322 1,445

527 655

0%

10%

20%

30%

40%

50%

0250500750

1,0001,2501,5001,750

2007 2008 2009 2010 2011 2012E 2013F 1H11 1H12

Net sales ($m; lhs) EBITDA margin (%; rhs)Net margin (%; rhs)

November 2012


EBITDA Margins (%; 2008-2011)* Note: *Dragon Capital estimates for 2011 EBITDA margin of BRF and JBS. Source: Company, Dragon Capital estimates


Company Price* Currency MC EV/EBITDA P/E $m 2012E 2013F 2012E 2013F MHP 14.40 USD 1,562 4.8 3.9 6.5 5.4 Premium/(discount) Cherkizovo Group (RU) 95% (4%) (31%) 63% 29% Premium/(discount) to DM peer median (11%) (23%) (37%) (52%) (45%) Premium/(discount) to GEM peer median (77%) (63%) (73%) (56%) (61%) Russian Peers Cherkizovo Group (RU) 12.12 USD 799 5.0 5.7 4.0 4.2 Developed Market Peers Atria Group (FI) 6.58 EUR 236 7.1 6.9 18.2 9.4 HKSCAN (FI) 3.85 EUR 269 6.0 5.6 23.6 9.4 Bell Holding (CH) 1943.00 CHF 819 5.4 4.7 10.3 9.8 L.D.C. (FR) 5.62 EUR 730 6.3 6.2 13.8 11.7 Sanderson Farms (US) 76.01 EUR 788 2.8 2.9 10.1 9.8 Tyson Foods (US) 45.45 USD 1,044 8.7 7.7 21.4 29.3 Hormel Foods (US) 16.59 USD 6,008 4.4 4.2 9.0 10.6 DM Peer Median - - 1,748 6.3 6.2 13.8 9.8 Emerging Market Peers Perdigao (BZ) 36.59 BRL 15,563 14.1 14.5 36.7 17.7 Charoen Pokphand Foods (TH) 36.00 THB 9,097 12.9 14.7 16.9 14.2 Astral Foods (SA) 10245.00 ZAr 495 6.7 7.3 13.0 13.7 EM Peer Median - - 6,671 12.9 14.5 15.0 13.9 Note: *prices as of Nov. 9, 2012. Sources: Dragon Capital, Bloomberg, Companies

HISTORICAL PRICE TARGETS/FAIR VALUES*

MHP (MHPC LI)


39

13 9

3

13

5

38

18

4 4 5 8

34

18

10 4

9 13

33

17 13

5 4 3

0

10

20

30

40

50

MHP Cherkizovo BRF JBS Campofrio Bachoco

2008 2009

2010 2011

0.0

5.0

10.0

15.0

20.0

25.0

30.0

May-08 Dec-08 Aug-09 Apr-10 Dec-10 Jul-11 Mar-12 Oct-12

Market Price ($) PT/FV ($/share)

November 2012



Period 2009 2010 2011 2012E 2013F Chicken Meat (‘000 t) 282.2 360.0 384.0 395.2 479.4 Growth (%, y-o-y) 25% 28% 7% 3% 21% Sunflower Oil (‘000 t) 140.4 195.8 173.6 192.7 231.2 Growth (%, y-o-y) 50% 39% (11%) 11% 20% Grain Crops (‘000 t) 960.5 913.1 1,712.1 1,589.4 1,683.0 Growth (%, y-o-y) 31% (5%) 88% (7%) 6%


Period 2009 2010 2011 2012E 2013F Net Sales 711.0 944.2 1,229.1 1,322.0 1,445.5 EBITDA 271.0 324.7 401.1 464.2 511.1 Depreciation (51.7) (67.9) (80.3) (100.9) (114.1) EBIT 218.0 256.8 320.7 363.3 397.0 Net Financial Income (Loss) (46.3) (50.4) (60.9) (86.4) (77.3) Other Non-operating Income (Loss) (23.6) 11.0 2.3 (44.9) (38.1) NIBT 153.5 217.3 262.1 232.0 281.6 Taxes 6.5 (1.9) (2.8) (2.6) (3.1) Net Income (Loss) 160.0 215.4 259.4 229.5 278.5


Period 2009 2010 2011 2012E 2013F Total Assets 1,137.9 1,574.0 1,944.4 2,121.6 2,325.0 Fixed Assets 710.9 854.9 1,135.6 1,319.8 1,328.3 PPE 627.7 745.0 1,008.9 1,201.4 1,209.6 Current Assets 427.0 719.1 808.7 801.7 996.8 Inventories 205.2 248.9 318.2 362.2 396.9 Accounts Receivable 43.4 53.4 65.8 76.8 84.2 Short-term Bank Deposits

7.6 134.5 1.8 1.3 1.4 Cash & Cash Equivalents 22.2 39.3 94.8 40.7 184.3 Total Liabilities & Equity 1,137.9 1,574.0 1,944.4 2,121.6 2,325.0 Total Liabilities 643.5 903.6 1,018.6 966.3 891.2 Accounts Payable 78.7 19.0 52.7 139.4 152.8 S/T Debt 164.2 163.9 189.6 108.9 57.8 L/T Debt 348.6 658.7 708.7 657.9 625.6 Equity 494.4 670.4 925.8 1,155.3 1,433.8

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) (11%) 33% 30% 8% 9% EBIT Growth (y-o-y) (13%) 20% 24% 16% 10% Net Income Growth (y-o-y) 2981% 35% 20% (12%) 21% EBITDA Margin 38.1% 34.4% 32.6% 35.1% 35.4% Net Margin 22.5% 22.8% 21.1% 17.4% 19.3% Net Debt/Equity 98% 97% 87% 63% 35% ROE 38.1% 37.0% 32.5% 22.1% 21.5% EBITDA coverage

5.85 6.44 6.58 5.38 6.62 Net Debt/EBITDA

1.81 2.41 2.00 1.56 0.98

November 2012


Milkiland: New Capacities in Poland and Rising Self-Sufficiency in Milk


Highlights

Ñ Profile Milkiland is a diversified dairy producer operating in Ukraine, Russia and Poland. The company operates 10 dairy plants in Ukraine with total raw milk processing capacity of 935 kt p.a., the Ostankino dairy plant in Russia (175 kt), and the Ostrowia cheese-making plant in Poland (150-175 kt). Milkiland is the fourth largest dairy producer in the CIS in terms of capacity and revenues after Danone-Unimilk, WBD and Vamin. In Ukraine, Milkiland is #2 for cheese and butter production, and is the largest cheese exporter, with a 31% share in 2011.

Ñ Valuation implies 85% upside Our DCF and comparative valuation models produce a 12-month price target of $8.81/share, which suggests 85% upside potential and justifies a Buy recommendation.

Ñ Polish cheese-maker acquired in July Milkiland acquired Polish cheese producer Ostrowia with cheese-making capacity of 15 kt p.a. (vs. 40.8 kt for Milkiland) in July 2012. The plant was bought for EUR 12m and EUR 8m is planned to be invested by end-2012. According to Milkiland, Ostrowia is expected to contribute 15% to the group’s revenue and EBITDA after target output volumes are achieved in 2013-2014, implying an up to $60m addition to the top line and $7-9m on the EBITDA level.

Ñ Construction of dairy farms to increase self-sufficiency in raw milk Milkiland invested EUR 13m in 1H12 into construction of modern dairy farms with capacity for 8,000 milking cows, with completion of the project expected in the beginning of 2013. The company expects its dairy farms’ combined annual raw milk supply to reach 60 kt (about 12% of current annual demand) by 2014-2015. Milkiland’s goal is to achieve 20-25% self-sufficiency in raw milk by 2020.

Ñ 2012 performance to be affected by Russian cheese import ban Milkiland’s 1H12 results were negatively affected by a Russian import ban on selected Ukrainian cheese producers (including a Milkiland subsidiary) which was in effect in February-May. Management estimated net revenue losses due to the ban at around EUR 16m and EBITDA losses at EUR 3m in 1H12. We expect Milkiland’s 2012 revenues to reach $372m (-4% y-o-y) and forecast EBITDA at $40.2m (-16% y-o-y), expecting Milkiland to benefit from increased sales of comparatively higher value-added cheese in 2H12 (at the expense of butter and dry milk products) and projected flat y-o-y raw milk purchase prices.

Ñ Milkiland to benefit from Ostrowia’s launch in 2013 Assuming no new Russian cheese import restrictions in 2013, we expect Milkiland to benefit from the launch of its Polish Ostrowia plant, which should provide 8 kt of cheese sales or $51m in revenue terms for the full year. We forecast Milkiland will generate 2013 revenues of $468.2m (+26% y-o-y) and EBITDA of $65.1m (+62%), for an EBITDA margin of 13.9% (+3.1pp, partially thanks to hryvnia depreciation impact as Milkiland is an export-oriented company).

Sell Hold Buy

Company Data Market Price (PLN) 15.55 Market Price ($) 4.76 Market Cap ($m) 148.7 Enterprise Value (12E; $m) 260.8 Free Float (%) 22.2% Free Float ($m) 33.0 Shares Outstanding 31,250,000 Nominal Value (EUR) 0.1 Bloomberg Code MLK PW DR Ratio - Number of Employees 6,089



12-month Performance ($) (18%) 12-month Rel. Perform. (KP-Dragon) 1%

12-month Low/High ($/share) 3.12/6.32 All-time Low/High ($/share) 3.12/16.15 12-month Trading Volume ($m) 26.5

Valuation Summary 2012E Revenues ($m) Year 2009 2010 2011 2012E 2013F


1 Inc Cooperatief U.A. - 73.0%

Management - 4.8%

Free float - 22.2%

2345678


Milkiland KP-Dragon (rel.)

Cheese & Butter 52%

Whole milk

products 38%

Skimmed milk

powder 10%

November 2012


Milkiland: Investment Highlights

Milkiland is a diversified dairy producer operating in Ukraine, Russia and Poland. The company operates 10 dairy plants in Ukraine with total raw milk processing capacity of 935 kt p.a., the Ostankino dairy plant in Russia (175 kt), and the Ostrowia cheese-making plant in Poland (150-175 kt). Milkiland is the fourth largest dairy producer in the CIS in terms of capacity and revenue after Danone-Unimilk, WBD and Vamin. In Ukraine, Milkiland is #2 for cheese and butter production, holding 12.3% and 5.5% domestic output shares in these segments, respectively, and is the largest cheese exporter with a 31% share in 2011.

The fourth largest dairy producer in the CIS in terms of capacity and revenue and #2 in

Ukraine…

Leading Ukrainian Cheese Producers(volume terms; 2011) Sources: Astarta-Tanit, UkrAgroconsult, Dragon Capital estimates

Leading Ukrainian Cheese Exporters (value terms; 2011) Sources: SSS, Dragon Capital estimates

On Aug. 1, Milkiland announced acquisition of Polish cheese producer Ostrowia with annual cheese production capacity of 15 kt (vs. Milkiland’s existing capacities of 40.8 kt). Milkiland acquired the plant for EUR 12m and plans to invest an additional EUR 8m by end-2012. According to the company, Ostrowia is expected to contribute 15% to the group’s revenue and EBITDA after target output volumes are achieved in 2013-2014, implying an up to $60m addition to the top line and $7-9m on the EBITDA level.

…acquired a Polish cheese maker in July

Milkiland produces whole milk products in Russia and sells cheese produced in Ukraine both on the local market and in Russia. It thus derives 65% of its revenues from Russia, 32% from Ukraine and 3% from other markets.

Milkiland derives 65% of total revenue from Russia

Milkiland Revenue Breakdown (value terms; 1H12)*

Note: *ingredients include skimmed milk powder, whole milk powder, dry whey, and agricultural products from Milkiland farms sold to third parties.

Sources: Company

Milkiland Revenue Breakdown by Market (1H12)

Source: Company

17.9% 12.3%

10.1% 5.6%

3.7% 3.6% 3.6%

2.6% 2.4%

2.0%

0% 10% 20% 30%

Molochny AllianceMilkiland

AlmiraZMG/Galychyna

MolisTerra-Food

Bel Shostka UkraineClub Syra

Khmelnytsky Cheese PlantZvenigora-Bongrain

31% 25%

18%

10%

29% 26%

16% 10%

0%

10%

20%

30%

40%

Milki

land

Moloc

hny A

llianc

e

ZMG-G

alych

yna

Almira

Milki

land

Moloc

hny A

llianc

e

ZMG-G

alych

yna

Almira

Cheese & Butter 51%

WMP 41%

Ingredients 8%

Russia 65%

Ukraine 32%

Other 3%

Value Terms Volume Terms

November 2012


Raw milk is the largest single expense, contributing over 60% to COGS…

Raw inputs accounted for 81% of Milkiland’s COGS, with raw milk accounting for the lion’s share of raw materials costs, or 60-70% of total COGS. The raw milk supply market in Russia is more consolidated than in Ukraine, with 44% of raw milk in Russia being produced by farms and the remainder by individual households. In Ukraine, farms produce only about 20%, which often adversely affects the quality of milk supplied to dairy producers.

Raw Milk Supply Structure (%; 2011)*

Note: *Milkiland’s in-house raw milk production disregarded. Sources: Company, UkrAgroConsult, Infagro, Rosstat, Dragon Capital estimates

Milkiland COGS Structure (2011) Note: *includes gas and electricity costs. Source: Company

…but Milkiland has marginally increased self-sufficiency in raw milk, doubling in-house output y-o-y in 1H12...

Milkiland-owned farms produced 11 kt of raw milk in 2011, supplying a mere 2% of the company’s annual raw milk needs (estimated at 486 kt in 2011, with 389 kt sourced in Ukraine and 97 kt in Russia). Still, focusing on boosting in-house raw milk production, the company doubled both its cattle headcount (to 2,900 head as of end-2011) and raw milk production volumes last year (from 4.2 kt in 2010). The remainder was purchased from households (53%) and more than 500 farms (47%) using the company’s own milk collection and delivery infrastructure. In 1H12, Milkiland doubled in-house raw milk output in y-o-y terms, to 8.5 kt.

…by focusing on milk cooperatives…

Milkiland also forms so-called milk cooperatives with raw milk suppliers, providing them with prepayments to cover their working capital needs, thus securing timely milk supplies. The company assisted in the creation of 16 milk cooperatives (with a total of 21,000 milking cows) in 2011. The cooperatives supplied 6% of Milkiland’s raw milk needs in Ukraine last year, with this share expected to increase to 20% in 2012.

…and investing EUR 13m in own dairy farms

Milkiland invested EUR 13m in the construction of modern farms with capacity for 8,000 milking cows in 1H12, with completion of the project expected in the beginning of 2013. The company expects the dairy farms’ combined annual raw milk supply to reach 60 kt (about 12% of its current annual demand) by 2014-2015. The producer’s ultimate goal is to achieve 20-25% self-sufficiency in raw milk by 2020.

We expect Milkiland’s raw milk prices to remain flat y-o-y in 2012

In 2011, Milkiland’s raw milk purchase price increased by an est. 30% but is expected to remain flat y-o-y in 2012. The average raw milk price in Ukraine declined by 9% y-o-y in 9M12 due to partial reinstatement of state subsidies to the dairy sector and the Russian import ban that depressed demand from local dairy processors, thereby creating over-supply and exerting downward pressure on raw milk prices. We expect the raw milk price drop in 9M12 to be reversed by currently rising grain prices. This in turn is expected to boost feed costs and decrease raw milk supply, and potentially fuel raw milk price growth in 4Q12. Also, the government has set (as of end-August) a minimum price for raw milk purchased from households of UAH 2.2/liter for the rest of 2012, which may also put upwards pressure on raw milk prices.

45% 20%

53% 47%

55% 80%

47% 53%

0%

20%

40%

60%

80%

100%

Russia Total Ukraine Total Ukraine DairyProcessors

Milkiland

Farms Individuals

Raw milk and other raw materials

81%

Salary 4%

Depreciation 4%

Transportation 4%

Other* 7%

Total supply: 31.8 Mt 11.2 Mt 4.7 Mt 0.5 Mt

November 2012


Milkiland’s 1H12 performance was negatively affected by the Russian ban on cheese imports from one of the company’s subsidiaries, Mena Cheese Plant. The ban was in effect over February-May and management estimates net revenue losses due to the ban at around EUR 16m and EBITDA losses at EUR 3m in 1H12. Milkiland reported 1H12 revenues of $173.9m (-3% y-o-y; +5% y-o-y in EUR terms), EBITDA of $21.0m (-20% y-o-y; -13% in EUR), for an EBITDA margin of 12.1% (-2.6pp y-o-y).

Russian cheese export ban negatively affected 1H12

results…

Reported 1H12 results came in slightly better than we expected, especially on the profitability side, suggesting upside risk. However, we remain conservative and considering that Milkiland management does not rule out that implications from the Russian cheese import ban will continue until end-2012 (the ban was lifted in May), we keep our 2012 forecasts unchanged. We expect Milkiland to post 2012 net sales of $372m (-4% y-o-y), EBITDA of $40m (-16%) and net income of $16m (-25%).

…and is expected to put pressure on full-2012

performance…

Assuming no new Russian cheese import restrictions in 2013, we expect Milkiland to benefit from the launch of a new cheese-making plant (Ostrowia). The company plans to bring Ostrowia’s production process into compliance with Russian and Ukrainian standards so as to receive licenses to export to these countries, expectedly in spring 2013. We expect 8 kt of Ostrowia-produced cheese to be sold by Milkiland in 2013, bringing around $51m of revenues. We forecast the company will generate 2013 revenues of $468.2m (+26% y-o-y) and EBITDA of $65.1m (+62%), for an EBITDA margin of 13.9% (+3.1pp, thanks to assumed hryvnia depreciation and Russian ruble remaining stable in 2013).

…but 2013 outlook is optimistic, supported by the

expected launch of a new cheese-making plant in Poland

Milkiland Net Sales and Profitability (2007-13F) Sources: Company, Dragon Capital estimates

Milkiland attracted a $100m loan facility in December 2011 and has already drawn $70m as of end-1H12, with the remaining $30m likely to be taken out by end-September, before the facility expires. Milkiland used the funding to refinance $35m worth of local bank loans, with another $40m to be used for working capital replenishment in 2012. Milkiland’s cash balances stood at $40.8m and net debt reached $67.5m, while Net Debt/EBITDA was estimated at 1.6x as of end-1H12.

Debt position

Milkiland generates 30% of total revenues in UAH, including from sales of cheese and other dairy products, 65% in RUB, and 5% in other currencies. Costs, the lion’s share being raw milk purchases (60-70% of total COGS), are mainly denominated in hryvnia since 10 out of Milkiland’s 12 dairy plants are located in Ukraine. We estimate the share of UAH-linked costs at approx. 60% of total in 2013, with the remainder attributed to F/X-linked costs of the company’s Russian Ostankino plant and recently acquired Polish cheese maker Ostrowia (the latter is expected to be launched in 2013). Thus, about 70% of Milkiland’s overall revenues and 40% of COGS F/X-linked. This implies that should the hryvnia depreciate, Milkiland’s revenues in F/X terms will decline less than its F/X-based COGS, thus positively affecting profitability. We currently assume hryvnia depreciation to UAH 8.8:USD in 2013 from UAH 8.2:USD in 2012.

Hryvnia depreciation would positively affect Milkiland’s

operating margin

227

399

279 340

389 372

468

179 174

(10%)(5%)0%5%10%15%20%

0

100

200

300

400

500

2007 2008 2009 2010 2011 2012E 2013F 1H11 1H12

Net sales ($m; lhs) EBITDA margin (%; rhs)

November 2012


Valuation COMPARATIVE VALUATION Company Price Currency MC EV/EBITDA (x) P/E (x)

$m 2012E 2013F 2012E 2013F Milkiland 4.76 USD 149 6.4 3.9 9.6 4.3 Premium (Discount) to Peers (90%) 1% (34%) (32%) (67%) Developed Market Peers Dairy Crest Group (UK) 349.1 GBp 757 2.8 4.7 neg. 10.0 Bongrain (FR) 46.0 EUR 902 4.3 3.9 9.9 8.7 Glanbia (IE) 8.0 EUR 3,001 11.7 11.2 17.2 14.7 Emmi (CH) 237.8 CHF 1,341 6.3 5.9 13.1 12.9 Dean Foods (US) 16.6 USD 3,079 7.8 6.9 13.8 13.1 Groupe Danone (FR) 49.7 EUR 40,662 10.7 10.3 17.5 16.4 Morinaga Milk Industry (JP) 262.0 JPY 837 1.8 1.8 14.3 9.3 Developed Market Peer Median* 1,501 6.3 5.9 14.1 12.9 Note: *average for market capitalization; prices as of Nov. 9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS/FAIR VALUES Milkiland (MLK PW)

0.0

5.0

10.0

15.0

20.0

25.0

Dec-10 Apr-11 Sep-11 Jan-12 Jun-12 Oct-12

Market Price ($/DR)

PT/FV ($/DR)

November 2012


Financial & Operating Summary Operating Summary Period 2009 2010 2011 2012E 2013F WMP (kt) 144.5 119.1 120.0 121.2 127.3 Growth (%) (18%) (18%) 1% 1% 5% Cheese (kt) 30.3 30.4 31.5 26.8 40.9 Growth (%) 27% 0% 4% (15%) 52% Butter Output (kt) 5.3 4.2 4.7 5.2 4.8 Growth (%) (46%) (20%) 11% 10% (7%) SMP (kt) 15.0 15.7 17.5 19.3 18.2 Growth (%) (32%) 5% 11% 10% (5%)

Profit & Loss Statement (IFRS; $m) Period 2009 2010 2011 2012E 2013F Net Sales 279.0 340.1 389.3 372.0 468.2 EBITDA 41.7 59.2 48.1 40.2 65.1 Depreciation 10.7 12.8 13.7 13.1 14.8 EBIT 31.0 46.2 29.3 27.1 50.3 Net Financial Income (Loss) (18.6 ) (15.3 ) (7.6 ) (7.7 ) (7.1 ) NIBT 11.0 29.0 22.3 19.4 43.2 Taxes 0.3 0.2 (1.8 ) (4.0 ) (8.5 ) Net Income (Loss) 11.4 29.2 20.5 15.5 34.7

Balance Sheet (IFRS; $m) Period 2009 2010 2011 2012E 2013F Total Assets 263.9 358.1 424.0 453.4 471.2 Fixed Assets 183.1 212.3 234.8 275.4 286.7 PPE 171.8 167.9 201.4 235.3 240.9 Current Assets 80.8 144.9 185.8 178.0 184.5 Inventories 27.1 36.3 44.9 57.1 65.4 Accounts Receivable 31.2 29.6 37.5 49.9 57.7 Cash & Cash Equivalents 9.6 50.5 69.1 33.2 19.9 Total Liabilities & Equity 263.9 358.1 424.0 453.4 471.2 Total Liabilities 191.9 193.7 209.4 215.7 198.8 Accounts Payable 19.5 20.8 23.8 17.3 21.8 S/T Debt 44.4 58.5 86.9 51.7 46.6 L/T Debt 88.8 48.2 36.4 89.6 76.2 Equity 72.0 164.4 214.5 230.0 264.7

Financial Ratios Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) (30%) 22% 14% (4%) 26% EBITDA Growth (y-o-y) 4% 42% (19%) (16%) 62% Net Income Growth (y-o-y) nm 157% (30%) (25%) 124% EBITDA Margin 14.9% 17.4% 12.4% 10.8% 13.9% Net Margin 4.1% 8.6% 5.3% 4.2% 7.4% Net Debt/Equity 172% 34% 25% 47% 39% ROE 20.1% 24.7% 10.8% 7.0% 14.0%

November 2012


Mriya Agro Holding: Increased Grain Prices to Offset Sugar Fall

Price Target (€/DR) 6.74 Price Target ($/DR) 8.57

Upside (%) 37%

Highlights

Ñ Profile Mriya Agro Holding is a group of agricultural companies established in 1992. Mriya’s current land bank of 298,000 ha spreads across five regions of western Ukraine: Ternopil, Khmelnytskiy, Chernivtsi, Lviv and Ivano-Frankivsk. The company diversifies its crop mix, planting wheat and coarse grains on almost equal areas, so as to overcome the risk of low yields due to unfavorable weather conditions. Mriya also cultivates potatoes and sugar beets.

Ñ Valuation implies 37% upside Our valuation yields a 12-month price target of $8.57/DR, suggesting a 37% upside to the stock’s current market price and justifying a Buy recommendation.

Ñ Strong operating outlook for 2012 Mriya reported strong expected 2012 crop yields with wheat yield forecast at 5.0 t/ha (+31% y-o-y), rapeseed at 2.5 t/ha (+25% y-o-y) and corn at 7-8 t/ha (vs. 6.9 t/ha in 2011), which came above our expectations. We expect Mriya to produce a combined 922 kt of grains and oilseeds in 2012 (+27% y-o-y), while Ukraine’s total harvest is estimated at 43 Mt (-24% y-o-y). This year, Mriya intends to sell all of its harvested crops, leaving only a small portion for seeding in 2013, as the company believes soft commodities prices may start to fall as early as February when the first realistic forecasts of next year’s global grain balances are made.

Ñ Mriya to benefit from surging grain prices in 2H12, but decline seen in 2013 Mriya reported 1H12 sales of $209.2m (+16% y-o-y) and EBITDA of $165.9m (+18%), in line with expectations. We foresee grain price growth in 2H12 positively affecting Mriya’s results. Global grain prices have been rising due to negative weather impact on expected harvests in the U.S. and Australia as well as some European countries and the Black Sea region. Conversely, domestic sugar prices have been retreating and we expect the commodity to account for only 13% of Mriya’s projected 2012 revenues. We estimate Mriya’s total revenues at $352m (+31% y-o-y) thanks to increased prices and a 4% y-o-y increase in acreage. Our 2012 EBITDA estimate yields $215m (+14%), implying EBITDA margin of 43.0% (-1.2pp y-o-y due to a decrease in sugar segment margin). In 2013, revenues are projected to decline 21% due to a decrease in prices and low 2012E leftover stocks.

Ñ Storage capacity to increase by 60 kt in 2012 To support future growth in crop production, the company is building two new storage facilities with total storage capacity of 200 kt (100 kt each) to add to 670 kt of existing silos. Mriya expects to complete construction of 60 kt of storage in 2012, with the remaining 140 kt to be launched in 2013. Mriya projects its 2012 CAPEX at $170m and expects 2013 investments to be unchanged y-o-y.

Ñ Risks Weather and export market curbs are major concerns for Mriya Agro Holding.

Sell Hold Buy

Company Data Market Price (EUR/DR) 4.90 Market Price ($/DR) 6.23 Market Cap ($m) 662.3 Enterprise Value (12E; $m) 951.7 Free Float (%) 20.0% Free Float ($m) 132.5 Shares Outstanding 4,250,010 Nominal Value (EUR) 0.01 Bloomberg Code MAYA GR DR Ratio 25:1 Number of Employees 339



3

6

9

12

15


Mriya Agro HoldingKP-Dragon (rel.)

12-month Performance ($) (15%) 12-month Rel. Perform. (KP-Dragon) 5% 12-month Low/High ($/DR) 5.06/7.65 All-time Low/High ($/DR) 1.54/11.18 12-month Trading Volume ($m) OTC


Year 2009 2010 2011 2012E 2013F


Management - 80.0%

Free float - 20.0%

Wint. wheat 44%

Sugar beet 13%

Wint. rapeseed

17% Corn 13%

Potatoes 9%

Other 4%

November 2012


Mriya Agro Holding: Investment Highlights

Mriya Agro Holding is a group of agricultural companies established in 1992. Mriya’s current land bank of 298,000 ha covers five regions of western Ukraine: Ternopil, Khmelnytskiy, Chernivtsi, Lviv and Ivano-Frankivsk. Mriya is a vertically integrated agro-holding company cultivating land, processing agricultural products, operating grain storage facilities and selling agricultural produce. The company cultivates grain, oilseeds, potatoes and sugar beets.

One of the largest vertically integrated agribusinesses in

Ukraine

Mriya Land Bank Locations (2012) Source: Company

Mriya increased its land bank by 22% y-o-y to 295,000 ha in 2011, planting 240,000 ha (81% of total) with crops. The company added 3,000 ha of land in 1H12, bringing its total to 298,000 ha as of the date of this report. Mriya’s land leases are typically based on five to 10-year agreements.

Harvested crops on 240,000 ha in 2011

For the 2011/12 season (July-June; crop harvesting in 2011), Mriya seeded the largest share of its land (65%) with winter wheat and winter rapeseed, and allocated 14% to sugar beet. The company has consistently diversified its crop mix, planting wheat and coarse grains (corn, barley, buckwheat and peas) on almost equal areas, which enables it to overcome the risk of low yields due to unfavorable weather conditions.

Winter wheat, winter rapeseed and sugar beet accounted for

most of 2011/12 crop mix…

Mriya Land Bank (e-o-p; 2005-11) Source: Company

Mriya Planted Area Breakdown (2011)

Source: Company

295

10 16

71

150

201 229

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010 2011

Fallow land ('000 ha)

Seeded land ('000 ha)

Winter wheat 50%

Winter rapeseed

15%

Sugar beet 14%

Corn 7%

Spring wheat 5%

Barley 2%

Potatoes 2%

Spring rapeseed

1% Peas 1%

Soybean 1%

Buckwheat 1%

Other 1%

November 2012


…while the company wisely boosted acreage under corn for the 2012 harvest, and reduced sugar beet acreage

For the 2012 harvest, the company planted 248,000 ha of land, including 138,900 ha under winter wheat (+16% y-o-y and 56% of total acreage), 39,700 ha under winter rapeseed (+10% y-o-y and 16% of total) and 27,300 ha under sugar beet (-19% y-o-y and 11% of total). We believe lower sugar beet plantings will positively affect Mriya’s profitability given currently low domestic sugar prices following oversupply in the 2011 production season that is continuing to exert downward pressure on prices. At the same time, Mriya wisely boosted its acreage under corn to 29,800 ha (+77% y-o-y and 12% of total), which will allow the company to capitalize on rising corn prices. Mriya plans to plant a minimum of 260,000 ha of land for the 2013 harvest (+12,000 ha compared to 2012 acreage), including 180,000 ha with winter crops (flat y-o-y and in line with our expectations).


Source: Company


Source: Company

Mriya has enough machinery to cultivate 300,000 ha of land

Mriya operates modern Western equipment including specialized DAF grain trucks to haul crops from fields to grain elevators, John Deere tractors to seed and cultivate crops, and John Deere and Claas combines to harvest crops. The company’s agricultural machinery amounts to more than 1,600 units. Mriya believes that it currently has enough machinery to cultivate 300,000 ha of land. Most of Mriya’s high-capacity agricultural equipment and machinery is equipped with GPS devices used during the cultivation period. Precise seeding and harvesting allows the company to reduce fuel consumption and seed use. Mriya also employs a satellite monitoring system providing company management with a complete picture of machinery movements.

The company reported above-average crop yields in 2011…

Mriya’s 2011 harvesting results confirm its ability to achieve superior yields compared to those reported on average in Ukraine across most crop categories. The company’s winter wheat yield stood at 3.8 t/ha, above the domestic average of 3.6 t/ha. The company reported average corn and winter rapeseed yields of 6.9 t/ha and 2.0 t/ha, 8% and 16% above respective averages for Ukraine. Mriya’s potato fields yielded 28.0 t/ha, or a substantial 65% above the national average of 17 t/ha. Potatoes have been an important crop for Mriya, which for 10 years has been successfully producing its own potato seeds. Mriya’s sugar beet yield (44 t/ha) also significantly outperformed the domestic average of 36 t/ha last year.

…producing 700 kt of grain and oilseeds, 134 kt of potatoes and 1.5 Mt of sugar beet

In 2011, Mriya harvested around 700 kt of grain and oilseeds (up from 500 kt in 2010), including 455 kt of winter wheat (up from 248 kt in 2010), 116 kt of corn (-11% y-o-y due to a 54% decrease in acreage), 72 kt of winter rapeseed (+84% y-o-y) and 46 kt of spring wheat (+57% y-o-y). The company boosted potato output by 53% y-o-y to 134 kt thanks to increased acreage (+54% y-o-y), while sugar beet production fell 13% y-o-y (due to a 28% y-o-y decrease in acreage but helped by 22% yield growth).

=

Winter wheat 50%

Winter rapeseed

15%

Sugar beet 14%

Corn 7%

Spring wheat 5%

Barley 2%

Potatoes 2%

Spring rapeseed

1% Peas 1%

Soybean 1%

Other 1%

Buckwheat 1%

Winter wheat 56%

Winter rapeseed

16%

Corn 12%

Sugar beet 11%

Other grain and oilseeds

3%

Potatoes 2%

November 2012


Crop Yields: Mriya vs. Respective Ukrainian Averages (2011) Sources: Company, SSS

Mriya Crop Production (2010-11) Source: Company, Dragon Capital estimates

In September Mriya reported strong expected 2012 crop yields, with wheat yield estimated at 5.0 t/ha (+31% y-o-y and above our projection of 4.3 t/ha); rapeseed at 2.5 t/ha (+25% y-o-y and in line with our projection); and corn at 7-8 t/ha (compared to 6.9 t/ha last year and above our forecast of 6.5 t/ha, though the reported preliminary yield was announced in the very beginning of the harvesting campaign). We expect the company’s 2012 grain harvest to come in at 923 kt (+27% y-o-y), while Ukraine’s total harvest is estimated at 43 Mt (-24% y-o-y). Mriya’s potato yield is expected to remain almost flat y-o-y at 28 t/ha in 2012 with output projected at 136 kt (+2% y-o-y). Considering almost flat y-o-y yield for sugar beet at 44 t/ha but decreased acreage (-21% y-o-y), we forecast Mriya’s sugar beet harvest at 1.2 Mt (-21% y-o-y) in 2012. This year, Mriya intends to sell all harvested crops, leaving only a small portion for seeding in 2013, as the company believes soft commodities prices may start to fall as early as February when the first accurate forecasts of next year’s global grain balances can be made.

Crop production outlook for 2012

Mriya is self-sufficient in storage capacity. The company currently owns 670 kt of storage capacity for grain and oilseeds and 96 kt for potatoes. Mriya’s Derenivka silo (Ternopil region) with 100 kt of storage capacity (10x10,000 tonne silos) was completed in 2011 (construction started in 2008 and the first phase was launched in 2009). The silo boasts all necessary infrastructure, including loading (90-100 t/hour) and unloading (68 t/hr for railcars and 80 t/hr for trucks) equipment, two driers (200 t/hr each, cleaning (250 t/hr) and a private rail terminal with two loading lines.

Mriya can currently store 670 kt of grain and 96 kt of

potatoes simultaneously

Mriya Crop Production and Yields (2012E) Source: Dragon Capital estimates

Mriya Grain Storage Capacity vs. Output (2010-11)


6.9

3.8

2.0

28

44

6.4

3.6

1.7

17

36

0.0

5.0

10.0

15.0Co

rn

Winte

r whe

at

Winte

rrap

eseed

Potat

oes

Suga

r bee

t

Mriya (t/ha) Ukrainian average (t/ha) 455

134 116

72 46

15 6 5 5 2

248

88

130

39 29 26 4 6 6 11

0

50

100

150

200

Winte

r whe

at

Potat

oes

Corn

Winte

r rap

eseed

Sprin

g whe

at

Barle

y

Soyb

eans

Sprin

g rap

eseed

Peas

Buckw

heat

2011 (kt) 2010 (kt)

1,172

604 195

136 100

11 5 2 0

50

100

150

200

250

300

Sugar beet Winterwheat

Corn Potatoes Winterrapeseed

Barley Springwheat

Soybeans

Production (kt; lhs)

302

670 499

727

0

100

200

300

400

500

600

700

800

2010 2011

Storage (kt/year)

Production (kt/year)

November 2012


Grain and oilseeds accounted for the largest share of Mriya’s 2011 net sales…

Grains and oilseeds accounted for 46% of Mriya’s 2011 net sales, while sugar beet contributed 40%. The company’s best-known product, potatoes, accounted for an est. 13% of total revenues. As we expected, the much higher share of grain and oilseeds (+19pp y-o-y) in Mriya’s 2011 sales breakdown was due to increased acreage (+19% y-o-y), higher average yields, and low comparison base (grain and oilseeds’ share of Mriya’s 2010 revenues declined by 20pp y-o-y as the company had high grain inventories which it accumulated as a result of export restrictions).

…and are expected to contribute 78% to 2012 revenues

For the 2012 harvest, the company increased plantings of winter wheat (+16% y-o-y), corn (+77% y-o-y) and winter rapeseed (+10% y-o-y). With favorable pricing conditions for the crops in domestic and global grain markets, we expect Mriya to see the revenue share of grain and oilseeds to expand by 32pp y-o-y to 78% this year. We estimate sugar beet’s share will decline by 27pp y-o-y to 13% of 2012 revenues.

Mriya Sales Breakdown (2011) Source: Company, Dragon Capital estimates

Mriya Sales Breakdown (2012E) Source: Dragon Capital estimates

COGS structure The largest expenses for Mriya are direct material costs, which account for around 80% of COGS. Fertilizers contribute the largest share (40%) to direct costs, followed by crop protection (22%), seeds (14%) and fuel (10%).

Fertilizers40%

Crop protection22%

Seeds14%

Salaries5%

Fuel and gas10%

Land lease8%

Other1%

Mriya Direct Costs (2011) Source: Company, Dragon Capital estimates

Selling expenses14%

Bank charges3%

Other**10%

Professional fees15%

Material costs*18%

Staff costs40%

Mriya SG&A Cost Breakdown (2011) Note: *including rental and fuel expenses, communication services, insurance and maintenance expenses; **including auditors’ remuneration, depreciation

and other costs. Source: Company, Dragon Capital estimates

1H12 results in line with expectations

Mriya reported 1H12 net sales of $54.5m (+20% y-o-y; net of IFRS 41 gains), total revenues of $209.2m (+16% y-o-y), EBITDA of $165.9m (+18% y-o-y), with LTM EBITDA at $213.0m (+21% y-o-y) and LTM cash EBITDA at $191.0m. We believe Mriya sold almost all of its 2011 harvest inventories, including 130-140 kt of wheat (26-28% of the 2011 harvest), 80 kt of corn (70%) and 30 kt of potatoes (22%).

Sugar beet 40.4%

Winter wheat 23.2%

Potatoes 13.1%

Corn 10.1%

Winter rapeseed

7.1%

Other 6.1%

Winter wheat 43.5%

Winter rapeseed 16.9%

Corn 13.4% Sugar beet

12.9%

Potatoes 9.5%

Other 3.8%

November 2012


Mriya Production Cost Comparison (2011) Sources: Company

Total Revenues to Recurring EBITDA Bridge ($m; 1H12)* Note: *EBITDA includes gains from revaluation in fair value of crops. Source: Company

Global grain prices have been rising due to negative weather impact on expected harvests in the U.S. and Australia as well as some European countries and the Black Sea region. Ukrainian grain export prices currently follow CBOT dynamics since there are no current export curbs and none are planned by the government for 2012/13 MY. Local grain producer prices also tend to follow export prices, but with a 1-2 week delay. Expected grain prices in 2H12 should positively affect Mriya’s full-2012 financials. Conversely, sugar prices are falling and we expect the commodity to account for only 13% of Mriya’s projected 2012 revenues.

The company should benefit from rising grain prices in 2012

We estimate Mriya’s 2012 sales at $352m (+31% y-o-y), thanks to increased prices and a 4% y-o-y increase in acreage. Our 2012 EBITDA estimate yields $215m (+14%), implying an EBITDA margin of 43.0% (-1.2pp y-o-y due to substantial decrease in sugar segment margin). 2013 revenues are projected to decline by 21% y-o-y to $280m due to a decrease in prices and low leftover stocks expected from the 2012 harvest.

Financial outlook for 2012-13

Mriya’s current storage capacity for 670 kt of grain and oilseeds makes the company self-sufficient. However, in order to support future growth in crop production, the company is building two new storage facilities with 100 kt capacity each in the Ternopil region. On the first site, the 40 kt first phase was scheduled for completion in September-October, in time for the corn harvest. The remaining 60 kt will be launched next spring. The facility will have all necessary infrastructure, including handling, drying and cleaning equipment and a private rail terminal. The other silo will have 20 kt of capacity ready for the 2012 harvest and the remaining 80 kt will be added in 2013. Mriya is also preparing construction documentation for four other silos, each with 100 kt storage capacity, planning to start construction in 2012-13. Mriya estimates greenfield silo CAPEX at $250-300 per tonne of storage capacity.

Mriya expects to add 60 kt of new storage capacities in 2012

The company projected its 2012 CAPEX at $170m (in line with our forecast) and expects 2013 investments to be unchanged y-o-y. This year’s CAPEX includes $6m for land bank expansion, $72m already spent on completed silos and over $80m for construction in progress (funds have been allocated but the capacities will be launched in 2013).

CAPEX projected at $170m in 2012…

In March 2011, Mriya placed a $250m five-year Eurobond paying a coupon of 10.95%. The company’s more recent debt raising includes a $60m loan from the IFC and a $25m loan from the EBRD. Its end-1H12 total debt stood at $417.9m, including $153.0m of short-term loans (37% of total), while cash balances totaled $78.8m. End-1H12 Net Debt to EBITDA ratio of 1.6x was below the Eurobond covenant of 3.1x.

…to be financed with Eurobond proceeds and IFC

and EBRD loans

57 24

60 91

227

62

143 148

0

50

100

150

200

250

300

Potatoes Sugar beet Corn Wheat

Mriya ($/tonne) Ukrainian average ($/tonne)

54.5

154.7 209.2

(14.0) (2.7)

1.6 142.3 23.6 165.9 (16.5) (35.2)

050

100150200250300

Reve

nues

Net g

ainfro

m rev

aluati

on

Total

reve

nues

Direct

cost

of sa

lesNo

n-cas

h cost

of sa

les SG&A

Othe

r ope

rating

expe

nces

Othe

r ope

rating

incom

e

Opera

ting P

rofit

Depre

ciatio

n

Recu

rring

EBITD

A

November 2012


Mriya’s Debt Repayment Schedule ($m; 2012-2017)


Hryvnia depreciation implies minor impact for Mriya

Mriya generates about 75% of total revenues either in foreign currency or in domestic currency at prices fixed in USD (grain sales). The remaining 25% include UAH-based domestic sales of potatoes (10% in 2013F) and sugar and sugar beet (15%). At the same time, Mriya incurs about 25% of total costs in UAH (mainly salaries, land lease and SG&A), while the remaining 75% (represented by fertilizers, plant protection, fuel, and partially seeds) are dollar-linked. This implies that should the hryvnia depreciate, Mriya hryvnia revenues will decline in line with COGS in dollar terms, producing a minor effect on operating profitability.

49.4 85.9 74.0

12.6

250.0

2.8 0

50

100

150

200

250

300

2012 2013 2014 2015 2016 2017

Bank loans Leasing

November 2012



Company Price Currency MC EV/EBITDA P/E $m 2012E 2013F 2012E 2013F

Mriya Agro Holding 6.23 USD 662 4.4 4.1 4.7 5.2 Premium (Discount) to Astarta Holding 41% (9%) (8%) (9%) (1%) Premium (Discount) to Russian Peers 164% (21%) (26%) 22% 12% Premium (Discount) to DM Peers (90%) (27%) (38%) (66%) (55%) Astarta Holding 18.85 USD 471 4.9 4.5 5.2 5.2 Russian Peers Rusgrain 14.5 RUB 20 2.0 2.0 0.5 - Razgulay 12.36 RUB 62 5.6 5.6 2.3 1.4 Trigon Agri 5.70 SEK 110 7.5 7.8 90.0 4.3 Ros Agro 7.00 SEK 835 4.3 4.5 5.4 4.9 Black Earth Farming 12.35 USD 229 12.6 10.5 neg. 16.8 Russian Peer Median* 251 5.6 5.6 3.9 4.6 Developed Market Peers KWS Saat (GE) 228.00 EUR 1,913 8.1 8.7 15.6 17.8 Archer-Daniels-Midland (US) 25.62 USD 16,872 5.8 6.6 13.8 11.4 Viterra (CA) 15.75 CAD 5,849 9.0 8.7 18.6 17.6 Andersons (US) 40.98 USD 762 6.0 4.4 9.4 10.0 DM Peer Median* - - 6,349 6.0 6.6 13.8 11.4 Notes: *averages shown for market capitalizations; prices as of Nov. 9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS/FAIR VALUES Mriya Agro Holding (MAYA GR)

Notes: *fair values were calculated between Feb. 2, 2009 and Jan. 23, 2011; **coverage was suspended between Jan. 1, 2010 and Jul. 1, 2010

0.02.04.06.08.0

10.012.014.016.0

Jul-08 Jan-09 Aug-09 Feb-10 Sep-10 Mar-11 Sep-11 Apr-12 Oct-12


PT/FV ($/share)

November 2012



Period 2009 2010 2011 2012E 2013F Land Leased (‘000 ha; e-o-p) 201.0 241.0 295.0 325.0 355.0 Growth (%, y-o-y) 34% 20% 22% 10% 9% Land Cultivated (‘000 ha; e-o-p) 150.0 229.0 239.8 250.0 260.0 Growth (%, y-o-y) 72% 53% 5% 4% 4% Grain and Oilseeds Production (‘000 t) 470.2 499.1 726.6 922.3 975.1 Growth (%, y-o-y) 50% 6% 46% 27% 6% Potatoes Output (‘000 t) 77.9 87.6 134.1 135.9 202.5 Growth (%, y-o-y) 67% 13% 53% 1% 49% Sugar Beet Production (‘000 t) 1,279.3 1,700.0 1,480.7 1,171.9 1,155.6 Growth (%, y-o-y) 132% 33% (13%) (21%) (1%)


Period 2009 2010 2011 2012E 2013F Net Sales 148.3 161.5 268.3 351.9 279.6 EBITDA 92.9 158.5 188.3 215.3 209.6 Depreciation (2.2) (5.5) (17.4) (17.0) (23.3) EBIT 90.6 152.9 170.8 198.3 186.3 Net Financial Income (Loss) (8.2) (8.3) (20.3) (56.6) (57.3) NIBT 82.4 144.7 150.6 141.8 129.0 Taxes (0.1) (0.3) (0.6) (0.6) (0.5) Net Income (Loss) 82.3 144.3 150.0 141.2 128.5


Period 2009 2010 2011 2012E 2013F Total Assets 308.5 591.3 1,052.9 1,263.2 1,375.2 Fixed Assets 69.8 207.3 505.3 660.2 766.5 PPE 67.9 206.5 502.3 657.2 763.5 Current Assets 236.3 378.4 519.2 574.7 580.4 Inventories 26.6 57.6 87.8 125.3 99.6 Accounts Receivable 51.4 99.5 108.3 216.9 172.4 Cash & Cash Equivalents 1.9 2.9 44.4 1.8 1.4 Short-term Bank Deposits 103.0 92.3 139.9 109.9 194.3 Total Liabilities & Equity 308.5 591.3 1,052.9 1,263.2 1,375.2 Total Liabilities 84.7 162.2 453.2 522.3 505.8 Accounts Payable 25.5 28.3 61.4 80.5 64.0 Bank Debt 52.7 110.8 351.0 401.0 401.0 Equity 222.3 424.3 595.4 736.6 865.2

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) 64% 9% 66% 31% (21%) EBIT Growth (y-o-y) 34% 71% 19% 14% (3%) Net Income Growth (y-o-y) 10% 75% 4% (6%) (9%) EBITDA Margin 48.4% 53.3% 44.2% 43.0% 47.5% Net Margin 42.9% 48.5% 35.2% 28.2% 29.1% Net Debt/Equity (24%) 4% 28% 39% 24% ROE 37.0% 34.0% 25.2% 19.2% 14.9% EBITDA coverage

6.16 6.12 3.71 5.73 5.23 Net Debt/EBITDA

(0.56) 0.10 0.89 1.34 0.98

November 2012



November 2012


Ovostar Union: Focus on Capacity Expansion

Price Target (PLN) 101.72 Price Target ($) 31.13

Upside (%) 7%

Highlights

Ñ Profile Ovostar Union is a leading industrial shell egg producer in Ukraine (with 5.7% output share in 2011) and accounts for 40% of local egg product sales. The company produced 623 million shell eggs last year (+14% y-o-y).

Ñ Valuation yields 7% upside, implying a Hold The average of our DCF and comparative valuation models yield a 12-month price target of $31.13/share, which implies 7% upside potential and suggests a Hold recommendation.

Ñ Sunflower seed processing plant launched at end-2011 Ovostar launched a sunseed processing plant with daily processing capacity of 80 tonnes (about 30 kt p.a.) in September 2011. The company sells sunflower oil to third parties, used sunflower meal (by-product) for chicken feed and consumes fuel pellets produced from sunflower husk as fuel. Ovostar plans to produce and sell about 7 kt of sunflower oil in 2012 (vs. 1.4 kt in 2011), which implies about 35% self-sufficiency in sunflower meal for feed.

Ñ Capacity expansion announced at IPO was completed by end-September... Ovostar completed its $46.5m 2011-12 CAPEX program (announced at IPO) at end-September 2012. It boosted Ovostar’s shell egg production capacity by 86% to 3.9 million laying hen places, providing for a 93% increase in shell egg production to 1,054 million eggs p.a.

Ñ ...and approval of a new investment program for 2H12-2013... Management has approved a new $35.4m investment program for 2H12-2013 aimed at further production expansion, to be financed with retained earnings. Investment will go towards increasing the number of laying hen places by 1.5 million to 5.4 million in 2014 and to 6.1 million in 2015 when the program is scheduled for completion. The program targets total shell egg production growth to 1,250 million eggs p.a. in 2014 and 1,450 million eggs p.a. in 2015, and expansion of egg product output capacity to 12.7 kt p.a.

Ñ ...support our strong 2012 outlook Ovostar plans to increase 2012 shell egg output by 35% y-o-y to 840 million pieces thanks to capacity expansion. We expect Ovostar’s 2012 average egg price to increase by 8% y-o-y to UAH 0.70/egg, conservatively assuming no premium to the market, which serves as an upside risk. We expect Ovostar to increase 2012 revenues by 45% y-o-y to $73.3m and EBITDA by 47% to $32.7m, for an EBITDA margin of 44.6% (+0.6pp y-o-y).

Ñ Solid 2013 sales outlook on capacity expansion We expect Ovostar to increase 2013 revenues by 29% y-o-y to $94.3m on 31% y-o-y output growth. We estimate its 2013 EBITDA at $38.6m (+18% y-o-y), implying an EBITDA margin of 40.9% (-3.7pp y-o-y due to hryvnia depreciation and higher feed prices as Ovostar will use 2012-harvested grain).

Ñ Risks Weather affecting feed grain prices could be a major risk to Ovostar.

Sell Hold Buy

Company Data Market Price (PLN) 95.45 Market Price ($) 29.21 Market Cap ($m) 175.3 Enterprise Value (12E; $m) 168.4 Free Float (%) 25.00% Free Float ($m) 43.8 Shares Outstanding 6,000,000 Nominal Value (EUR) 0.021 Bloomberg Code OVO PW DR Ratio - Number of Employees 1,309


12-month Performance ($)

0

10

20

30

40

50

Nov-11 Jan-12 Mar-12 May-12 Jul-12 Oct-12

Ovostar Union KP-Dragon (rel.)

12-month Performance 55% 12-month Rel. Perform. (KP-Dragon) 91% 12-month Low/High ($/share) 17.47/41.53 All-time Low/High ($/share) 14.68/41.53 12-month Trading Volume ($m) 18.1


Year 2009 2010 2011 2012E 2013F


Prime One Capital Ltd - 75.0%

Free Float - 25.0%

Shell Eggs 66%

Egg Products

22%

Sunoil 9%

Other 3%

November 2012


Ovostar Union: Investment Highlights

Ovostar Union is a leading industrial shell egg producer in Ukraine with a 5.7% market share in volume terms in 2011 (+0.3pp y-o-y). The company also produces dry and liquid egg products, accounting for 40% of the Ukrainian egg product market last year. The company’s production facilities are located in the Kyiv and Cherkasy regions. Ovostar Union enjoys a high degree of vertical integration, operating a closed production cycle. Being self-sufficient in hatching eggs, the company also totally satisfies internal needs for feed mix. Ovostar also processes sunflower seed, selling sunflower oil to third parties and using by-products such as sunflower meal for chicken feed and fuel briquettes produced from sunflower husk as fuel.

One of the largest Ukrainian egg producers with a 5.7%

share of the local egg market

Major Egg Producers in Ukraine (volume terms; 2011)

Source: Avangard, Ovostar, Pro-consulting Ovostar’s Share of Ukrainian Egg Product Market (volume; 2011)

Source: Ovostar

Ovostar produced 623 million shell eggs last year (+14% y-o-y), with the increase attributed to both growth in laying hen flock and the switch to a more efficient hen breed (Hy-Line). Of last year’s shell egg output, 439 million eggs (+25% y-o-y; incl. exports) were sold and 216 million processed into egg products. The company produced 324 million eggs (+12% y-o-y) in 1H12 and plans to increase its shell egg output by 35% y-o-y to 840 million pieces for full-year 2012 thanks to capacity expansion, which was announced pre-IPO and was completed in September 2012.

Ovostar expects to produce 840 million eggs in 2012

(+35% y-o-y)

Ovostar Shell Egg Production (million pieces; 2008-12E) Source: Company

Ovostar’s Share of Industrial Shell Egg Production in Ukraine (%)

Source: Company

Avangard 50.7%

Inter-Zaporizhya

9.6%

Ovostar Group 5.7%

Agrofirma Berezanskaya

5.1%

Landgut Ukraine 2.8%

Other 26.1%

Ovostar Union 40.0%

Other 60.0%

528 540 546 623

840

0

250

500

750

1,000

2008 2009 2010 2011 2012E

6.3%

5.9%

5.4%

5.7%

0% 2% 3% 5% 6%

2008

2009

2010

2011

November 2012


Ovostar’s major egg distribution channel is retail chains, accounting for half of sales

Ovostar was the first Ukrainian shell egg producer to launch sales of packed shell eggs through supermarket chains. Retail chains remain the company’s major sales channel, accounting for 54% of total shell egg sales in 1H12. The company’s current customers are ATB, Silpo, Rewe/Billa, Furshet, Velyka Kyshenya, Auchan, Novus and Metro. The company also sells shell eggs to large retail chains under private label contracts.

Ovostar Shell Egg Distribution Channels (value; 1H12)* Note: *POS – points of sales. Source: Company Ovostar Revenue Breakdown (value; 1H12)

Source: Company

Average egg prices to rise by 8% y-o-y in 2012

Ovostar’s 2011 egg price averaged UAH 0.65/egg (+14% y-o-y), outperforming the market average by 21%. This was largely attributable to the large share of branded eggs in Ovostar’s portfolio. In 1H12, average prices for shell eggs sold by Ovostar increased by an est. 6% y-o-y to UAH 0.66/egg, and we expect the company’s 2012 average egg price to increase by 8% y-o-y to UAH 0.70/egg, applying a conservative forecast that assumes almost no premium to the market price and leaves room for upside.

Ovostar’s Average Annual Egg Price vs. Ukrainian Average

(EXW, net of VAT; UAH/10 eggs) Sources: UkrAgroConsult, Company, Dragon Capital estimates

Sales of egg products contribute 20-30% to total revenues

Ovostar operates a modern egg processing plant, Ovostar EPP, with processing capacity of 2.0 million shell eggs per day. All of Ovostar’s egg products are distributed under the OVOSTAR™ brand. The company held a 40% share (+2pp y-o-y) of the Ukrainian egg product market in 2011 and a 100% share of the liquid egg yolk and liquid egg white markets in Ukraine. Ovostar processed 99 million shell eggs into egg products in 1H12, producing 0.39 kt (+41% y-o-y) of dry egg products and 2.13 kt (+28% y-o-y) of liquid egg products, which jointly contributed 23% to the company’s total revenues over the period (vs. 27% in 2011). We expect egg products to account for 21% of the company’s 2012E revenues, generally in line with the 1H12 trend.

Retail Chains 54.0% Branded POS

30.0%

Export 8.0%

B2B 4.0%

Wholesale 4.0%

Shell Eggs 70.0%

Egg Products 23.0%

Sunflower Oil 7.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0


2010 Ukraine avg. 2011 Ukraine avg. 2012 Ukraine's Avg

2011 Ovostar avg. 2012E Ovostar avg.

November 2012


Ovostar Egg Product Output (kt; 2008-12E) Sources: Company, Dragon Capital estimates

Average Prices of Dry Egg Products in Ukraine (2007-12E) Sources: SSC, Pro-Consulting

Ovostar launched a sunflower seed crushing plant with daily processing capacity of 80 tonnes (about 30 kt p.a.) in September 2011. The launch of sunflower processing brings Ovostar both additional revenues (7% of total in 1H12) and savings on hen feed (as sunflower meal, which is a vitamin-rich byproduct of sunflower seed crushing, is used in hen feed production). Another by-product is seed husk that is used in production of fuel briquettes. In 1H12, Ovostar processed 6.4 kt of sunflower seeds and produced 2.1 kt of sunflower oil, selling 2.0 kt at $1,004/t. The company plans to produce and sell about 7 kt of sunflower oil in 2012 (up from 1.4 kt in 2011), which implies about 35% self-sufficiency in sunflower meal for feed.

Sunflower oil production began in 4Q11, bringing

additional revenues and cost savings

Feed accounted for 74% of Ovostar’s egg production costs in 2011 with raw materials (mainly feed) contributing 66% to the company’s 2011 total COGS, followed by salaries with a 15% share. Ovostar buys feed grain from the market and mixes it into fodder at its own mills. Packaging costs accounted for over 9% of Ovostar’s overall 2011 COGS.

Fodder accounts for 74% of total egg production costs and

for over 65% of COGS

Ovostar Egg Production Cost Breakdown (2011)

Source: Company Ovostar COGS Breakdown (2011)

Source: Company

Ovostar showed healthy performance in 1H12, boosting revenues by 26% y-o-y to $27.8m, increasing EBITDA by 43% to $13.2m (for an EBITDA margin of 47.3%; +5.7pp y-o-y) and improving net income by 42% to $12.2m. Shell eggs accounted for 70% of Ovostar’s 1H12 revenues (-4pp y-o-y), egg products contributed 23% (-3pp y-o-y) and sunflower oil added 7%.

Ovostar’s strong 1H12 results...

3.2 3.5

1.2 1.4 1.4

3.2 3.5

3.4 3.8 4.6

0.0

1.5

3.0

4.5

6.0

7.5

9.0

2008 2009 2010 2011 2012E

Dry Egg Products (kt) Liquid Egg Products (kt)

0

30

60

90

120

150

2007 2008 2009 2010 2011 2012E

Dry Egg Powder (UAH/kg)Dry Egg Yolk (UAH/kg)Dry Albumen (UAH/kg)

Fodder 74.0%

Poultry Amortization

11.0%

Salaries 5.0%

Energy 3.0%

Other 7.0%

Raw materials 66.0%

Salaries 14.7%

Packaging 9.1%

Amortization 3.9%

Other 6.3%

November 2012


…along with completion of the investment program announced at IPO…

At end-September 2012, Ovostar reported completion of its 2011-12 CAPEX program worth $46.5m, which it announced at IPO (June 2011) and partially financed with IPO proceeds ($31m). The full impact is expected to be felt as soon as next year. The investments:

Ñ boosted Ovostar’ egg production capacity by 86% to 3.9 million laying hen places (six hen houses were built) providing for a 93% increase in shell egg production to 1,054 million eggs p.a.

Ñ increased egg processing capacity by 67%, to 2.0 million eggs per day Ñ enabled an 80% increase in annual egg product output, to 9.7 kt (dependent on

liquid/dry product mix).

...and a new expansion plan... The company announced a new $35.4m investment program for 2H12-2013 aimed at further production expansion, to be financed with retained earnings. The investments will go towards:

Ñ increasing the number of laying hen places by 1.5 million to 5.4 million in 2014 by building four new hen houses with 309,000 capacity each and one house for 280,000 laying hens further increasing the number of laying hen places to 6.1 million in 2015 when the program is scheduled for completion

Ñ boosting total shell egg production to 1,250 million eggs p.a. in 2014 and 1,450 million eggs p.a. in 2015

Ñ expanding egg product output capacity to 12.7 kt p.a.

Shell Egg Production Forecast (billions of pieces; 2010-15F) Source: Company

Egg Product Capacity Expansion (2010-15F)


…pave the way for a solid 2012 outlook

We expect Ovostar to increase 2012 revenues by 45% y-o-y to $73.3m and EBITDA by 47% to $32.7m, for an EBITDA margin of 44.6% (+0.6pp y-o-y). The pace of 1H12 revenue growth was expectedly slower than our full-year forecast due to ongoing modernization of the company’s egg processing plant and reconstruction of egg production facilities (laying hen houses). However, as the investment program was completed in September, adding new production capacities, we expect the company to meet our revenue projection. In terms of profitability, Ovostar outperformed our full-year EBITDA and net margin forecasts in 1H12. However, we keep our 2012 projections unchanged due to expected downward pressure on profitability due to higher grain prices in 2H12.

Solid 2013 sales outlook on capacity expansion

We expect Ovostar to increase 2013 revenues by 29% y-o-y to $94.3m, mainly thanks to 31% y-o-y output growth. We estimate its 2013 EBITDA at $38.6m (+18% y-o-y), implying an EBITDA margin of 40.9% (-3.7pp y-o-y due to projected hryvnia depreciation and higher feed prices as Ovostar will use 2012-harvested grain).

0.55 0.62

0.84

1.10 1.25

1.45

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2010 2011 2012E 2013F 2014F 2015F

5.5 5.5

10.5 10.5

12.7 12.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2010 2011 2012E 2013F 2014F 2015F

November 2012


Ovostar sells produced eggs and egg products (81% of 2013F revenues) mainly on the domestic market. The remainder (19%) is equally split between exports of eggs and egg products and USD-linked sales of sunflower oil sales. Fodder costs (45% of annual COGS) and packaging costs (9%) are mainly F/X-denominated. Thus, about 55% of Ovostar’s total annual COGS are USD-linked. This implies that potential hryvnia depreciation would result in revenues in hryvnia terms decreasing more sharply than USD-based COGS, thus adversely affecting profitability and multiples. We currently assume hryvnia depreciation to UAH 8.8:USD in 2013 from UAH 8.2:USD in 2012.

Ovostar is a strong local player but exposed to national currency

depreciation risk

November 2012



Company Price* Currency MC EV/EBITDA P/E $m 2012E 2013F 2012E 2013F

Ovostar Union 29.21 USD 175 5.1 4.3 5.7 4.9 Premium/(Discount) to Avangard (UA) (73%) 53% 39% 79% 53% Premium/(Discount) to MHP (UA) (89%) 7% 10% (13%) (10%) Premium/(Discount) to Cherkizovo Group (RU) (78%) 3% (24%) 42% 16% Premium/(Discount) to Cal-Maine (US) (83%) (31%) (31%) (49%) (63%) Premium/(Discount) to DM Peer Median (90%) (18%) (31%) (59%) (50%) Closest Market Peers Avangard (UA) 10.20 USD 651 3.4 3.1 3.2 3.2 MHP (UA) 14.40 USD 1,562 4.8 3.9 6.5 5.4 Cherkizovo Group (RU) 12.12 USD 799 5.0 5.7 4.0 4.2 Cal-Maine (US) 42.36 USD 1,013 7.5 6.2 11.3 13.2 Developed Market Peers

Atria Group (FI) 6.58 EUR 236 7.1 6.9 18.2 9.4 Hkscan OYJ (FI) 3.85 EUR 269 6.0 5.6 23.6 9.4 Bell Holding AG-REG (CH) 1943.00 CHF 819 5.4 4.7 10.3 9.8 Campofrio Alimentacion (SA) 5.62 EUR 730 6.3 6.2 13.8 11.7 L.D.C. SA (FR) 76.01 EUR 788 2.8 2.9 10.1 9.8 Sanderson Farms (US) 45.45 USD 1,044 8.7 7.7 21.4 29.3 Tyson Foods (US) 16.59 USD 6,008 4.4 4.2 9.0 10.6 Hormel Foods (US) 29.75 USD 7,821 8.7 8.1 15.6 15.0 DM Peers Median 1,748 6.3 6.2 13.8 9.8 Notes: *averages shown for market capitalizations; prices as of Nov. 9, 2012. Sources: Bloomberg, Company, Dragon Capital estimates

HISTORICAL PRICE TARGETS

OVOSTAR UNION (OVO PW)

0.0

10.0

20.0

30.0

40.0

50.0

Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12


PT ($/share)

November 2012



Period 2009 2010 2011 2012E 2013F Shell Eggs (billion pieces) 0.54 0.55 0.62 0.84 1.10 Growth (%, y-o-y) 2% 1% 14% 36% 31% Egg Powder (‘000 t) 3.5 1.2 1.4 1.6 2.4 Growth (%, y-o-y) 10% (65%) 10% 20% 45%


Period 2009 2010 2011 2012E 2013F Net Sales 32.3 37.0 50.6 73.3 94.3 EBITDA 5.7 11.6 22.3 32.7 38.6 Depreciation (2.1) (2.1) (1.5) (2.4) (3.4) EBIT 3.6 9.5 20.8 30.3 35.1 Net Financial Income (Loss) (1.2) (0.3) (0.7) 0.5 1.0 NIBT 2.4 9.3 20.1 30.8 36.1 Taxes 0.1 (0.1) 0.0 (0.1) (0.1) Net Income (Loss) 2.5 9.2 20.1 30.7 36.0


Period 2009 2010 2011 2012E 2013F Total Assets 41.8 40.8 91.3 123.3 161.3 Fixed Assets 18.5 18.9 45.9 79.6 105.6 PPE 12.2 11.6 24.0 57.5 83.2 Current Assets 23.3 21.9 45.4 43.7 55.7 Inventories 11.5 14.0 12.6 18.2 23.4 Accounts Receivable 9.3 7.2 10.7 15.1 19.4 Short-term Bank Deposits 1.4 0.0 0.0 0.0 0.0 Cash & Cash Equivalents 0.6 0.4 21.5 9.8 12.4 Total Liabilities & Equity 41.8 40.8 91.3 123.3 161.3 Total Liabilities 11.8 9.4 8.9 10.1 12.2 Accounts Payable 3.4 3.4 4.9 7.2 9.2 S/T Debt 5.9 4.3 1.2 1.2 1.2 L/T Debt 2.2 1.2 2.6 1.8 1.8 Equity 30.0 31.4 82.4 113.1 149.1

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) (12%) 14% 37% 45% 29% EBITDA Growth (y-o-y) (62%) 103% 92% 47% 18% Net Income Growth (y-o-y) (52%) 261% 120% 53% 17% EBITDA Margin 17.6% 31.3% 44.0% 44.6% 40.9% Net Margin 7.8% 24.7% 39.8% 41.9% 38.1% Net Debt/Equity 20% 16% (22%) (6%) (6%) ROE 8.7% 29.8% 35.4% 31.4% 27.4%

November 2012


Sintal Agriculture: Reducing Planted Area for 2013?

Price Target ($) - Upside (%) -

Highlights Company Data

Ñ Profile Sintal Agriculture, founded in 1992, leases about 150,000 ha of land, including 118,800 ha in Kherson and 28,000 ha in Kharkiv. Sintal has 19,300 ha under irrigation in Kherson region using a system which was built in the Soviet era but the company has invested heavily in its modernization. Sintal grows wheat, corn, barley, rapeseed, peas, soybeans, sunflower and sugar beet.

Ñ Land bank expanded by 46,000 ha in 2011 Sintal increased its land bank by 46,000 ha in 2011 through acquisition of Agrika agricultural company, which was owned by Icon Private Equity. The land is located in the Kherson region in proximity to the company’s existing land holdings. The deal was in the form of a share exchange agreement, according to which Icon transferred 100% of Agrika’s shares to Sintal in exchange for a 6% stake in Sintal. Additionally, the fund provided Sintal with an $8m convertible loan, which may potentially increase Icon’s stake to 10.8%.

Ñ Sintal produced 203.5 kt of grains and oilseeds in 2011 Sintal decided to change its crop rotation plan, increasing the share of land under sunflower, rapeseed, soybean and corn in 2011. Sintal’s total grain and oilseed production reached 203.5 kt (-3% y-o-y) and 19 kt of sugar beet (-52% y-o-y) last year, with winter wheat, winter rapeseed and corn jointly contributing 65% to total. Sintal registered an overall increase in crop yields of 23% y-o-y in 2011.

Ñ 2012 winter crops suffered from very low temperatures in 2M12 Sintal planted winter crops on 60,575 ha of land (+36% y-o-y) for the 2012 harvest, as newly acquired assets from Agrika were promptly integrated with Sintal’s operations. However, due to very low temperatures this winter, Sintal’s winter crops were severely damaged with about 40,000 ha of plantings (67% of total) killed and the remaining 20,000 ha registering an average yield of only 0.5-0.6 t/ha.

Ñ 2011 results and outlook for 2012 According to company data as of September 2012, Sintal generated revenues of $42m (+32% y-o-y) and EBITDA of $18m (+41% y-o-y) in 2011, for an EBITDA margin of 42.9% (+2.7pp y-o-y). Sintal sold its grain inventory from the 2011 harvest in 1Q12 and, due to expected substantial corn yield improvement, the company plans to sell its 2012 harvest by year-end. Sintal does not plan to grow winter crops for the 2013 harvest but will possibly plant sunflower on 50,000 ha in the Kherson region next spring. Sintal also does not rule out disposing of some of its land in the Kherson region in order to focus on more productive land plots.

Market Price (EUR/DR) 0.26 Market Price ($/DR) 0.34 Market Cap ($m) 11.1 Enterprise Value (10; $m) 16.7 Free Float (%) 36.3% Free Float ($m) 4.0 Shares Outstanding 47,059 Nominal Value (EUR) 1.00 Bloomberg Code SNPS GR DR Ratio 700:1 Number of Employees 464


12-month Performance ($/DR)

12-month Performance ($) (82%) 12-month Rel. Perform. (KP-Dragon) (79%) 12-month Low/High ($/DR) 0.07/2.57 All-time Low/High ($/DR) 0.07/8.62 12-month Trading Volume ($m) 0.7

Valuation Summary

Year 2009 2010 2011 2012E 2013F

Net Sales ($m) 30.4 31.8 - - - EBITDA ($m) 11.8 12.8 - - - Net Income ($m) 8.0 10.0 - - - P/E 1.4 1.1 - - - EV/EBITDA 0.7 1.3 - - - EV/Sales 0.28 0.52 - - - P/Book 0.18 0.16 - - -

Management - 57.7%

Icon PE - 6.0%

Free Float - 36.3%

0.00.51.01.52.02.53.0

Nov-11 Jan-12 Apr-12 Jul-12 Oct-12

SintalKP-Dragon (rel.)

November 2012


Sintal Agriculture: Investment Highlights

Sintal Agriculture, founded in 1992, leases about 150,000 ha of land, including 118,800 ha in Kherson and 28,000 ha in Kharkiv regions. The layer of humus in Sintal’s soil is 15-20% thicker than on average across Ukraine. Quality black soils (“chernozem”) make up 80-85% of the company’s land. Hot and dry weather prevailing in southern Ukraine in the summer makes irrigation crucial to achieving superior crop yields. Sintal currently has 19,300 ha under irrigation (this system was built in the Soviet era but the company has invested heavily in its modernization). Sintal owns an irrigation pipe network located 120 meters from the Dnipro river, Ukraine’s major waterway, but the channels through which water is pumped from the river and which span the company’s land bank are leased from the state. Sintal uses its own irrigation equipment to pump water to its fields. The company produces wheat, corn, barley, rapeseed, peas, soybeans, sunflower seeds and sugar beet and uses mini-till and no-till farming technologies.

Sintal boasts a partly irrigated land bank

Sintal Land Bank (2012)

Source: Company

Sintal increased its land bank by 46,000 ha in 2011 through acquisition of Agrika, an agricultural company owned by Icon Private Equity. The land is located in Kherson region in proximity to the company’s existing land holdings. Sintal commented that the newly acquired land has no irrigation system (which is needed for grain growing in this low-precipitation region of Ukraine) and thus the company plans to invest in irrigation. The deal was in the form of a share exchange agreement, according to which Icon transferred 100% of Agrika’s shares to Sintal in exchange for a 6% stake in Sintal. Additionally, the fund provided Sintal with an $8m convertible loan, which may potentially increase Icon’s stake to 10.8%.

The company expanded its land bank by 46,000 ha in 2011

Sintal previously announced plans to expand its irrigated land area to 80,000 ha in 2013 to cover 65-70% of its Kherson region land bank. The company’s long-term strategy envisages building 50 kt of storage capacity per every 25,000 ha of harvested land. Sintal is currently building a 100 kt silo in Kharkiv region, with the first 50 kt phase completed in 2011. More importantly, irrigation could potentially allow Sintal to collect two harvests a year.

Targeting collection of two harvests a year from southern

Ukrainian fields

Lviv

Uzhgorod

Ternopil

Rivne Lutsk

Zhytomyr Kyiv

Vinnytsia

Chernihiv

Sumy

Poltava

Cherkasy

Kirovohrad

Mykolayiv

Odesa Kherson

Simferopol

Zaporizhya

Kharkiv

Luhansk

Donetsk

Chernivtsi Dnipropetrovsk

k Ivano-Frankivsk

November 2012


Sintal harvested 82,700 ha of land in 2011...

The company took a strategic decision to change its crop rotation plan, increasing the share of sunflower, rapeseed, soybean and corn for the 2011 harvest. As a result, the area under sunflower rose by 38% y-o-y to 20,700 ha (25% of total), winter rapeseed area spiked by 202% to 16,300 ha, soybean area inched up 7% to 9,000 ha, and corn area increased by 39% to 7,500 ha. The company’s total winter wheat acreage fell 42% y-o-y to 28,300 ha, with negligible volumes of other crops also sown.

…producing 203.5 kt of grain and oilseeds…

Sintal produced 203.5 kt (-3% y-o-y) of grain and oilseeds and 19 kt of sugar beet (-52% y-o-y) in 2011. Winter wheat, winter rapeseed and corn jointly contributed 65% to the total 2011 harvest. Last year, the company boosted output of rapeseed (+432% y-o-y to 43.1 kt), corn (+68% y-o-y to 38.0 kt), winter barley (+43% y-o-y to 23.7 kt) and sunflower seeds (+41% y-o-y to 35.9 kt), while its production of winter wheat declined 51% y-o-y to 58.9 kt on a 51% y-o-y decline in winter wheat planted acreage. Soybean output was down 2% y-o-y to 15.6 kt.

Sintal Acreage Breakdown by Crop (2011)

Source: Company

Sintal Grain and Oilseed Harvest Breakdown by Crop (2011) Source: Company

...and improving yields by 23% y-o-y on average

Sintal registered an overall increase in crop yields of 23% y-o-y in 2011, in particular its rapeseed yield averaged 2.6 t/ha (+73% y-o-y) exceeding the Ukrainian average by 50%. Barley yield rose to 2.7 t/ha (+50% y-o-y), 8% above the national average over the period. Sunflower yield improved by 6% y-o-y to 1.7 t/ha while soybean yield declined 11% y-o-y, to 1.7 t/ha. The company’s reported corn yield of 5.0 t/ha increased by 19% y-o-y, but still stood 22% below the national average due to the low level of precipitation in the Kherson region, which created unfavorable weather conditions for this crop.

Sintal Crop Yields vs. Ukrainian Averages (t/ha; 2011)


Sintal Winter Crop Acreage Breakdown (2012) Source: Company

Sunflower Seed

24.7% Wheat 23.2%

Rapeseed 19.5%

Soybeans 10.8%

Barley 10.7%

Corn 9.0%

Sugar Beet 1.0%

Other 1.1%

Winter wheat 26.5% Winter

rapeseed 19.6%

Corn 17.6%

Sunflower 16.7%

Winter barley 10.8%

Soybeans 6.9%

Sugar beet 1.0%

Other 1.0%

1.5 1.6 1.8 1.9

3.0 4.2

2.6 1.7

2.7 1.7

3.0

5.0

1.7 1.9 2.5 2.0 3.4

6.4

0.01.02.03.04.05.06.07.0

Rape

seed

Sunfl

ower

Seed

Barle

y

Soyb

eans

Whea

t

Corn

2010 Sintal 2011 Sintal 2011 Ukraine Avg.Wheat 54.5%

Barley 29.0%

Rapeseed 16.0%

Other 0.5%

November 2012


Sintal has planted winter crops on 60,575 ha of land (+36% y-o-y) for the 2012 harvest, as newly acquired assets from Agrika were promptly integrated with Sintal’s operations. To balance its crop mix, the company slashed rapeseed sowings in favor of wheat and barley (54% and 29% of land bank under these crops, respectively). The share of winter rapeseed in total winter sowings dropped from 36% in 2010 to 16% in 2011. However, due to very low temperatures this winter, Sintal’s winter crops were severely damaged with about 40,000 ha of plantings (67% of total) killed and the remaining 20,000 ha registering an average yield of only 0.5-0.6 t/ha.

2012 winter crops

According to company data as of September 2012, Sintal generated revenues of $42m (+32% y-o-y) and EBITDA of $18m (+41% y-o-y) in 2011, for an EBITDA margin of 42.9% (+2.7pp y-o-y). The company sold its grain inventory from the 2011 harvest in 1Q12 and, expecting substantial corn yield improvement, the company plans to sell its 2012 harvest also this year. Sintal does not plan to sow winter crops for the 2013 harvest, and will possibly plant sunflower on 50,000 ha in spring in Kherson region depending on weather conditions and soil tests the company plans to perform. Sintal also does not rule our disposing of some of its land in the Kherson region in order to concentrate on more productive land plots.

2011 results and outlook

As of September 2012, Sintal’s total debt stood at $25m, including an $8m convertible loan provided by Icon Private Equity. The company is scheduled to repay $4m of loans by end-2012 with the remaining $21m maturing in 2013 (but planned to be prolonged). Sintal is also currently negotiating a $10-12m loan that will be pledged by shareholder equity, for spending on working capital, debt repayments and possibly purchase of lease rights for 22,000 ha of land in Kyiv region with a further 15,000 ha of land available for purchase in close proximity.

Debt

November 2012



Period 2009 2010 2011 2012E 2013F Grain Crops (‘000 t) 328.8 209.5 203.5 - - Growth (%, y-o-y) 36% (36%) (3%) - - Sugar Beet (‘000 t) 17.8 39.7 19.0 - - Growth (%, y-o-y) (60%) 124% (52%) - -

Profit & Loss Statement ($m)

Period 2009 2010 2011 2012E 2013F Net Sales 30.4 31.8 - - - EBITDA 11.8 12.8 - - - Depreciation (1.8) (1.3) - - - EBIT 10.0 11.5 - - - Net Financial Income (Loss) (1.6) (1.3) - - - NIBT 8.0 10.2 - - - Taxes 0.7 (0.6) - - - Net Income (Loss) 8.0 10.0 - - -

Balance Sheet ($m)

Period 2009 2010 2011 2012E 2013F Total Assets 59.5 72.2 - - - Fixed Assets 14.8 17.4 - - - PPE 14.7 17.2 - - - Current Assets 44.6 54.8 - - - Inventories 17.8 28.0 - - - Accounts Receivable 1.0 3.8 - - - Cash & Cash Equivalents 7.6 0.0 - - - Total Liabilities & Equity 59.5 72.2 - - - Total Liabilities 12.4 15.1 - - - Accounts Payable 7.2 9.5 - - - Bank Debt 5.2 5.6 - - - Equity 61.1 71.3 - - -

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) (19%) 4% - - - EBITDA Growth (y-o-y) (4%) 9% - - - Net Income Growth (y-o-y) 423% 24% - - - EBITDA Margin 38.7% 40.2% - - - Net Margin 26.4% 31.4% - - - Net Debt/Equity (4%) 8% - - - ROE 13.1% 14.0% - - -

November 2012



November 2012


Alpcot Agro: Strong Operating Results, But Still Loss Making



Ñ Profile Alpcot Agro is a Swedish company that was incorporated in 2006 and invests in farmland and associated agricultural operations in Russia and Ukraine. Since October 2009 Alpcot Agro shares have been listed on the NASDAQ OMX First North in Stockholm. The company currently operates 186,200 ha of land in Russia (64% of total) and 101,800 ha in Ukraine (36% of total). The company expanded its operations in Ukraine through acquisition of Landkom International in late 2011. Alpcot Agro also had 6,973 head of cattle as of end-1H12.

Ñ Strong operating results in 2011 but weak financials Alpcot Agro produced 279.8 kt (+155% y-o-y) of grain and oilseeds in 2011, harvested from 91,400 ha of land (+29% y-o-y). The company’s harvest reached 215.6 kt in Russia (+118% y-o-y thanks to strong yields) and 64.2 kt in Ukraine (+489% y-o-y thanks to doubled acreage following acquisition of Landkom). Alpcot Agro reported a 30% y-o-y increase in 2011 revenues, to $39.0m, but remained loss-making.

Ñ 1H12 profitability growth attributed to gains on acquisition of Landkom Alpcot Agro revenues reached $25.8m in 1H12 (+134% y-o-y) driven mainly by sales of grain inventories from the 2011 harvest, with crop sales (77% of total revenues) tripling y-o-y in value terms. Reported 1H12 EBIT growth to $8.8m (+868% y-o-y) was attributable to a $14.3m one-off gain related to the Landkom acquisition. However, disregarding the acquisition gain, Alpcot Agro reported an operating loss of $5.5m.

Ñ 2012 yields for winter crops in Ukraine above national average The company planted 133,400 ha of land for the 2012 harvest, including 66,500 ha with winter crops (mainly winter wheat and rapeseed) and 66,900 ha with spring crops. Reported 2012 winter wheat yield of 3.7 t/ha and winter barley yield of 3.2 t/ha exceeded the respective Ukrainian averages by 27% and 56%, respectively, while the winter rapeseed yield (2.4 t/ha) was in line with the national average. In Russia, the company’s yields for winter wheat improved by 31% y-o-y in Kaliningrad, to 4.2 t/ha, and were mostly unchanged y-o-y in central Russia, reaching 2.6 t/ha (-4% y-o-y). Alpcot Agro plans to increase its cultivated land bank for the 2013 harvest, planning winter crop plantings in excess of 65,000 ha.

Ñ Long-term strategy Alpcot Agro plans to divest its non-core land assets in central Ukraine and Russia, and to consolidate its land bank in western Ukraine. The company aims to cultivate around 150,000 ha of land in Russia and 100,000 ha in western Ukraine by 2015, though it does not foresee any large M&A until 2014. The company also plans to develop dairy operations, targeting annual revenues of $20m and EBITDA margin of 40% by 2015.

Market Price (SEK) 6.60 Market Price ($) 0.99 Market Cap ($m) 137.8 Enterprise Value (11; $m) 154.2 Free Float (%) 100% Free Float ($m) 137.8 Shares Outstanding 139,008,658 Nominal Value (SEK) - Bloomberg Code ALPA SS DR Ratio - Number of Employees 1,401



12-month Performance ($) (19%) 12-month Rel. Perform. (KP-Dragon) (7%) 12-month Low/High ($/share) 0.87/1.35 All-time Low/High ($/share) 0.87/2.60 12-month Trading Volume ($m) 37.5

Valuation Summary 2011 Revenues ($m)

Year 2009 2010 2011 2012E 2013F

Net Sales ($m) 23.4 30.0 39.0 - - EBITDA ($m) (18.7) (15.5) (0.3) - - Net Income ($m) (36.4) (34.6) (22.9) - - P/E neg. neg. neg. - - EV/EBITDA neg. neg. neg. - - EV/Sales 6.44 5.46 4.27 - - P/Book neg. 3.91 1.99 - -

Free Float - 100%

0.50

1.00

1.50

2.00


Alpcot Agro

KP-Dragon (rel.)

Crops 80% Milk and

meat 16%

Other 4%

November 2012


Alpcot Agro: Investment Highlights

Alpcot Agro is a Swedish company that was incorporated in 2006 and invests in farmland and associated agricultural operations in Russia and Ukraine. The company commenced operations in Russia in 2007 and in Ukraine in 2008. Alpcot Agro operates 186,200 ha of land in Russia (64% of total) and 101,800 ha in Ukraine (36%). In order to optimize crop production, Alpcot Agro’s land is organized in large clusters of about 30,000 ha. All large clusters are equipped with full infrastructure: logistics, storage and machinery. Regions of operations in Russia are organized into four mega-clusters, while in Ukraine (due to recent land bank expansion) land reorganization is in progress. In order to improve yields, Alpcot Agro started to implement no-till technology, which secures soil humidity, conserves nutrients and prevents soil erosion and demands less usage of fossil fuels. Land operated by Alpcot Agro in Russia is possessed through direct and indirect ownership and lease. Given the moratorium on agricultural land sales, all operated land in Ukraine is leased. Alpcot Agro’s business structure also includes five livestock units in Russia with 6,973 head of cattle as of end-1H12.

Alpcot Agro is an agricultural producer cultivating 288,000 ha of land in Russia and Ukraine

Alpcot Agro Ukrainian Land Bank

Source: Company

Alpcot Agro Land Bank Breakdown (2012)

Source: Company

Alpcot Agro acquired AIM-listed Landkom International, with 79,230 ha of land in western Ukraine, in January 2012 after Landkom shareholders approved the acquisition. Under the terms of the acquisition, one newly issued share of Alpcot Agro was exchanged for 22.16 Landkom shares. As a result, former Landkom shareholders came to own 16.43% of issued share capital of the enlarged group (excluding the placing shares). Landkom agreed to the takeover due to needing to refinance a significant part of its working capital facilities in order to operate effectively and keep up production levels.

Acquisition of Landkom

Alpcot Agro Harvested Area in Ukraine (’000 ha)

Source: Company

Alpcot Agro Harvested Area in Russia (’000 ha) Source: Company

Registered land, Russia

31.2% Indirectly

owned land, Russia 4.4%

Leased land, Russia 28.2%

Leased land, Ukraine 36.2%

1.3

0.4 0

0.7

0

5.5

3.3 2.5

1.5 0.9

0

1

2

3

4

5

6

Winter wheat Corn Soybean Buckwheat Rape

2010 201133.3

13.7

4.2 3.0

13.3

36.0

16.1

5.5 5.6

12.5

0

10

20

30

40

Winter wheat Sunflower Spring wheat Spring rape Other

2010 2011

November 2012


Alpcot Agro produced 279.8 kt (+155% y-o-y) of grains and oilseeds from 91,400 ha in 2011

Alpcot Agro produced 279.8 kt (+155% y-o-y) of grains and oilseeds in 2011, harvested from 91,400 ha of land (+29% y-o-y). The company’s harvest reached 215.6 kt (+118% y-o-y) in Russia and 64.2 kt in Ukraine (+489% y-o-y), thanks to outstanding crop yields in Russia and doubled acreage in Ukraine following acquisition of Landkom. The major crops included winter wheat (119.0 kt), corn (est. 43.7 kt) and sunflower (est. 36.6 kt), which jointly accounted for 71% of Alpcot Agro’s 2011 harvest.

Ukraine: Alpcot Agro’s Harvest Breakdown (volume; 2011)

Source: Company

Russia: Alpcot Agro’s Harvest Breakdown (volume; 2011)*

Note: *Other include soybean, beans, buckwheat, winter rapeseed Source: Company

2011 yields above average

Alpcot Agro reported an average crop yield of 3.1 t/ha in 2011 compared to 1.6 t/ha in 2010. The company’s Ukrainian crop yields were higher overall. Winter wheat and corn jointly accounted for 87% of the 2011 harvest in Ukraine, recording yields of 4.5 t/ha for winter wheat (+73% y-o-y) and 9.4 t/ha for corn (+16% y-o-y), which exceeded the respective domestic averages by 32% and 47%. Though Alpcot Agro’s Russian yields for winter wheat (3.0 t/ha; 44% of total 2011 harvest in Russia) underperformed the national average by 13%, yields for other major crops, including sunflower (2.3 t/ha; 17% of total), barley (2.6t/ha, 6%) and corn (6.4 t/ha; 6%), exceeded national averages by 18-72%.

Ukraine: Alpcot Agro Crop Yields vs. Average (t/ha; 2011)

Source: Company, SSS Russia: Alpcot Agro Crop Yields vs. Average (t/ha; 2011)

Source: Company, State Statistics of Russia, Dragon Capital estimates

2012 planted area up 40% y-o-y

The company planted 133,400 ha of land for the 2012 harvest, including 127,400 ha (+40% y-o-y) with commercial crops and 6,000 ha with feed crops for in-house use (the company’s dairy segment). Alpcot Agro planted 66,500 ha with winter crops (50% of total area), mainly with winter wheat (about 66% of total area under winter crops) and rapeseed (30%). Spring crops were planted on 66,900 ha (50% of total area for the 2012 harvest), including sunflower (17,300 ha or 26% of total area under spring crops), corn (14,100 ha; 21%), barley (8,500 ha; 13%), soybean (6,900 ha; 10%) and spring rapeseed (4,200 ha; 6%).

Corn 48.1%

Winter wheat 38.8%

Soybean 6.5%

Buckwheat 2.8%

Rapeseed 3.7%

Winter wheat 43.6%

Sunflower 17.0%

Sugar beet 13.0% Barley

6.2%

Corn 5.9%

Spring Wheat 4.4%

Spring rapeseed

3.7%

Other 6.2%

6.4

3.4

1.7 2.0 1.0

9.4

4.5

2.7 1.7

1.2

0

2

4

6

8

10

Corn Winter wheat Rapeseed Soybean Buckwheat

Ukraine Avg.

Alpcot Agro Ukraine4.3

3.0 2.2

1.3 1.6 1.1

6.4

2.6 2.6 2.3 1.7 1.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Corn Winter wheat Barley Sunflower Spring wheat Spring rape

Russia Avg.

Alpcot Agro Russia

November 2012


Alpcot Agro Planted Areas under Winter Crops (ha; 2012)

Source: Company

Alpcot Agro Planted Areas under Spring Crops (ha; 2012)

Source: Company Despite low temperatures in 2M12 and lack of snow cover, which affected winter wheat and barley, average yields for Alpcot Agro’s winter crops were in line with the company’s 2011 results and higher than Ukrainian averages. As of Aug. 31, 2012, Alpcot Agro reported a winter wheat yield of 3.7 t/ha and a winter barley yield of 3.2 t/ha, which exceeded Ukrainian averages by 27% and 56%, respectively. Alpcot Agro’s winter rapeseed yield of 2.4 t/ha was in line with the national average. In Russia, the company’s yields for winter wheat improved 31% y-o-y in Kaliningrad to 4.2 t/ha, and were largely unchanged y-o-y in central Russia reaching 2.6 t/ha (-4% y-o-y).

Reported 2012 winter crop yields in Ukraine above

national averages

Alpcot Agro intends to increase the share of its land bank under cultivation for the 2013 harvest. The company plans winter plantings in excess of 65,000 ha with over 30,000 ha in Russia (mainly winter wheat) and around 35,000 ha in Ukraine (rapeseed, winter wheat and winter barley).

Alpcot Agro targets over 65,000 ha of land under winter crops

for 2013 harvest

Ukraine: Alpcot Agro Winter Crop Yields vs. Average (t/ha; 2012)*

Note: *Ukrainian average yields as of Sep. 3, 2012. Source: Company, SSS

Russia: Alpcot Agro Winter Wheat Yields (t/ha; 2011-2012)

Source: Company

Alpcot Agro operates five large livestock units in Russia, located centrally in each of the company’s different crop production clusters, in order to benefit from the synergies between crop and livestock production. The main purpose of livestock operations is milk production, while Alpcot Agro also operates meat production on a smaller scale. As of end-2011 the company’s livestock operations encompassed 7,588 head of cattle (+25% y-o-y), including 2,990 milking cows, 3,365 heifers and 1,233 bulls and calves. The company produced 12.1 kt of milk in 2011 (+20% y-o-y), recording an average cow milk yield of 5,101 l/year, 8% higher than the Russian average. Alpcot Agro had 6,973 head of cattle as of end-1H12, including 3,204 milking cows (+14% y-o-y) that produced an est. 8.6 kt of milk (+44% y-o-y) and contributed 20% to total sales in the first half of the year.

Milk and meat production contribute around 20% to company’s total revenue

Winter wheat 66.3%

Winter rapeseed 29.8%

Winter barley 3.9%

Sunflower 25.8% Corn

21.1%

Barley 12.7%

Soybean 10.3%

Forage crops 9.0%

Spring Rapeseed

6.3%

Other 14.8%

2.9

2.1 2.4

3.7 3.2

2.4

0

1

2

3

4

Winter wheat Winter barley Winter rapeseed

Ukraine Avg. Alpcot Agro Ukraine

2.7 3.2

2.6

4.2

0

1

2

3

4

5

Central Russia Kaliningrad

2011 2012

November 2012


Alpcot Agro Milk Production (1Q11-2Q12)

Source: Company

Alpcot Agro Livestock (heads; 1H11-1H12)

Source: Company

Strong operating results but weak financials

Alpcot Agro reported 2011 revenues of $39.0m (+30% y-o-y) supported by increased volume sales of grain (+47% y-o-y; grain accounting for 80% of total 2011 revenues) but partially offset by a decline in the average grain price (-25% y-o-y in Russia; -24% in Ukraine). However, Alpcot Agro remained loss-making in 2011, reporting negative EBITDA of $0.3m (vs. negative $15.5m in 2010) and a net loss of $22.9m (vs. $34.6m loss in 2010).

1H12 EBIT growth driven by an one-off gain on Landkom’s acquisition

The company’s revenues reached $25.8m (+134% y-o-y) in 1H12 driven mainly by sales of grain inventories from 2011 the harvest while crop sales (77% of total revenues) tripled y-o-y in value terms. Reported 1H12 EBIT of $8.8m (+868% y-o-y) was attributed to a $14.3m one-off gain (negative goodwill on business combination) related to acquisition of Landkom. However, disregarding the acquisition gain, Alpcot Agro had an operating loss of $5.5m in 1H12.

Alpcot Agro has 290 kt of storage capacities

Alpcot Agro increased its total storage capacity to 290.1 kt (+38% y-o-y) in 2011, and purchased 20 kt of additional grain storage capacity that is yet to be put into operation. Storage facilities in Russia reached 191.0 kt last year, mainly comprised of granaries (76% of total). The company’s Ukrainian storage capacity amount to 99.1 kt, accounting for Landkom’s facilities, represented by silos (55% of total Ukrainian capacities) and granaries (45%).

Long-term strategy In the long term, Alpcot Agro plans to divest its non-core land assets in central Ukraine and Russia, consolidate its land bank in western Ukraine and obtain ownership of indirectly-owned land in Russia. The company aims to cultivate around 150,000 ha of land in Russia and 100,000 ha in western Ukraine by 2015, though it does not foresee any large-scale M&A until 2014. The company also plans to develop its dairy segment, planning to double daily milk output to 100 t (vs. 48 t in 1H12), increase average cow milk yield to 8,000 l/year (vs. 5,101 l/year in 2011), generate annual revenues of $20m and achieve a 40% EBITDA margin in the segment by 2015.

2.8 3.2 3.3 2.9

3.8 4.8

1,161 1,357 1,399

1,190

1,626

1,737

0

500

1000

1500

2000

0.0

1.0

2.0

3.0

4.0

5.0

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012

Milk Production (kt; lhs)

Average milk production per cow (liters; rhs)

773

2,530 2,801

818

2,951 3,204

0

1,000

2,000

3,000

4,000

Bulls and calves Heifers Dairy cows

1H11 1H12

November 2012



Period 2009 2010 2011 2012E 2013F Grain Crops Output in Ukraine (‘000 t) 11.7 10.9 64.2 - - Growth (% y-o-y) - (7%) 489% - - Grain Crops Output in Russia (‘000 t) 169.3 98.9 215.6 - - Growth (% y-o-y) - (42%) 118% - - Total Grain Crops Produced (‘000 t) 181.0 109.8 279.8 - - Growth (% y-o-y) - (39%) 155% - -


Period 2009 2010 2011 2012E 2013F Net Sales 23.4 30.0 39.0 - - EBITDA (18.7) (15.5) (0.3) - - Depreciation (6.0) (8.9) (11.9) - - EBIT (24.7) (24.4) (12.2) - - Net Financial Income (Loss) 0.2 (13.6) (2.7) - - NIBT (24.5) (23.8) (14.9) - - Taxes 1.7 0.3 (0.1) - - Net Income (Loss) (36.4) (34.6) (22.9) - -


Period 2009 2010 2011 2012E 2013F Total Assets 162.2 188.9 196.1 - - Fixed Assets 97.7 122.1 112.6 - - PPE 58.9 95.0 90.9 - - Current Assets 49.0 56.6 76.7 - - Inventories 16.3 14.6 25.9 - - Accounts Receivable 17.4 14.5 15.9 - - Cash & Cash Equivalents 4.7 9.8 9.3 - - Total Liabilities & Equity 162.2 188.9 196.1 - - Total Liabilities 18.1 38.9 36.1 - - Accounts Payable 10.8 14.1 10.1 - - S/T Debt - - - - - L/T Debt 7.0 24.6 25.7 - - Equity (19.8) 36.7 72.0 - -

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) - 28% 30% - - EBIT Growth (y-o-y) - nm nm - - Net Income Growth (y-o-y) - nm nm - - EBITDA Margin (80.1%) (51.7%) (0.7%) - - Net Margin (155.6%) (115.1%) (58.8%) - - Net Debt/Equity (12%) 43% 26% - - ROE nm (94.2%) (31.8%) - -

November 2012


KSG Agro: Hit by Unfavorable Weather

Price Target ($) -

Upside (%) -

Highlights

Ñ Profile KSG Agro is a Ukrainian agricultural producer with a land bank of 92,000 ha (primarily in the Dnipropetrovsk region). KSG Agro specializes in crop growing, focusing on sunflower, wheat, barley, rapeseed and soya. The company is also actively developing fruit and vegetable farming. KSG Agro controls over 2,000 ha of land with irrigation infrastructure inherited from the Soviet era. The company also breeds pigs and produces fuel pellets for use as a renewable energy source.

Ñ Severely hit by unfavorable weather… In 2012, KSG planted 65,300 ha of land (-18% vs. initially planned 84,000 ha due to delayed land acquisitions), including sunflower (41% of total area), wheat (28%), corn (12%), barley (12%) and other crops (7%). However, extremely hot summer temperatures in the Dnipropetrovsk region adversely affected yields, with average 2012E yield declining by 21% y-o-y (to 1.9 t/ha). As a result, the company cut its 2012 harvest projections almost in half to 122.6kt (+15% y-o-y) from the 232.3 kt expected initially (+118% y-o-y).

Ñ …the company cut its 2012 EBITDA estimate in half KSG downgraded its full-year financial guidance due to the severe decline in harvest expectations caused by unfavorable weather. The company is thus currently expecting 2012 net sales of $53.8m (+55% y-o-y but 19% below its previous estimate), EBITDA of $25.0m (-19% y-o-y and -41%) and net income of $14.2m (-49% y-o-y and -55%), implying EBITDA and net margins (factoring in estimated $24.5m full-year change in fair value of biological assets and agricultural produce) of 32.0% and 18.1%, respectively.

Ñ Revenue diversification is a medium-term target In addition to land bank expansion (to 200,000 ha by 2015), KSG Agro’s strategy also focuses on revenue diversification and increasing vertical integration to smooth cash flows throughout the year which are now greatly affected by seasonality of farming production and the volatility of agricultural commodity prices. Thus, in 2012 the company started reconstruction of a pig farm in Dnipropetrovsk region aimed at creation of a pig breeding complex with annual capacity of 19 kt of pork (targeted by 2016). The company also plans to intensify production of fuel pellets (60 kt annually by 2015). The combined share of the two segments is expected to reach 30% of the company’s revenues by 2015.

Ñ Risks: weather, land reform and export restrictions Similar to other grain producers, weather conditions are the biggest risk for KSG Agro’s operating and financial performance. Regulatory changes also represent a key risk as the agricultural industry in Ukraine is subject to governmental regulation and export curbs (quotas or tariffs).

Company Data

Market Price (PLN/share) 11.62 Market Price ($/share) 3.57 Market Cap ($m) 53 Enterprise Value (12E; $m) 75 Free Float (%) 34.4% Free Float ($m) 18.3 Shares Outstanding 14,925,500 Nominal Value ($) 0.01 Bloomberg Code KSG PW DR Ratio - Number of Employees 1,064



12-month Performance ($) (41%) 12-month Rel. Perform. (KP-Dragon) (30%) 12-month Low/High ($/share) 3.55-7.69 All-time Low/High ($/share) 3.55-10.15 12-month Trading Volume ($m) 13.6


Year 2009 2010 2011 2012E 2013F

Net Sales ($m) 13.8 15.6 34.7 - - EBITDA ($m) 5.8 12.2 30.8 - - Net Income ($m) 2.5 10.0 28.2 - - P/E 21.1 5.3 1.9 - - EV/EBITDA 11.1 5.0 2.5 - - EV/Sales 4.70 3.91 2.17 - - P/Book 12.32 5.17 0.74 - -

ICD Investments - 65.65%

Free float - 34.35%

2.0

4.0

6.0

8.0


KSG AgroKP-Dragon Index (rel.)

Farming 68%

Food production

24%

Pig breeding

3%

Vegetables 2%

Other 3%

November 2012


KSG Agro: Investment Highlights

KSG Agro is an integrated agricultural company operating in central Ukraine (primarily Dnipropetrovsk region) with 92,000 ha of land under management (up from 61,000 ha as of end-2011). The company specializes in crop growing and is also actively developing fruit and vegetable farming. KSG Agro controls over 2,000 ha of land with irrigation infrastructure inherited from the Soviet era. The company also breeds pigs, beginning active development of the segment in 2011 due to its high profitability and benefits arising from vertical integration (e.g. fodder production). In addition, KSG Agro produces fuel pellets for use as a renewable energy source.

KSG is an integrated agricultural company…

In May 2011 KSG Agro went public on the Warsaw Stock Exchange, placing 33% of its shares for $39.6m.

…trading on the WSE

KSG Agro Land Bank (end-2011) Note: *land bank in thousands of hectares; Source: Company

KSG Agro Revenue Structure (value terms; 2012E) Source: Company

Crop growing is the company’s core business with a combined 70% share of 2011 revenues, including grain farming (68% of total revenues) and fruit and vegetable (2%) growing. KSG Agro focuses on growing sunflower, wheat, barley, rapeseed and soya. The company has also been involved in fruit and vegetable planting, particularly producing cherries, apples, pears, and apricots in gardens occupying some 100 ha as well as growing potatoes, carrots, onions, beets, and cabbage. KSG Agro possesses own grain storage facilities of 120 kt (as of end-9M12) and also owns facilities to store fruit and vegetables with a capacity of 4,000 tonnes.

KSG Agro’s core business is farming…

As of end-2011, KSG Agro’s land bank under management comprised 61,000 ha, located primarily in Dnipropetrovsk region (54,100 ha) and neighboring Kharkiv (3,400 ha), and Kherson (1,600 ha) regions as well as in Khmelnytskiy (1,500 ha) region with the former two being defined as strategic regions (“target region”) for further land expansion. Since the beginning of 2012 the company has acquired an additional 23,000 ha of land in its target region, bringing current land bank to 84,000 ha (+149% since IPO in 2011) and targeting to increase its acreage to 100,000 ha by end-2012 and to 200,000 ha by 2015.

…operating 84,000 ha of land

Farming, 23.600, 68.0%

Food production,

8.200, 23.6%

Pig breeding, 1.100, 3.2%

Vegetables, 0.700, 2.0% Other, 1.100,

3.2%

3.8*

54.1

1.6

1.5

November 2012


KSG Agro Land Bank (’000 ha; 2009-12E)

Note: *year-end. Source: Company KSG Agro Cropland Breakdown (2012)

Source: Company

Suffered severely from adverse weather in 2012

For the 2012 harvest, KSG Agro originally planned to plant 80,000 ha (+78% y-o-y). However due to delays in land acquisitions, the company decreased its cropland to 65,300 ha (18% less than initially planned), which was planted with sunflower (26,800 ha; or 41% of total), wheat (18,500 ha; 28%), corn (7,800; 12%), barley (7,700 ha; 12%) and other crops (4,500; 7%).

Expected 2012 harvest cut in half

Moreover, unfavorable weather adversely affected yields, with average 2012E yield declining by 21% y-o-y to 1.9 t/ha, including 1.8 t/ha for sunflower (-22% y-o-y and 20% below KSG Agro’s initial expectation), 2.3 t/ha for wheat (-25% and -34%, respectively), 1.4 t/ha for barley (-29% and -52%) and to 2.5 for corn (-43% and -46%). As a result, the company cut its 2012 harvest projections almost in half to 122.6kt (+15% y-o-y) from the 232.3 kt expected initially (+118% y-o-y), projecting 2012E crop farming revenues at $38.8m (+64% y-o-y on the back of favorable grain and oilseed prices).

KSG Agro Harvest (2011-12R) Note: 2012E – expected harvest, 2012R – revised harvest. Source: Company

KSG Agro Crop Yields (t/ha) Sources: Company, Dragon Capital estimates

Food processing accounted for 24% of revenues in 2011

Food processing is KSG Agro’s second largest business segment, accounting for 24% ($8.2m) of total revenues in 2011, providing benefits of vertical integration and smoothing the company’s cash flows throughout the year. The company produces wheat flour (packaged and raw), buckwheat (packaged and raw), sunflower oil (bottled), pasta (packaged), vegetables and fruits, selling through domestic retail chains. The company anticipates 2012E revenues from the segment of $8.8m (+7% y-o-y).

27 34

61

100

27 34

46

80

0

30

60

90

12020

09

2010

2011

2012

E

Total* Cultivated

Sunflower 47%

Wheat 22%

Barley 7% Corn

6% Other 1%

Land Destructed by

Drought 17%

51.4 62.7 46.9

35.8

97.5

42.4 10.4

31.7

10.5

29.9

19.4

0

50

100

150

200

250

2011 2012E* 2012R*

OtherCornBarleyWheatSunflower

1.8

3.4

2.5

6.4

2.2 3.1

1.9

4.3

2.2

3.5 2.9

4.7

1.8 2.3

1.4

2.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Sunflower Wheat Barley Corn

Ukrainian avg. yields (t/ha; 2011) KSG Agro yields (t/ha; 2011)

KSG Agro yields (t/ha; 2012E) KSG Agro yields (t/ha; 2012R)

November 2012


In 2011, KSG Agro focused on pig breeding (although the company had been involved in the business since 2008) seeing benefits from the segment’s growth potential, high profitability and integration gains. In line with this strategy, last year the company increased its pig herd eight-fold to 8,000 head. As a result, the segment’s sales are expected to triple y-o-y in 2012, to $3.3m (or 4.5% of total projected sales, +1.3pp y-o-y). Pork output is currently sold domestically.

Pig breeding…

In an attempt to deepen vertical integration, KSG Agro also started processing farming by-products to produce pellets which are used as fuel for the company’s internal consumption as well as for export to Poland as a renewable energy source. The company signed a strategic agreement with Polish Energy Partners S.A., stipulating mutual cooperation on the construction of a pellet production plant with annual capacity of 60,000 tonnes and envisaging annual supplies to Poland of at least 50,000 tonnes of pellets (during seven years after construction). Currently KSE Agro has two production lines with combined capacity of 7,000 tonnes. In 2012E, the company expects pellet production to contribute 5.0% to total revenues, while a strategic plan seeks to increase this figure to 15% by 2015 when the plant is completed.

…and fuel pellet production to account for a joint 9.5% of

2012E revenues

KSG Agro Revenue Structure (value terms; 2012E) Source: Company

KSG Agro Net Sales and Profitability Margins (2009-12) Source: Company

In 2011, KSG Agro increased its revenues by 122% y-o-y to $34.7m (including $14.8m of IFRS 41 Agriculture gains) and posted EBITDA of $30.8m (+152% y-o-y) and net income of $28.2m (+180%), implying solid EBITDA and net margins of 62.2% and 56.9%.

2011 revenues rose 122% y-o-y…

KSG Agro reported 9M12 revenues of $37.1m (+18% y-o-y), including revenues of $18.6m (+56% y-o-y) and income from change in fair value of biological assets (under IAS 41) of $18.5m (-5% y-o-y due to weaker harvest expectations caused by unfavorable weather). The company reported EBITDA of $19.6m (just -1% thanks to a 6.7x y-o-y increase in depreciation, to $5.3m), EBIT of $14.3m (-25% y-o-y) and net income of $10.5m (-48% due to an 86% increase in financial expenses, to $3.6m), implying EBITDA and net margins of 52.9% and 28.2%, respectively. The company attracted additional debt in 9M12, mostly aimed at expansion into pig breeding and fuel-pellet segments, bringing outstanding debt to $42.1m (vs. $23.0m as of end-2011) and increasing its Net Debt/EBITDA ratio (annualized) to 1.54x as of end-9M12 from 0.72x as of end-2011.

…however bad weather hit 9M12 financials…

Crop Farming 72.1%

Food Production 16.4%

Agro Pellets 5.0%

Pig Breeding 4.5%

Vegetables 1.5%

Other 0.6%

13.8 15.6 34.7

53.8 4.3

16.9

14.8

24.4

0%

20%

40%

60%

80%

0

25

50

75

100

2009 2010 2011 2012R

Net sales ($m; lhs) IAS 41EBITDA margin (%, y-o-y; rhs) Net margin (%, y-o-y; rhs)

November 2012


…and put full-year results at risk

KSG downgraded its full-year financial guidance due to a severe decline in harvest expectations caused by unfavorable weather. The company is currently expecting 2012 net sales of $53.8m (+55% y-o-y but 19% below its previous estimate), EBITDA of $25.0m (-19% y-o-y and -41%) and net income of $14.2m (-49% y-o-y and -55%), implying EBITDA and net margins (factoring in estimated $24.5m full-year change in fair value of biological assets and agricultural produce) of 32.0% and 18.1%, respectively (-30.2pp y-o-y and -38.7pp).

Medium-term strategy calls for revenue diversification

In addition to land bank expansion (to 200,000 ha by 2015), KSG Agro’s medium-term strategy also focuses on revenue diversification and increasing vertical integration to smooth company cash flows (which are currently greatly affected by the seasonality of farming production and the volatility of agricultural commodity prices). Thus, in 2012 the company started reconstruction of a pig farm in Dnipropetrovsk region aimed at creation of a pig breeding complex with annual capacity of 19,000 tonnes of pork (targeted by 2016). The company has already agreed with French I-TEK to buy EUR 17.6m worth of equipment (to be financed with bank debt) planning to complete the first stage of the reconstruction by end-2012 to be followed by acquisition of 4,400 sows. KSG Agro also plans to intensify production of fuel pellets, targeting at least 60,000 tonnes of output p.a. by 2015. In general, the company expects pork and fuel pellets to account for a combined 30% of total revenues by 2015.

November 2012



Period 2009 2010 2011 2012E 2013F Land Leased (‘000 ha; e-o-p) 27 27 61 - - Growth (%, y-o-y) 0% 0% 129% - - Land Cultivated (‘000 ha; e-o-p) 26 25 46 - - Growth (%, y-o-y) 8% (1%) 79% - - Grain and Oilseeds Production (‘000 t) 70 55 107 - - Growth (%, y-o-y) 24% (21%) 95% - -


Period 2009 2010 2011 2012E 2013F Net Sales 13.8 15.6 34.7 - - EBITDA 5.8 12.2 30.8 - - Depreciation (0.6) (0.6) (1.5) - - EBIT 5.2 11.6 29.2 - - Net Financial Income (Loss) (2.7) (1.6) (1.1) - - NIBT 2.5 10.0 28.1 - - Income Tax Benefit (Expense) (0.0) (0.0) 0.1 - - Net Income (Loss) 2.5 10.0 28.2 - -


Period 2009 2010 2011 2012E 2013F Total Assets 26.1 26.3 122.7 - - Fixed Assets 10.6 10.8 73.5 - - Current Assets 15.5 15.5 49.2 - - Inventories 4.6 5.1 14.8 - - Current Biological Assets 2.7 7.6 13.4 - - Accounts Receivables 4.0 1.7 14.1 - - Cash & Cash Equivalents 2.6 0.0 1.1 - - Total Liabilities & Equity 26.1 26.3 122.7 - - Total Liabilities 21.1 14.7 31.9 - - Accounts Payable 7.0 6.7 7.9 - - S/T Debt 11.2 5.6 17.5 - - L/T Debt 2.9 2.4 5.8 - - Equity 4.3 10.3 72.4 - -

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) 101% 13% 122% - - EBITDA Growth (y-o-y) 80% 110% 152% - - Net Income Growth (y-o-y) (376%) 298% 180% - - EBITDA Margin 32.2% 37.5% 62.2% - - Net Margin 14.0% 30.9% 56.9% - - Net Debt/Equity 267.0% 77.1% 30.6% - - ROE 72.0% 120.6% 55.0% - -

November 2012


AgroGeneration: Improving Financial Performance



Ñ Profile AgroGeneration is a Paris-listed producer of agricultural commodities, founded by French investors in 2007. Its activity is concentrated in Ukraine where it operated about 51,000 ha of land as of end-2011. The company produces wheat, rapeseed, corn, barley and other crops.

Ñ Strong 2011 operating performance... AgroGeneration produced 163.9 kt of grain and oilseeds in 2011 (+38% y-o-y), harvested from 47,110 ha of land (+19% y-o-y). Corn and wheat accounted for 38% and 30% of total 2011 harvest, respectively. The company produced 61.6 kt of corn (+47% y-o-y), 49.8 kt of wheat (+20%), 22.4 kt of barley (+78%) and 13.5 kt of rapeseed (+7%). AgroGeneration managed to substantially improve its 2011 corn yield to 6.5 t/ha (+30% y-o-y), bringing it in line with the Ukrainian average of 6.4 t/ha.

Ñ ...paved the way for solid results In value terms, AgroGeneration’s crop output rose by 67% y-o-y to $44.4m as of end-2011. However, 2011 revenues totaled only $30.1m (+20% y-o-y) as the company sold only 96.2 kt (-19% y-o-y) of grain and oilseeds (59% of total harvest), while the remainder 67.6 kt was left for sale on more favorable terms in 1H12. The company almost doubled its 2011 EBITDA, to $6.3m (vs. $3.6m in 2010), implying an EBITDA margin of 21.0% (+6.4pp y-o-y), and increased net income to $3.0m (+144% y-o-y), with a net margin of 10.0% (+5.1pp).

Ñ 2012 early crop yields substantially outperformed national averages AgroGeneration’s 2012 reported yields increased by 1-48% y-o-y as of Sep. 12. At the same time, due to unfavorable weather, namely low temperatures in winter and a hot summer, average national yields dropped y-o-y. AgroGeneration’s reported yields for wheat (4.3t/ha: +1% y-o-y), barley (3.7 t/ha: +22% y-o-y) and rapeseed (2.6 t/ha; +48% y-o-y) outperformed the respective national averages by 48%, 68% and 13%, respectively.

Ñ Targeting 150,00 ha land bank in five years AgroGeneration plans to increase its Ukrainian land bank to 100,000 ha as early as 2Q13-4Q13. The company is also expanding its operations in Argentina through a joint venture with a strategic partner aiming to put 50,000 ha under cultivation within the next five years, including 14,000 ha in 2012/13 MY.

Market Price (EUR) 1.81 Market Price ($) 2.34 Market Cap ($m) 82.1 Enterprise Value (11; $m) 93.4 Free Float (%) 37.0% Free Float ($m) 30.4 Shares Outstanding 35,090,252 Nominal Value (EUR) 0.05 Bloomberg Code ALAGR FP DR Ratio - Number of Employees 130



12-month Performance ($) (11%) 12-month Rel. Perform. (KP-Dragon) 2% 12-month Low/High ($/share) 1.90/2.75 All-time Low/High ($/share) 1.90/3.58 12-month Trading Volume ($m) 15.0


Year 2009 2010 2011 2012E 2013F

Net Sales ($m) 6.7 25.0 30.1 - - EBITDA ($m) (6.0) 3.6 6.3 - - Net Income ($m) (7.4) 1.2 3.0 - - P/E neg. 61.9 21.4 - - EV/EBITDA neg. 23.2 11.8 - - EV/Sales 10.6 3.4 2.5 - - P/Book 2.9 1.7 1.2 - -

Green Alliance - 18%Gravitation - 12%Aloe PE -15%Champagne Cereales - 8%A Plus Finance - 6%L.E.S.S. Agro - 2%SCASEAS - 1%Management - 2%Free float - 37%

1.002.003.004.005.00


AgroGeneration

KP-Dragon (rel.)

Crops 98%

Other 2%

November 2012


AgroGeneration: Investment Highlights

AgroGeneration is a Paris-listed producer of agricultural commodities, founded by French investors in 2007. Its activity is concentrated in Ukraine where it operated 51,422 ha of land bank as of end-2011, operating in Lviv, Ternopil, Zhytomyr and Sumy regions. The company produces wheat, rapeseed, corn, barley and other crops. AgroGneration’s business in Ukraine is conducted through two subsidiaries, Agrofuel (41% of total area operated) and Vinal (59%). The company also operated 850 ha of land in Argentina as of end-2011.

AgroGeneration is a French diversified crop producer

operating in Ukraine

AgroGeneration Business Locations

Source: Company

In 2010/11 MY (July-June), AgroGeneration harvested 47,110 ha of land (+19% y-o-y). The company seeded the largest share of its land with wheat (26%) and corn (20%), followed by rapeseed (16%) and barley (16%). For the 2012 harvest, AgroGeneration increased its planted area by 7% y-o-y to 50,535 ha. Winter crops were planted on 23,417 ha (+13% y-o-y; 46% of total, with winter wheat accounting for 55% of area) and spring crops on 27,118 ha (+3% y-o-y; 54% of total).

Wheat and corn accounted for the largest shares of 2010/11

crop mix

AgroGeneration produced 163.9 kt of grain and oilseeds in 2011 (+38% y-o-y), with corn and wheat accounting for 38% and 30% of the total harvest, respectively. The company produced 61.6 kt of corn (+47% y-o-y), 49.8 kt of wheat (+20%), 22.4 kt of barley (+78%) and 13.5 kt of rapeseed (+7%).

AgroGeneration produced 164 kt of grain and oilseeds in

2011...

AgroGeneration Planted Area Breakdown (2011)

Source: Company

AgroGeneration Crop Production Breakdown (volume; 2011) Source: Company

Wheat 26.3%

Corn 20.1%

Rapeseed 16.3% Barley

15.9%

Other 21.5%

Corn 37.6%

Wheat 30.4%

Barley 13.6%

Rapeseed 8.3%

Other 10.1%

Lviv

Uzhgorod

Ternopil

Rivne Lutsk

Zhytomyr Kyiv

Vinnytsia

Chernihiv

Sumy

Poltava

Cherkasy

Kirovohrad

Mykolayiv

Odesa Kherson

Crimea

Zaporizhya

Kharkiv

Luhansk

Donetsk Chernivtsi Dnipropetrovsk Ivano-Frankivsk

Khmelnytskiy

Cropping area (‘000 of ha) Storage capacity (‘000 of tons) Railway connection

5 15

13 17

7 6

5

8 17

12 21

8 17

November 2012


...reporting yields in line with Ukrainian averages...

AgroGeneration’s 2011 average crop yields were generally in line with or slightly above respective Ukrainian averages. However, the company managed to substantially improve its corn yield, one of the major crops for the producer, which increased by 30% y-o-y to 6.5 t/ha, being in line with the Ukrainian average of 6.4 t/ha.

...but 2012 early crop yields substantially outperformed national averages

The company reported harvesting 60% of its planted area as of Sep. 12. Grain and oilseed production reached 112.3 kt (+28% y-o-y and 68% of 2011 harvest) over the period, with 19,635 ha remaining to be harvested (51% planted with corn). AgroGeneration reported 1-48% y-o-y yield growth across crops. At the same time, due to unfavorable weather conditions, namely low temperatures in winter and a hot summer, average national yields dropped y-o-y. AgroGeneration’s reported yields for wheat (4.3t/ha: +1% y-o-y), barley (3.7 t/ha: +22% y-o-y) and rapeseed (2.6 t/ha; +48% y-o-y) outperformed the respective national averages by 48%, 68% and 13%, respectively.

AgroGeneration Crop Yields vs. Ukrainian Average (t/ha; 2011)

Source: Company, SSS

AgroGeneration Early Crop Yields vs. Ukrainian Average (t/ha;

2012) Source: Company, SSS

The company can currently store up to 76 kt of grains and oilseeds simultaneously

AgroGeneration increased its total storage capacity by 6 kt to 76 kt p.a. in 2011, further strengthening its bargaining power vis-à-vis buyers. The company’s storage facilities are distributed evenly throughout operated land and most of t hem are located in close proximity to railways, thus helping to minimize logistics costs.

AgroGeneration Revenue Breakdown by Region (2011) Sources: Company

AgroGeneration Grain Storage Capacity vs. Production (2011)

Sources: Company

5.0

3.7

2.5 1.8

6.5

4.0

3.0

1.8

6.4

3.4

2.5 1.9

0

1

2

3

4

5

6

7

8

Corn Wheat Barley Rapeseed

2010 AgroGeneration2011 AgroGenerationUkraine Avg.

4.2

3.1

1.8

4.3 3.7

2.6 2.9 2.2 2.3

0

1

2

3

4

5

6

7

8

Wheat Barley Rapeseed

2011 AgroGeneration2012 AgroGenerationUkraine Avg.

Ukraine 73%

France 26%

Argentina 1%

70 76 118

164

0

50

100

150

200

2010 2011

Storage (kt/year)

Production (kt/year)

November 2012


AgroGeneration’s crop output in value terms rose by 67% y-o-y to $44.4m as of end-2011 thanks to a 38% increase in the tonnage produced, average yield growth (+17% y-o-y to 3.5t/ha) and average selling price growth of 23% y-o-y to $271/t. However, the producer’s 2011 revenues totaled only $30.1m (+20% y-o-y) as it sold only 96.2 kt of grain and oilseeds last year (-19% y-o-y and 59% of total harvest), with the remaining 67.6 kt stored for sale on more favorable pricing conditions in 1H12. The bulk of AgroGeneration’s 2011 revenues (72% of total) originated in Ukraine, followed by France (26%) and Argentina (2%). The company’s French revenues represent its new sales channel — exports from Ukraine to the EU — including mainly rapeseed and corn.

Solid 2011 results with revenues driven by exports — a

new sales channel for the company...

AgroGeneration almost doubled its 2011 EBITDA, to $6.3m (vs. $3.6m in 2010), implying an EBITDA margin of 21.0% (+6.4pp y-o-y), and increased net income to $3.0m (+144% y-o-y), for a net margin of 10.0% (+5.1pp y-o-y).

...and EBITDA almost doubled y-o-y

AgroGeneration Net Sales and Profitability (2010-11)

Sources: Company, Dragon Capital estimates AgroGeneration plans to expand its Ukrainian land bank to 100,000 ha as early as 2Q13-4Q13. The company is also expanding its operations in Argentina through a joint venture with a strategic partner aimed at putting 50,000 ha under cultivation within the next five years, including 14,000 ha in 2012/13 MY.

AgroGeneration targets land bank of 150,000 ha in the next

five years

AgroGeneration signed a partnership agreement with the EBRD in November 2011 which provided the company with a $10m 7-year loan while the EBRD also received an option to invest $3.5m of equity capital (representing a stake of 3.2%). The company also issued a bond in July 2012 raising EUR 9.4m in gross proceeds. The bond pays 8% p.a. and matures in 2018, with proceeds used to restructure existing loans and replenish working capital. AgroGeneration’s total debt stood at $22.9m and cash balance reached $11.6 as of end-2011, implying Net Debt/EBITDA of 1.8x.

Debt position

25.0 30.1

14.6% 21.0%

4.9%

10.0%

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

2010 2011

Net Sales ($m; lhs) EBITDA margin (%; rhs)

Net margin (%; rhs)

November 2012



Period 2009 2010 2011 2012E 2013F Wheat (‘000 t) 18.3 41.4 49.8 - - Growth (%, y-o-y) na 126% 20% - - Corn (‘000 t) 15.6 41.9 61.6 - - Growth (%, y-o-y) na 167% 47% - - Total Grain Output (‘000 t) 55.0 118.5 163.9 - - Growth (%, y-o-y) 197% 115% 38% - -


Period 2009 2010 2011 2012E 2013F Net Sales 6.7 25.0 30.1 - - EBITDA (6.0) 3.6 6.3 - - Depreciation (1.7) (2.7) (4.6) - - EBIT (7.7) 1.0 1.8 - - Net Financial Income (Loss) 0.1 0.0 1.0 - - NIBT (7.6) 1.0 2.8 - - Taxes 0.2 0.2 0.2 - - Net Income (Loss) (7.4) 1.2 3.0 - -


Period 2009 2010 2011 2012E 2013F Total Assets 24.5 56.5 93.1 - - Fixed Assets 12.6 32.4 31.0 - - PPE 7.9 14.4 14.0 - - Current Assets 11.9 24.1 62.1 - - Inventories 2.5 3.8 24.3 - - Accounts Receivable 4.1 3.5 9.3 - - Cash & Cash Equivalents 3.1 5.0 11.6 - - Total Liabilities & Equity 24.5 56.5 93.1 - - Total Liabilities 15.1 24.3 42.2 - - Accounts Payable 9.4 11.7 19.3 - - S/T Debt - - - - - L/T Debt 5.6 12.6 22.9 - - Equity 9.4 32.3 50.8

- -

Financial Ratios

Period 2009 2010 2011 2012E 2013F Sales Growth (y-o-y) - 272% 20% - - EBITDA Growth (y-o-y) - nm 74% - - Net Income Growth (y-o-y) - nm 144% - - EBITDA Margin (88.5%) 14.6% 21.0% - - Net Margin (110.1%) 4.9% 10.0% - - Net Debt/Equity 10% 19% 20% - - ROE (30.7%) 3.0% 5.3% - -

November 2012


DRAGON CAPITAL EQUITY RESEARCH COVERAGE POLICY Investment Recommendations Dragon Capital employs three basic recommendations to rate stocks under coverage: Buy, Hold and Sell. The recommendations are assigned according to the table below.

Target Price Upside to Current Market Price Recommendation >30% Buy 0% – 30% Hold <0% Sell

In addition, we may rate a stock as a Strong Buy in case its valuation upside exceeds 50%, there are no material risks that could jeopardize our valuation and we see a high probability for the stock to outperform the market in the short-term perspective based on available information and our fundamental valuation. Stocks that are either suspended from trading or do not have a recommendation assigned by Dragon analysts are designated as Not Rated. We put a stock Under Review if its price target and/or recommendation are subject to change based on latest financial results, newly arisen risk factors or other important events. We make all reasonable effort to reinstate recommendations and price targets on stocks being reviewed in the shortest possible time. Finally, we suspend a traded company from coverage in case Dragon Capital signs an investment banking services mandate with such company. Coverage is reinstated after the relevant investment banking transaction is closed. Current Distribution of Investment Recommendations

Companies Recommendation

Buy Hold Sell Under Review Not Rated Suspended 133 19 5 0 5 104 0

% of Total 14% 4% 0% 4% 78% 0% Dragon Capital market strategy reports, particularly the strategy weeklies, contain a different set of recommendations — positive and negative sentiment ideas — in addition to the fundamental recommendations described above. These essentially represent our recommendations for the coming trading week and are based on a number of factors such as anticipated global and local events, fundamental analysis, technical analysis and others. “Positive sentiment” designates stocks that we think are likely to achieve positive returns in the coming week. Conversely, equities in the “negative sentiment” category are expected to drop in price over the period, thus shorting these stocks could potentially generate positive returns for the week.

November 2012


36D Saksahanskoho 01 033 Kyiv, Ukraine Tel.: (+380 44) 490 7120 Fax: (+380 44) 490 7121 www.dragon-capital.ua

Chief Executive Officer Tomáš Fiala [email protected]

SALES AND TRADING RESEARCH EQUITIES FIXED INCOME Managing Director, Research Andriy Bespyatov, PhD, CFA Managing Director, Director, Fixed Income Trading [email protected] Equities Sales and Trading Ivo Suchy Dmytro Tarabakin [email protected] Strategy Electricity, Oil & Gas [email protected] Andriy Bespyatov, PhD, CFA Dennis Sakva, CFA Fixed Income Trading [email protected] [email protected] Managing Director, Oleksandr Ublinskykh International Equity Sales [email protected] Economics Manufacturing, Real Estate, Peter Bobrinsky Fyodor Bagnenko Olena Bilan Telecommunications [email protected] [email protected] [email protected] Taisiya Shepetko, CFA [email protected] Managing Director, Equity Fixed Income Sales Politics Sales & Retail Business Kostyantyn Kucherenko Viktor Luhovyk Fixed Income Development [email protected] [email protected] Olena Bilan Andriy Dmytrenko, CFA Svitlana Rusakova [email protected] [email protected] [email protected] Banking & Insurance Anastasia Tuyukova, CFA Sergiy Fursa Anastasia Tuyukova, CFA [email protected] Director, [email protected] [email protected] Trading and Domestic Sales Olga Slyvynska Editing Denis Matsuyev [email protected] Metals & Mining Viktor Luhovyk [email protected] Andriy Bespyatov, PhD, CFA [email protected] [email protected] Conal Campbell Derivatives, Sales and Trading Dennis Sakva, CFA [email protected] Sergiy Gayda [email protected] [email protected] Junior Analysts Food & Agriculture, FMCG Volodymyr Skepskiy Tamara Levchenko [email protected] [email protected] Nadiya Syhydyuk Taisiya Shepetko, CFA [email protected] [email protected] Natalia Shpygotska [email protected]

DISCLAIMER: This report has been prepared by Dragon Capital for information purposes only and is not an offer or solicitation to deal in any security. The opinions, forecasts and estimates in this report reflect our good-faith judgment as of the date of publication, and may change without notice. Although the information in this report comes from sources we believe to be reliable, and although we have made every effort to ensure its accuracy at the time of publication, we make no warranty, express or implied, of this report's usefulness in predicting the future performance, or in estimating the current or future value, of any security. Nor should this report be regarded as a complete description of the securities or markets referred to herein. Any opinions expressed herein may differ from opinions on the same subject expressed by other business departments of Dragon Capital as a result of employing different assumptions or methodology. Any investment decision made on the basis of this report shall be made at the investor's sole discretion, and under no circumstances shall Dragon Capital or any of its employees or related parties be liable in any way for any action, or failure to act, by any party, on the basis of this report. Nor shall Dragon Capital or any of its employees or related parties be liable in any way for any loss or damages arising from such action or failure to act. Dragon Capital does and seeks to do business with companies covered in its research reports. Investors should therefore be aware of a potential conflict of interest. Additional information on securities or companies discussed in this report is available upon request. This report, or any part of it, may not be reproduced without the prior written permission of Dragon Capital; when quoting, reference to Dragon Capital as the source of the quote is required.

Documents

Dragon Capital Agribook Nov 19 2012