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Ukraine Agriculture Stocks Gain With Europe Trade Deal in Sight

June 13, 2014
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Ukrainian agricultural companies from Agroton Public Ltd. to Kernel Holding SA are rallying on speculation the government will reach a trade pact with the European Union that will help them boost exports.

The stocks are the best performers among 356 companies on the Warsaw Stock Exchange in the last five trading days through yesterday. Wheat and sunflower producer Agroton soared 18 percent in the past week for the biggest gain. Kernel, the largest Ukrainian company listed on the Polish bourse, surged 46 percent from a March low while Milkiland NV, a dairy producer with businesses in Russia and Ukraine, has advanced 42 percent in three weeks as the confrontation between the two countries eased.

Petro Poroshenko, who was sworn in as Ukraine’s new president on June 7, vowed to complete a trade agreement with the EU "soonest" as he battles pro-Russian rebels in the country’s easternmost regions. A Bloomberg index of the most- traded Russian stocks in the U.S. fell yesterday for the first time in nine days as Ukraine accused President Vladimir Putin’s government of allowing armored vehicles to cross its border to help separatists. Markets in Moscow were closed for a holiday.

"Better trade ties with Europe would certainly increase the value of one of Ukraine’s greatest assets: the quality of their farmland," David Riedel, president and founder of Riedel Research Group Inc., said by e-mail yesterday. "The country has the ability to be the breadbasket of Europe if given favorable access to markets there."

 

European Promises

 

The EU has promised Ukraine almost half a billion euros ($660 million) a year of trade relief, eliminating annual import duties on some Ukrainian agricultural goods. Kernel trades at 0.7 times its book value, the lowest ratio among its 15 global peers and less than one-third the average valuation of the group, according to data compiled by Bloomberg.

"Ukraine’s agricultural companies look very attractive at their current valuations as the industry should benefit the most from closer ties with Europe," Mattias Westman, who oversees about $3.6 billion in Russian assets as chief executive officer at Prosperity Capital in London, said by phone yesterday. "They should be able to increase exports significantly as demand is there and some trade restrictions are likely to be eased."

 

Barroso’s Commitment

 

The hryvnia-denominated UX Index of stocks traded in Kiev has surged 14 percent over the past month, the most among 93 stock gauges after Argentina’s benchmark. Investors have returned to the assets of the former Soviet republic after it won a $17 billion bailout from the International Monetary Fund, resumed talks with Russia’s OAO Gazprom to lower its fuel payments and sought an end to the fighting in its eastern regions.

Poroshenko, in his inauguration speech, urged the 28-nation European bloc to give Ukraine, the world’s third-biggest corn exporter and sixth-largest shipper of wheat, the prospect of a EU membership. The EU-Ukraine Association Agreement will be signed "as quickly as possible," European Commission President Jose Barroso said in Brussels June 5. "Both sides are committed to this."

Kernel’s shares jumped 10 percent to 33.96 zloty ($11.18) in Warsaw in the past five days, trimming their decline for the year to 11 percent. The stock is heading for its fourth weekly gain, the longest stretch of advances since November 2012.

"We have long been positive on Kernel Holdings which would directly benefit," Riedel said. He has a buy recommendation on the stock with a 12-month price estimate of 66.26 zloty, implying a 95 percent return from yesterday’s closing price. "The company needs good yields to boost production and drive margins higher."

 

Milkiland, Agroton

 

Agroton rose to 2.97 zloty for the best five-day performance on the Warsaw Stock Exchange, extending its rally this year to 52 percent. Milkiland soared 15 percent in the past week to 7.36 zloty. The bourse’s WIG Index slipped 0.4 percent yesterday.

Egg producer Avangardco Investments Public Ltd. jumped 5.3 percent to $10 in London yesterday, the highest level since April 2 and shrinking this year’s decline to 15 percent.

The European Commission proposed in March to remove import duties on Ukrainian goods ranging from cereals to chemicals. The EU would eliminate annual tariffs against Ukraine of 330 million euros on agricultural products including cereals, pork and poultry and 53 million euros on processed food, European Trade Commissioner Karel De Gucht said March 11.

The Bloomberg Russia-US Equity Index dropped to 92.74 yesterday. It lost 1.4 percent at 11:05 a.m. in New York today. The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, added 0.7 percent to $26.46.

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