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Ukraine: Market Undervalues Energy Stocks

Kyiv, 27 April 1998 (RFE/RL) -- What happens when a stock market stalls, foreign capital flees, and even the prices of blue-chip shares stagnate or plummet? Traders start talking about finding bargains.

In Ukraine, the investment choice of the moment might be a piece of Dniproenergo, Zahidenergo, or Tsentrenergo. By several investment criteria, the price of these firms, which generate wholesale electricity, is too low, analysts say.

"The fundamental value of these companies is much higher than the current market price," said Atlantik East Ltd. Senior Trainer Stanislav Coufal. "The mathematics for a price rise for these stocks is fairly compelling."

"These stocks are definitely undervalued," said Alfa Capital Kyiv Head of Research Paul Gregory. "If an investor is looking to take a position in Ukrainian stocks, the 'energos' are one of his better options."

"Fundamentally, the price for Ukrainian energo companies is very depressed," agreed Wood & Company Czech Republic Director Jan Sykora.

All the analysts argued that the energos' market capitalizations - the total value of issued share capital - are a lot lower than the true worth of the companies, taking into account their capacities to generate electricity, and, in turn, profits.

Dniproenergo, for example, can generate 8,000 megawatts of electricity per day. If you add up the shares, the company at current prices is worth about $270 million. But, in Russia, a power company with similar capacity would have a market capitalization of around $720 million, and in the Czech Republic the same company would be valued at over $1 billion.

There are cautions, however.

"You have to be careful when you calculate these ratios," said Alpha Capital's Gregory. "Ukrainian (energo) companies only generate, while in Russia and the Czech Republic similar firms generate and distribute. To a certain extent you're comparing apples and oranges."

But all the analysts agreed that the Ukrainian energos are probably undervalued, which should mean that the price will go up over time.

As to why the energos' share prices are low, Atlantik East believes an April 1 State Property Fund decision approving the creation and sale of three-to-seven percent more energo stock is what is depressing prices. The issue will be limited to employees and management of nuclear power stations, who will be able to buy stock at nominal prices - in some cases half of the possible market resale value.

"The government is unlikely to privatize its nuclear plants any time soon," investment analyst Coufal said, "And since workers at regular power stations did quite well when shares of their companies came to be traded, the government is compensating the people in nuclear power who couldn't make any money, because their stations couldn't be privatized."

"Some foreign investors have already started to buy these shares," Coufal reported. "They have made the decision that they can take the risk."

Analysts also note the new Parliament has yet to meet. It might restore investor confidence, but - then again - it might move to slow privatization. And adding to the brew, last week the State Privatization Fund announced plans for further privatization of more energo shares this month, in part as an attempt to meet International Monetary Fund credit conditions, but also to attract desperately needed cash into Ukrainian industry. If the privatization goes through, reassured investors will likely swoop on the energos - driving up demand and prices.