UKRPRODUCT (UKR)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

UKRPRODUCT (UKR): We Take Our 56% Profit – Jan 2008

RHPS Recommendation – SELL

Trading in the second half of 2007 was ‘buoyant’, with smoked sausage cheese the star of the show. The post tax profit for the year is now expected to reach £3m, which represents a PE ratio of about twelve. But there are a number of uncertainties for next year, including the trend of the skimmed milk powder price and the rate of inflation in the Ukraine. So with the shares having done well in a weak market, SELL.

UKRPRODUCT (UKR): Supplying Kraft - Dec 2007

RHPS Recommendation – HOLD

Ukrproduct has won a tender to supply 60 tonnes of high-grade skimmed milk powder to Kraft Foods. The consignment is due for delivery before the end of the year, and is proof of the high quality of Ukrproduct’s powder. As its Starkon plant Ukrproduct has installed equipment for whey purification, condensation and crystallisation. Liquid whey, a main by-product of the hard-cheese making prices, can now be processed at the Starkon site to yield dry whey, and this will substantially replace the dry whey that Ukrproduct has been buying in from third parties for its processed cheese production. The cost of this investment was £240,000 – but it will add approximately £15,000 per month to the Group’s operating profit. My target is 100p.

UKRPRODUCT (UKR): Milking the Profits - Oct 2007

RHPS Recommendation – BUY UP TO 85p

Interim profits were 150% up on 2006 as Ukrproduct doubled the output of its skimmed milk powder. The Ukrainian market for processed cheese and butter has stabilised after last year’s ban on exports to Russia, and Ukrproduct is starting to market its new hard cheese. Broker Renaissance Capital is forecasting earnings per share of 6.3p for this year, but I believe this is much too low. So I am restoring the shares to a BUY UP TO 85p.

UKRPRODUCT (UKR): More Smoked Sausage Cheese - Sep 2007

RHPS Recommendation – HOLD

Ukrproduct has announced that a second smokeroom for the production of smoked sausage cheese is now fully operational at the Molochnik plant in Zhytomyr, doubling the group’s capacity to produce smoked sausage cheese, and improving its quality. With the share price above my 60p buy limit. HOLD

UKRPRODUCT (UKR): Aug 2007

RHPS Recommendation –SELL

In January the world price for skimmed milk powder started to go up. And up. And up. By May the price had doubled from $2,000 per tonne to over $4,000 per tonne. So what better than to be a producer of skimmed milk powder – especially one that has just completed a major expansion of capacity and is able to sell more than ever before?

This is the happy position in which Ukrproduct Group finds itself. The “Ukr” here stands for the Ukraine and the group is the leading manufacturer of dairy foods in this fast developing country of some 50 million people. Ukrproduct has the top market position in cheese and butter in the Ukraine, but it is the milk powder business, where it ranks number three, which is the star of the show today.

Various factors have conspired together to cause the sudden jump of the price of milk powder.

The endless drought in Australia, one of the world’s top milk powder producers; an export ban by the Indian government, concerned that there may not be sufficient milk powder for its own population; and surging demand form China and the Middle East are three factors. But these are just indicators of the wider problem. Climate change is affecting traditional patterns of agriculture; land has been switched from food production to grow biofuel crops; while the world’s population grows inexorably and demands a higher standard of nutrition.

“It won’t be long before a bottle of good milk costs as much as a bottle of good wine” predicts Ukrproduct’s finance director Dmitry Dragun. Well, I’d say it will be a while before we are uncorking a bottle of Chateau Friesian, but all the same there is no doubt that hard-pressed farmers, for so long suppressed by merciless world commodity markets and skinflint retailers, are starting to feel wanted.

This could become the next hot area of the stock market

But my recommendation for Ukrproduct does not rely upon fickle sentiment. This is a well established, profitable company. It has a very clear strategy. It has done all those old-fashioned boring things that the best companies do – like investing in the future, building capacity, and creating its own brands. Unlike British dairy producers, it is selling into a market where demand is growing strongly. And furthermore, we have the chance to buy the shares at a very favourable level, for reasons I will explain in a moment.

But let’s just go back to skimmed milk powder. Ukrproduct has a factory in Starokonstantinov, just west of the centre of the country, where last year it produced 4,000 tonnes of milk powder. This was sold for a total of £7m, accounting for 20% of the group’s total revenue. At the end of last year it installed a new skimmed milk powder dryer, and this has not only doubled capacity but is also delivering a quality product which commands a price premium over other Ukrainian producers. With this on stream Ukrproduct is now selling about 700 tonnes per month, and since it is getting a price roughly double that of last year, we can guess that monthly revenues must have quadrupled.

Ukrproduct and its broker W H Ireland are cautious about extrapolating this forward, and although the latter had edged up its profit forecast (to the figures shown in the table below), this will certainly be beaten if conditions stay as they are.

Aside from the bonanza from skimmed milk, there is one other good reason why Ukrproduct might make more money in the next few years than is currently predicted. The forecasts do not include any contribution from Ukrproduct’s new venture into hard cheese. Last year, aside form skimmed milk powder, 36% of group revenue came from the sale of processed cheese, 33% from packaged butter, with a small contribution from the distribution of third party products. But over the last year Ukrproduct has been building a new factory to produce hard cheese. This has the capacity to produce 3,600 tonnes annually. Last year, 95,400 tonnes of hard cheese were sold in the Ukraine, with a value of £270m. On that basis Ukrproduct’s new plant should be capable of generating some £9m of sales once it is running at full capacity. The situation now is that the factory is built and the cheese, with a brand name of “Molendam” is being test-marketed.

There is every reason to expect this to become a successful new line of business.

For one thing it is selling into an expanding market. The economy of the Ukraine is growing at over 7% per year, and as its citizens become richer they are increasingly inclined to eat cheese, and not just any old cheese but a product with a recognisable brand and reliable quality. Retail sales volume of cheese grew by 12% in 2006 and, according to market researchers at Euromonitor, are likely to keep growing at 7% per year to 2011. This is attributed not only to the general economic climate, but to the fact that busier lifestyles create a demand for convenient packaged foods, to better packaging and marketing and also because the consumption of cheese in the Ukraine is well below that seen in Western Europe.

However, the details also favour Ukrproduct. Last year unprocessed cheese sales were 103.2m tonnes, accounting for three-quarters of the market. Of that 95.4m tonnes were of hard cheese and this dominant market segment is being boosted by product innovation and advertising. So Ukrproduct’s new production should easily be absorbed.

Ukrproduct has described the competitive landscape as “chaotic”. But things are changing. At the start of 2006 there were more than 400 local cheese manufacturers. Today only about 300 remain. This follows a year of crisis, instigated by the politically motivated decision of the Russian government to ban the import of Ukrainian cheese. Supplies destined for Russia were redirected to the domestic market, with some hard cheese turned into processed cheese. This sudden extra supply had inevitable consequences in the market place, so that although 12% more cheese was sold in the Ukraine last year, price competition meant its value only rose by 5%.

This problem was responsible for Ukrproduct’s flagging share price last year. But it has left it in a far stronger position. It responded by cutting its sales through open air markets and concentrating on supplying the retail sector. As other producers went out of business, Ukrproduct not only remained profitable, but also continued with the expansion programme which is now coming to fruition at what is proving to be an opportune moment. 

In any event, Ukrproduct looks set to continue to gain market share within the country. It has modern facilities, and a nationwide distribution network through which it both collects milk from dairy farmers and supplies the supermarkets. This, too, puts Ukrproduct at an advantage. Because although the food retail industry is expanding and modernising it is still a long way from the ferocious beast that we see in this country. Retailers are concerned with reliability of supply and of their product range, and have not yet engaged in a concerted attempt to drive down prices. So Ukrproduct looks set to grow its already leading market share in Ukraine’s dairy industry, and this could make it an interesting acquisition candidate. Seventy two per cent of the shares are held by the group’s founders Sergey Evlanchik and Alexander Slipchuk who both believe that the current share price massively undervalues the business, and have noted the interest shown by overseas investors into the Ukrainian food industry. Recent deals have included the purchase of the Ukraine’s leading juice provider, Sandora, by Pepsi; the acquisition of Rodich Dairy, a small Ukraine dairy plant, by the Danone group; while in April Froageries Bel, the French cheese manufacturer, bought 95% of Shostka Dairy Plant, Ukraine’s leading producer of hard cheeses. This may ultimately intensify competition but in the immediate future it will boost standards in the industry to the benefit of modern producers. This will suit Ukrproduct, which after a very difficult year in 2006 is now opening a new capacity at a very opportune time. The jump in the price of skimmed milk is the icing on the cake.

RHPS Verdict: Ukrproduct is a great way to participate in the global revival of the dairy industry. The company is well financed, pays a dividend and is set for a bumper year. Buy the shares with a 12 month target of £!

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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