OREANDA-NEWS. April 28, 2011. Ukrnafta reported a ridiculous profit of UAH 46mn in 1Q11 (0.7% net margin) against ~UAH 1bn earned in 3Q10 (15.3% net margin). The principal cause is soaring costs against lagging revenues. Over the last half year costs jumped by over 25% while sales actually contracted by 0.5%, reported the press-centre of Millennium Capital.

As a result, EBITDA was down 6x from UAH 1,497mn in 3Q10 to UAH 243mn in 1Q11 while net profit plunged by 20x over the same period. The opaque profit eroding schemes are back into place after half year of relief. This time they have crept into costs rather than revenues but with the same detrimental effect on profitability. Expect corporate conflict to escalate after the print.

The release is EXTREMELY NEGATIVE for UNAF. The numbers are shocking as our worries on profitability after strangely weak result of 4Q10 were confirmed. Given the run rate of 1Q11 earnings Ukrnafta is terribly overvalued. Nevertheless, we expect the stock to remain at about UAH 800 on massive buy-out by Pryvat that will follow in the coming days as people start to unload their long positions into the market. We believe only a few shares will remain in the free-float by the end-2011.