Investment Case

We initiate Mriya (MAYA GR) with a SELL recommendation, prompted by the high multiples the stock is currently trading at and worsening fundamentals: a sugar price decline (from which the company derives most of its margin) and crop yields converging down to the average figures for regions where it operates.

Sugar price drop to harm Mriya`s margins in 2011-12

The sugar price decline in 2011/12 vs. 2010/11 (USD 525-660 vs. USD 830-1,000) should lead to lower earnings from sugar beets in 2012, unless the company sells to related parties at a price which implies booking losses at related parties.

Low quality of earnings

Sugar beet sales to related parties, which accounted for 42% of revenues and 45% of EBITDA in 2011, was executed at USD 73/t vs. our calculations of the market average price of USD 45/t. At the same time, Mriya’s sugar beet production costs per ha were 1.8x below those Astarta reports, which we find hard to believe.

Crop yield premium is disappearing

Once known as a farmer that cold deliver 50%+ yields premiums to the region average, Mriya`s yield premium in grains has shrank in 2010 and 2011. For sugar beets, the key crop for Mriya, yields still were 32%-34% above the region average in 2010-11, but less than the 51%-59% in the two preceding years. For wheat, its second most important crop, yields were 7% below the region average in 2011, vs. 39%-66% premiums in the three preceding years.

Yield premiums to benchmark region average

Source: Concorde Capital estimates

Low costs still an advantage, though hardly explained

Mriya continues to report one of the lowest costs per ha among listed Ukrainian farmers. Its costs per ha for sugar beets were 28% below of those of Kernel and almost twice below those of Astarta, which is strange to us given that (1) Mriya`s yields are comparable to those of Astarta and (2) we do not see any technology advantages. For other crops, Mriya’s costs per ha were also below most of its listed peers, with only Sintal Agriculture and KSG Agro reporting lower costs per ha for some crops in 2010-11.

Production costs, USD/ha, sugar beets		Wheat		Corn
Source: Concorde Capital estimates		Source: Concorde Capital estimates		Source: Concorde Capital estimates

Overly aggressive CapEx on infrastructure, in our view

Mriya has the highest capital expenditure program among local farmers: its guidance is USD 120-130 mln per annum in 2012-13. Unlike other farmers, Mriya is actively investing in greenfield storage facilities, with CapEx of USD 250/t, at the upper side of the range of USD 150-250/t reported by listed competitors, and far above the cost of brownfield facilities, USD 50-150/t. Overly aggressive CapEx in greenfield silos will not pay back, in our view. Key reasons for farmers to have its own infrastructure are the ability to control the quality of the produce and timing of the sale, both of which should result in the higher than market average selling prices. However, we estimate that Mriya`s average selling prices were only 5% above Ukraine`s average in 2011 (USD 11/t) and 12% below in 2010, sugar beets excluded. A 5% premium implies a payback period of 23 years, if 2011 is taken as a reference.

	2010					2011
	Volume, kt	Avg market price, USD/t	Market value, USD mln	Book value**, USD mln	Premium/ (discount)	Volume, kt	Avg market price, USD/t	Market value, USD mln	Book value	Premium/ (discount)
Wheat	277.1	142	39.3			516.9	158	81.8
Corn	130.0	150	19.5			118.3	142	16.8
Barley	26.0	158	4.1			4.3	154	0.7
Buckwheat	11.0	333	3.7			4.5	458	2.1
Rapeseed total	45.3	358	16.2			74.0	429	31.8
Soy	3.7	333	1.2			4.8	317	1.5
Potatoes	87.6	250	21.9			135.0	200	27.0
Total, ex-sugar beets			105.9	89.7	-15%			161.6	169.2	5%
Sugar beets	1,700	57	96.9			1,480.7	73	108.1
Total, with sugar beets			202.8	186.6				269.7	277.3

* Average for the post-harvest period, except for sugar beets where Mriya`s reported price is taken as the market one.

** Calculated as the book value of agricultural produce at the year end plus sales of agricultural produce minus book value of the agricultural produce at the year start.

Highest land acquisition costs

Mriya pays the highest land lease right acquisition costs among public farmers: USD 1,500/ha in 2011 vs. USD 250-1,050/ha paid by other farmers. Though company explains it pays a premium due for the high quality of acquired land, we find its multiple excessive for Ukraine.

Stock is overvalued; SELL

We set our 12M target price for Mriya shares at USD 5.5 (EUR 4.4) per GDR, averaging an asset base model (USD 2,118/ha for Mriya`s land plus USD 92 mln for storage assets) and DCF, which yields USD 6.7 per share fair price at WACC of 17-18%. SELL, downside of 23%.

Liquidity, corporate governance is a risk

As with other Ukrainian stocks listed in Frankfurt, liquidity is low. Though an IPO on WSE/LSE, discussed for many years, is likely to improve liquidity, timing is unclear: weak sugar prices will undermine profits in 2011-12, while the company’s ambitious CapEx for 2012 can be covered by its strong cash position. Corporate governance is an issue: the company is still heavily reliant on sales to third-party (2/3 in 2010, 2/5 in 2011) sugar plants.