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In 2008 ZMZ earned 553 mn USD, which is 10% lower than in 2007. Reduction of ZMZ’ sales was related to the decrease of supplies to the main consumer of plant – GAZ group. At the same time the supplies in physical terms dropped 28%. However, due to upping of shipping engines to UAZ by 20% in physical terms, and due to price growth, the sales dynamics was graded.
In 1Q 2009 the financial situation at ZMZ got even worse. Sales of ZMZ within the first 3 months lowered by 73% in ruble terms to 964 mn RUR. At the same time the expenses reduced by lower rates, which leaded to loss at the operating level. So, operating loss totaled 116 mn RUR versus profit of 439 mn RUR within the similar period of 2008.
The main reason of financial estimates worsening was the radical change of distribution structure. We would like to remind that this year ZMZ did not manage to negotiate with GAZ on the prices for products, due to that GAZ refused from ZMZ’ engines and transferred to LCV complication with UMZ’ engines. In 2009 GAZ will buy just about 2 thousand engines from ZMZ within the frames of the state order versus 132 thousand, which were bought by the group last year. As a result, engines’ sale might drop this year by 3.5 times to 57 thousand. At the same time the non-loss point of ZMZ is at the level of 60 thousand engines. So, within 2009 ZMZ will likely gain first loss.
Along with that ZMZ has its own plans on further development, related to elaborating petroleum engine for Fiat Ducato, which is currently being kit up with diesel engines F1A1. However its production will begin in 2012 only and likely by 2015 it will enter the project capacity levels of 7.5 thousand engines annually. However the selling volumes of ZMZ without GAZ will still be more than twice lower than the estimates of the past years.
Positive moment worth noticing is the level of debt load of ZMZ. In 2008 the financial leverage formed 0.21, this year it might reduce to 0.05. Credit portfolio of ZMZ as of early 2009 totaled 1.8 bn RUR (64 mn USD), ratio of debt/EBITDA was lower than 1. In 2009 the given estimate might raise to 1.28 considering the income, which nevertheless is a low level.
We updated the evaluation of ZMZ considering the new data and prospects. As a result, we estimated the company at the level of 204 mn USD, which correlates with 1.451 USD per common share and 1.088 USD per preferred one. According to the current market quotes that means overestimation of the common shares by 10.7% and underestimation of the preferred ones by 17.6%. However, due to the worsened conditions of ZMZ’ operating we lower the recommendation to REDUCE for the common and preferred share of the company.
ZMZ: Together with GAZ? - Not any more! - June 09, 2009 (PDF)