You're reading: After losing West’s trust, ag firms looking to China

German bonds may be trading at near zero interest, but for almost everyone else the cost of capital is at its steepest in years, reflecting global markets’ growing aversion to risk.

Ukrainian agribusiness companies that have in past years raised badly needed capital in Poland will likely face an even tougher market. One reason is that shoddy accounting by Warsaw Stock Exchange-listed companies has shaken investor trust.

But on the flip side, China is eyeing the local market, offering an alternative to traditional sources of funding.

Agroton, a major agricultural producer based in eastern Ukraine, has rattled investor confidence in recent months. According to Pavlo Bidak, agricultural analyst at the Kyiv-based investment bank ICU, the company was unable to provide adequate documents for revenues of $66 million and filled its export documentation with mistakes. The lack of documents suggests doubtful origins, Bidak noted.

This led to a qualified report by its auditor Baker Tilly questioning the veracity of the reports. Agroton has since switched to Big Four auditor KPMG. The company’s stock price fell an astonishing 63 percent since the beginning of April.

While Agroton’s accounting shenanigans stand out as the most serious violations, other companies have also done some damage to their reputations. A recent article by the Polish business daily Parkiet blamed the unreliable nature of several issuers for the poor performance of the WIG-Ukraine Index, which covers the 10 Ukraine-based companies (mostly agribusiness) listed on the Warsaw Stock Exchange.

The index fell a whopping 23 percent over the past month, representing a fall of 16 percent since the beginning of the year.

The article highlighted that Ukrainian companies have repeatedly made ambitious promises, but then failed to deliver, citing sunflower producing giant Kernel’s recent results as an example. Further worries arose after KSG Agro, a major crop producer out of Dnipropetrovsk Oblast, failed to disclose audited results altogether, blaming problems with its auditor.

“Problems with communication on behalf of Ukrainian managers means that even the diligent and reliable companies get thrown into the same bag,” the business daily wrote.

Bidak noted, however, that in some cases Polish investors needed to distinguish better between solid reliable companies and “junk,” particularly some of the newer companies on the exchange. “A lesson for Polish investors – do not buy everything that someone offers you, even if you know that broker,” he said.

Unfortunately, Bidak added, if a new company plans to list in Warsaw fund managers will look at it through the prism of past negative experience.

These cases should be taken seriously, said Andrzej Szurek, head of new markets at the Warsaw-based investor relations company Inner Value. Institutional investors, in particular, attach a great deal of importance to timely and transparent reporting, and the trust has clearly been shaken.

“It was not a spark but a torch that led to the Parkiet article,” he said.

Those companies that wish to stand out in investors eye’s shouldn’t make unrealistic promises but rather keep their standards high, reporting with regularity and consistency, Szurek advised, and they should take on a more proactive approach. This means being open to communication with retail investors, not just analysts from major institutional buyers, as well as a more accessible and customer-oriented attitude.

“This would reassure not only retail buyers, but also the institutional ones,” he added.

China ready to move in

As capital markets in the West dry up, some companies may find an alternative source of investment in the east, notably China.

Abundant capital and a long experience of dealing in opaque markets means the Chinese state-run companies can often pick partners and set ground rules better than Western competitors.

Seeking to secure its growing food needs, China has been particularly active in Africa in recent years, becoming the continent’s top trading partner and top source of foreign direct investment – much of it going to agriculture. But Ukraine’s neighbors Belarus and Russia have also seen a rise in Chinese investments

The Middle Kingdom recently announced plans to finance $3 billion of agricultural projects in Ukraine in areas including trade, fertilizer and cultivation. Major areas of investment are said to include procuring pesticide, seeds and equipment from China, and selling Ukrainian agricultural products to China.

China is sometimes seen as the ultimate-trophy market for Ukrainian companies – perhaps far off, but large, hungry and growing at unmatched speed. According to the U.S. Grain Council, the country is expected to surpass Japan as the world biggest corn importer by 2014, while Ukraine has in recent years grown to be the world’s second biggest exporter.

Ukrlandfarming Plc, Ukraine’s largest grain producer owned by billionaire Oleg Bakhmatyuk, is among those jumping on the opportunity. The company has signed a memorandum of understanding with China’s CAMC Engineering Co. on attracting $4 billion to invest in capacity, meat-production and modernizing sugar production plants.

According to Ukraine’s Agriculture Minister Mykola Prysyazhnyuk, the country plans to export 3 million of corn to China via forward contracts in the upcoming financial year, starting June 2012.

 

Top 10 problems
Oleksiy Kolchanov,
senior associate at Asters law firm in Kyiv.

This is Kolchanov’s list of Top 10 problems confronting the agricultural sector:
1. Lack of reforms.
2. Huge [unreimbursed] value-added tax outstanding and VAT write-offs from the exporters.
3. Lack of clarity and transparency in all process.
4. Overregulation.
5. Bureaucracy.
6. Corruption.
7. Non-transparent position in negotiations with the European Union and [Russian-led] Customs Union. 8. Unpredictable law and regulatory decisions.
9. Ineffective and expensive administrative services.
10. No progress with land reform.

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].