After a promising 1Q12 marked by positive expectations fueled by the ECB’s monetary easing, EU (especially GIIPS) banks are finding themselves in a new round of turbulence facing emerging challenges to asset quality, adverse operating conditions and restricted access to market funding (though the fact that out of the approx. EUR 1 trillion of LTRO 1 and 2 tranches EUR 800bn was re-deposited with the ECB points to a sufficient cushion for the EU banks to meet their obligations falling due in the next two years). Against this backdrop, Ukrainian banks’ modest 4M12 performance does not come as a surprise.

It seems that “sell in May and go away” is firmly cementing itself as a new post-2008 tradition. Last week the MSCI World index was down by 1.8% w-o-w while the MSCI Emerging Markets and Frontier Markets indices shed 4.1% and 1.6% respectively. Deteriorating U.S. data (jobs creation and other readings) in the last two weeks, persistent worries about China (exports, IP, new loan growth) and re-surfacing large-scale threats to Europe and its weakest periphery such as Greece, all pushed the uncertainty and volatility in global stocks to new levels.

Last week’s AGM of UniCredit owned Ukrsotsbank, Ukraine’s 5th largest bank, approved conversion of the parent’s subordinated debt into equity in order to strengthen the bank’s capital adequacy. Ukrsotsbank will issue 5,708,068,338 new shares, increasing their total number by 45% to 18,403,054,388 and thus enlarging its equity by 18% or UAH 1.26bn ($158m) based on the issuance price of UAH 0.22/share. The first stage of share subscription will be held between July 17-Aug.6 and the second stage is scheduled for Aug. 7-10. As the share capital increase (SCI) involves no cash injection and given the positive (albeit insignificant) effect on interest costs stemming from the elimination of subordinated debt, the share price should correct down by 20%, from UAH 0.21 to UAH 0.17, on technical earnings dilution (before accounting for the positive effect stemming from long-term asset expansion capability improvement thanks to own capital base growth (CAR up by 3.17pp to 15.75%) and reduction of F/X risk exposure thanks to conversion of F/X debt into hryvnia equity).

Russia agreed last week to lift an import ban on three Ukrainian cheese plants, including Milkiland’s Mena Cheese, which jointly accounted for 66% of Ukrainian cheese exports last year. These plants have already undergone quality tests by Russian experts and submitted action plans to resolve remaining concerns.

Global markets performed quite well last week (MSCI World Index +1.1% w-o-w), although on a month-to-date basis markets are slightly down, in line with profit-taking expectations in the wake of a stellar 1Q12. Last week was predominantly about rumors concerning the IMF’s fund-raising campaign, which ended quite successfully: although the $430bn in pledges fell below the initial target of $600bn, it still provided a good “umbrella in case of a nasty rain”, given that the U.S. as well as some of the largest EM economies did not participate. Positive data from the EU (e.g. better ZEW and IFO data in Germany) also encouraged markets. On the commodities side, oil continued to retreat from recent highs (down over 2% w-o-w) on positive steps being taken to reduce tensions over Iran. Soft commodities were also down with sugar dropping 6.2% w-o-w on NYBOT due to expectations of better harvests in India and Brazil.

Friday’s U.S. non-farm payrolls dealt a blow to markets, with reported 120,000 new job additions marking a five-month low and significantly underperforming all forecasts and consensus of 205,000. The country’s unemployment rate of 8.2%, the lowest since January 2009, failed to impress, with the MSCI World Index consequently declining by 1.8% w-o-w. Moreover, due to Easter holidays in Europe and the U.S., the correction continued today and EU markets, reopening tomorrow, will probably start with a gap down.

The MSCI World Index closed up 0.3% w-o-w after experiencing up and downswings of 2-2.5% during the week. More importantly, global markets finished 1Q12 with strong YTD growth (+10.9%), with most indices up and EM peers, in particular, jumping by over 20%. All in all, fresh monetary stimuli made this a very good period for most asset classes. On the commodities front, Urals continued its slow correction (-1.8% w-o-w) last week, while wheat and corn were very volatile, first sliding by almost 6% on wrongly placed bets concerning the USDA’s annual crop plantings survey and quarterly crop inventory briefing and then recovering strongly on Friday to finish the week little-changed.

While we did not expect much in terms of breaking news last week, the markets took negatively (MSCI World Index -1.0% w-o-w) weaker flash PMI data in Europe and the same (probably more important) data in China, which could signal the balance of proponents of hard and soft landing in the latter country is changing. The oil price lost almost a dollar to $122.8/bbl (Urals), while iron ore prices were stable and steel fell by 4%.

Our updated DCF and comparative valuations yield a 12-month price target of $7.28/share — 28% below our previous estimate but 35% above the stock’s current market price. We assign a Buy recommendation to Milkiland.

We initiate coverage on WSE-listed Agroton, a diversified vertically integrated agricultural producer in eastern Ukraine operating in the crop growing, poultry and milk segments. The average of our DCF and comparative valuation models yielded a 12-month price target (PT) of $9.95/share which implies a 35% upside from the stock’s current market price. We recommend the stock as a Buy, ranking it fourth out of seven agri stocks on the sector analyst’s ranking scale, with the stock’s relatively low liquidity a restraining factor.