Regnum information agency reported that on February 20, the Governor of the Volgograd region proposed assigning operational control over Khimprom to one of the company’s minority shareholders. According to him, this move should resolve economic and organizational problems due to which Khimprom has posted losses for the fourth consecutive year. According to the Governor, the state’s management of the company has been a failure. For this reason, it would be logical to assign operational control to professional managers, such as management company Renova-Orgsintez. The Governor noted that this proposal was made to the Russian president who pledged to assist in resolving the problem.
Admittedly, Khimprom is in dire need of a management shakeup. In 2003, the chemical industry worldwide was to operate amid higher raw material and energy prices and demand for chemical products was weak at that time. Given this situation, Khimprom’s management which, as a matter of fact, was appointed by the state as the company’s largest shareholder (51%), failed to find a way out. While chemical companies in developed countries saw smaller growth, the Russian chemical industry and Khimprom in particular, ceased to operate efficiently. The company has seen no major improvements since 2003.
The idea to assign management of Khimprom to a private investor emerged earlier. However, the state was cautious about it. The reason for this could be that Khimprom is to a certain extent associated with the military and industrial complex. However, relations between the state and Renova-Orgsintez, Khimprom’s core shareholder, could be characterized as working and business-like. In February 2007, the state supported Renova’s initiative to re-elect Khimprom’s board. Overall, the likelihood exists that the state will assign to Renova operational control over Khimprom. The state will not likely allow the chemical company to be privatized. However, assignment of control over the company in the form of “long-term lease” (e.g. concession) is quite possible. Renova-Orgsintez could succeed as anti-crisis manager, since after the long-term relations with the state are documented, the company will obviously be interested in Khimprom and have a reason to make large investments in the company.
Our target price for Khimprom (RTS: vhim) estimated on the basis of comparative analysis is $131 per share, which corresponds to a Buy recommendation.
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