Daily analyst comments

Interfax reported that Power Machines will float an additional share issue in the range of $200-250 mln by public offering in September 2007. The bulk of additional shares are to be bought out as part of the pre-emptive right of acquisition by existing shareholders (UES which owns coupled with Lenenergo 25%+1 share, concern Siemens 25%+1 share and Interros 30.4%).

At present, relations between Power Machines and Siemens are tense, since the companies are unable to reach a decision who will service gas turbines sold (the most profitable business of their mutual project to manufacture this type of products). Given this situation, in the event that Siemens refuses to participate in the additional share issue, these shares could be bought out by UES. However, we view the likelihood that the situation could unfold under this scenario as slim, since in this case, Siemens’ stake will be diluted and slip below a blocking stake.

For the record, the additional share issue is intended to finance the company’s $1 bln investment program up to 2010. The investment program is to be financed via $450-500 mln additional share issues, increasing leverage via bank loans and $300-400 mln bond issue and asset sale (production facilities and a land allotment in St. Petersburg) for $200 mln. As part of the investment program, the company plans to scale up its production facilities. By 2011, the capacity of machinery manufactured by Power Machines will rise from 8.8 GW to 17 GW.

Taking into account that the current debt/equity ratio will change from the current 24% to 40% after the additional share issue and attracting additional debt financing, the company’s capital structure will improve, use of borrowed capital will increase which will reduce the cost of capital used by Power Machines. Meanwhile, an additional share issue sends a positive signal to investors and underscores that implementation of the investment program has begun which will make it possible to boost the company’s cash flows. Thus, we believe this development could positively impact Power Machines stock valuations.