Daily analyst comments

When determining the price for its additional share issue in favor of a strategic investor TGC-5 will proceed from the estimate of $450-500/kW of installed capacity. As Interfax news agency wired, the SPO arrangers gave such a recommendation to the company. The bidding deadline for strategic investors elapsed a day before, TGC-5 received four bids, including from Complex Energy Systems (CES) and Trans-Nafta, possibly from an entity affiliated with Gazprom and from engineering group E4.

Previously CES said that it is not prepared to pay more than $450 per kW of installed capacity, while utility stocks are extremely overvalued in general. The option was mentioned for CES to focus on TGC-5, the group's key asset. Quite possible that CES, having no wish to overpay for TGC-5 facilities, made an attempt to lower interest of other rivals in the additional share issue. Authority that CES has in the energy sector is enormous and other contenders to a TGC-5 interest paid attention to the statement made by CES. We assume that either CES or Gazprom will be able to place highest bids for the stake offered by TGC-5.

Under the current stock valuations of TGC-5 ($513/kW), the interest on offer could be valued at $463 mln. Given a premium for the major stake we think that in the event of a competitive offering on Russian and European exchanges investors would be ready and willing to shell out some $565 per kW of installed capacity, i.e. $514 mln or 11% higher than the current stock valuations. CES holds some 20% of TGC-5 and in the event that the entire SPO is picked up the former would have over 40% in the capital which implies that CES, being the closest to the controlling interest, is prepared to pay more than other potential buyers.

We are not confident that the plans earlier announced by TGC-5 to launch a road show and float its securities among a wide group of portfolio and strategic investors will be brought to fruition. Quite likely that the additional share issue will be floated in favor of a sole strategic investor, in all likelihood CES, which will place the highest bid within the earlier disclosed price range ($450-500/kW). We assign a Hold recommendation to TGC-5 shares with a year end-2007 target price of $0.00155 per stock.