Daily analyst comments

Interfax reports that the agreement on Gazprom's entry in the charter capital of Kazan Orgsintez might be reached before the end of 1H 2008. According to the prime-minister of the Republic of Tatarstan, Rustam Minnikhanov, Gazprom is a large strategic partner and in the future its stake in the charter capital of Kazan Orgsintez might be increased to a blocking stake. Programs to upgrade the company and supplies of raw materials that would allow the company to double its production are part of the negotiations process.

The reason for Kazan Orgsintez's interest in the integration with the gas monopoly most likely is the guaranteed supply of raw materials. In June 2007 Gazprom and Tatarstan formed a working group to resolve the conflict that arose last March between "Gazprom" and "Kazanorgsintezom" because of disagreements about the terms of raw material supplies. Kazan Orgsintez refused to use Gazprom's raw materials under these conditions, and as a result, Orenburggazprom cut ethane supplies to the company.

In October, the Russian antimonopoly service accused Gazprom to be in violation of the law and ruled that Gazprom should end the processing scheme to process ethane in Kazan Orgsintez. Gazprom appealed this decision and the ethane supply agreement in 1Q 2008 was concluded under the same terms. 50% of the ethane is to be supplied under the terms of purchase, 50% is to be processed using a give-and-take scheme.

In our opinion, Gazprom's entry in the charter capital of Kazan Orgsintez is a positive event for the company. Firstly, the presence of the gas monopoly among shareholders would allow the company to solve the raw materials supply problem and thereby avoid falling profit margins. Moreover, Gazprom, as a strategic partner, intends to participate in Kazanorgisintez's investment programs that, after being implemented, are likely to increase production, which would have a positive impact on the financial results of the company.

However, it is also possible that in the future Gazprom, as it was with Salavatnefteorgsintez, would take full control over the company, and make it less attractive for investors because of the possible re-distribution of Kazan Orgsintez revenues among the other subsidiaries of the group.

However, presently the fair value of common shares in Kazan Orgsintez (RTS: KZOS) is USD 0.42. This implies 15% downside and corresponds to SELL recommendation.