Daily analyst comments

Saturn Research & Production Co has filed an application to increase its stake in Ufimskiye Motors (UMPO) to 51%, reported Vedomosti with reference to the head of the Federal Antimonopoly Service (FAS), Alexei Ulyuanov.

Saturn currently owns 19.88% of UMPO shares. This stake was acquired in late 2007 from UMPO-controlled structures for USD 73.5 million, or RUB 1.8 billion. The package was purchased after UMPO's BoD had failed to adopt a decision on transferring the sole executive body authorities to a management company established by UMPO and Saturn. Therefore, an application to increase Saturn's share in UMPO' charter capital is indicative of Saturn's intention to gain control over the company in order to join and co-ordinate both companies' business activities and boost their effectiveness. The joint company would become the largest engine corporation in Russia. In our opinion, this should increase the companies' investment attractiveness, which is positive news for the shareholders. Moreover, the creation of a united company is one more way to avoid hostile takeover bids.

However, the merger is impeded by the state holding, Oboronprom. The state engine corporation is to be established on the basis of Oboronprom, which in turn should incorporate both Saturn and UMPO. However, Saturn's management is not willing to participate it the state holding. In our opinion, the company's management is reasonable in this respect, since most companies that would be incorporated into the state holding are in difficult financial positions and do not have sufficient volumes of orders or modern technology. Participation in the state holding would reduce the investment attractiveness of Saturn shares, since it may lead to a redistribution of future orders in favor of other companies, which could be the case after technology transfers within the holding. The judicial contest is currently ongoing in respect of the UMPO share package acquired by Saturn in late 2007.

In line with our estimates, the target price of Saturn shares as of late 2008 should be USD 0.15 per share, which implies a 72.4% upside potential and corresponds to a Buy recommendation. The fair value of UMPO is USD 1.16 per share with a 30% downside, which corresponds to a Sell recommendation.