On June 25 the GAZ group released its FY 2007 financials audited to IFRS. The statement shows that revenue increased by 35.1% to USD 5.98 billion (RUB 152.8 billion) and net profit rose by 28.5% to USD 281.8 million (RUB 7.2 billion), while the net margin shrank by 0.24% to 4.71%.
Table 1. GAZ group: Basic financials for FY 2007 as compared with 2006 results
| | Units of measure | 2007 | 2006 | Change |
|---|
| Revenue | USD mn | 5 979.8 | 4 426.4 | 35.1% |
| Expenses | USD mn | 4 862.1 | 3 559.5 | 36.6% |
| Gross profit | USD mn | 1 117.8 | 866.9 | 28.9% |
| Gross margin | % | 18.7% | 19.6% | - 0.9% |
| Commercial expenses | USD mn | 182.1 | 128.5 | 41.7% |
| Administrative expenses | USD mn | 406.6 | 325.4 | 25.0% |
| EBIT | USD mn | 484.8 | 344.9 | 40.5% |
| EBIT margin | % | 8.11% | 7.79% | + 0.31% |
| EBITDA | USD mn | 630.3 | 468.3 | 34.6% |
| EBITDA margin | % | 10.54% | 10.58% | -0.04% |
| Net profit | USD mn | 281.8 | 219.3 | 28.5% |
| Net margin | % | 4.71% | 4.95% | -0.24% |
Source: company data, Finam estimates
We are neutral about the published financials, which did not bring any surprises. The GAZ group continues to expand production to keep up with growing demand on the automotive market. The biggest contribution to overall revenue came from the truck division (with revenue up 88.6%) and the road-building machinery division (up 59.5%). This strong sales growth is attributed to favorable price trends for the company's products on the markets, due to growth of investment in construction.
Table 2. GAZ divisions: Revenues in 2006-2007, USD mn.
| | 2007 | 2006 | Change |
|---|
| Automobiles | 3 247 | 2 582 | 25.8% |
| Buses | 794 | 592 | 34.2% |
| Engines and fuel equipment | 764 | 592 | 29.0% |
| Trucks | 789 | 418 | 88.6% |
| Road-building machinery | 387 | 243 | 59.5% |
Source: company data, Finam estimates
Favorable market conditions have allowed the GAZ group to pass on a substantial part of its incremental production cost, caused by rising resource prices, to customers. As a result, the group has sustained its profit margins at last year's level.
Table 3. GAZ divisions: Operating profit margins in 2006-2007, %.
| | 2007 | 2006 |
|---|
| Automobiles | 5.2% | 6.0% |
| Buses | 9.2% | 15.2% |
| Engines and fuel equipment | 18.0% | 13.8% |
| Trucks | 11.8% | 6.6% |
| Road-building machinery | 18.3% | 15.4% |
Source: company data, Finam estimates
The operating margins of GAZ divisions are likewise linked with favorable trends on each market segment. The truck division, for instance, saw its margin increase from 6.6% to 11.8%, while that of the road-building machinery division expanded from 15.4% to 18.3%. The automobile division saw its profit margin shrink, which we put down to the gradual saturation of this market segment and stiffening competition on the part of both domestic and foreign producers.
We expect further company expansion in 2008, but the pace of growth is likely to slow. The reason is the gradual saturation of the commercial vehicle market, which is the key market segment for the group. As before, we expect the truck and road-building machinery divisions to remain the engines of growth in the group's overall revenue, as demand on the respective markets is expected to remain strong amid hefty investments in infrastructure.
We estimate the fair price of one common share in GAZ at USD 263 per share as of year-end 2008, which implies an upside potential of 35.2% and corresponds to a BUY recommendation. The target price of one preferred share is USD 144.7, with an upside of 28.6%, which corresponds to a BUY recommendation.
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