Daily analyst comments

On October 6, 2008, OGK-3 (RTS: OGKC) released its 1H 2008 financials audited to IFRS.

OGK-3: key indices of the profit and loss report, USD mn

Indicator	IH2007	IH2008	IH2008/IH2007
Revenue	576	768	+33%
Operating expenses	514	714	39%
EBIT	62	54	-13%
EBITDA	86	87	+2%
Net profit	67	135	+101%

Source: company data, Finam estimates

The 33% revenue growth is attributable to a 15% rise in sales of electrical power and a 7.6% expansion in thermal power sales, as well as growth in producer prices for electricity and capacity as well as a larger market share. Compared to the year-earlier period, revenue on electrical power sales jumped by 34.4% and that on thermal power sales increased by 15.9%.

OGK-3: operating expenses, mn USD

Indicator	IH2007	IH2008	IH2008/IH2007
Fuel expenses	230	343	49%
Electricity purchases	123	168	37%
Payroll expenses	64	74	16%
Amortization	23	33	40%
Repairs	12	11	-11%
Taxes, except for profit tax	18	22	21%
Other expenses	43	46	5%
Operating expenses	514	714	+39%

Source: company data, Finam estimates

Operating expenses surged by 39%, outpacing the rise in sales revenue. The main expenditure items that caused a rise in overall spending were fuel, equipment amortization and electricity purchases. Fuel expenses grew along with increases in wholesale prices on gas and coal. The surge in expenditures on equipment amortization is due to the re-evaluation of fixed assets at the end of 2007. The higher cost of electricity is attributed to a rise in prices on the wholesale electricity market.

OGK-3: profit margins

Indicator	IH2007	IH2008	∆
EBIT margin	10.83%	7.07%	-3.76%
EBITDA margin	14.89%	11.34%	-3.55 %.
Net margin	11.66%	17.58%	+5.92%

Source: company data, Finam estimates

Changes in the financial indicators reflect a downturn in the profit margins. The wider net margin is exclusively attributable to financial investments, with the funding raised via the placement of additionally issued shares, which cannot be regarded as the company’s core activity. As a result, we are moderately downbeat about the posted financial results. On the downside, we point out the company’s lower profitability and a marked rise in its expenditures. Some of them, however, were once-only. We do not expect the financial report to have a tangible effect on the company’s stock valuations.

We estimate the fair price of OGK3 (RTS: OGKÑ) at USD 0.0297 per share, which corresponds to a SELL recommendation.