Research Notes

Six months ago we performed a valuation and assigned a recommendation to Russia's No. 2 wireless operator, VimpelCom (VIMP). Since that time the market landscape and the national economy have undergone some changes, as a result of which we decided to update our valuation model, adjust forecasts and set a new target price for the company.

We are upbeat about VimpelCom's prospects both in Russia and the CIS, since the wireless provider has shown improvements in its financial results and profit margins, steadily closing in on MTS, the market leader.

Since growth in the penetration rate has not begun to taper off, we have slightly raised our expectations for this metric during the period under review. Furthermore, although the company's subscriber base contains a host of silent users, we believe this will exert a positive impact on its financial performance, with ARPU falling at a slower pace than the increase in the mobile major's subscriber base.

A solution to the company's expansion on the Ukrainian market has not yet been found. Even though the transaction was officially closed, the company's shareholders have so far failed to reach a compromise agreement on the Ukrainian subsidiary's expansion strategy. We expect to see the conflict sorted out in early 2006, while the companies' operating merger will occur no earlier than mid-2006.

Based on our calculations, the fair price for VIMP common shares jumped from $189.48 to $244.25 per share, whereas the fair price for the mobile firm's ADRs climbed from $47.37 to $61.06. Overall, upside potential for the wireless provider's commons and ADRs equaled 41% and we are raising our recommendation on VIMP stocks from Hold to Buy.

Ivan Kobulaev

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