Research Notes

Baltika: Still a Standalone Brewery

Common recommendation Sell Target price: $31.60 Current price: $37.10 Upside/downside potential: -14.8%   Preferred recommendation Sell Target price: $25.60 Current price: 30 Upside/downside potential: -14.7%

Reason: Target price revision

RTS ticker	PKBA
Market cap, $ mln	4,350.6
EV, $ mln	4,676.1
Number of common shares outstanding	117,158,530
Number of preferred shares outstanding	13,545,150
Free float	10%
52-wk common price range, $	16.86 – 37.10

Financial indicators, $ mln   2003 2004 2005F Sales 737.2 994.0 1,207.9 Operating profit 168.5 172.5 288.1 EBITDA 226.8 252.6 373.1 Net profit 123.1 132.0 226.4		Profit margins, %   2003 2004 2005F Operating profit margin 22.9% 17.4% 23.9% EBITDA margin 30.8% 25.4% 30.9% Net profit margin 16.7% 13.3% 18.7%
Multiples   2003 2004 2005F P/S 5.9 4.4 3.6 P/E 35.3 33.0 19.2 EV/EBITDA 20.6 18.5 12.5 EV/S 6.3 4.7 3.9		Dividend, $/share   2002 2003 2004 Common dividends 0.30 0.38 0.48 Preferred dividends 0.39 0.49 0.63

We revised our growth forecasts for the Russian beer market and reviewed Baltika's operating and financial guidance. According to our new estimates, we adjusted our model for the calculation of the company's fair value and downgraded the target price for Baltika stocks.

• Last year the Russian beer market grew at a slower pace than we expected (about 6%), but Baltika reported above-market growth rates. According to our forecasts, the beer producer's 2005 sales rose by nearly 12% in terms of physical volumes.

• The beer giant's 9M05 consolidated financial statement, released in November 2005, showed a substantial improvement in the company's financial standing, in particular, a steep rise in profit margins.

• On January 18, 2006 Baltika came out with the terms for the consolidation of Pikra, Vienna and Yarpivo, in particular, share conversion ratios. Overall, we view the company's offer to its minority shareholders as fair. Despite the fact that we assess the likelihood of the companies' merger as high, we prefer to wait until Baltika's shareholders weigh in on this issue. Therefore, we still regard Baltika as a standalone business.

• Despite the company's solid market positions and good prospects for improvement in operating and financial indicators, we no longer see upside potential in Baltika shares compared to their current prices and assign a Sell recommendation to the beer producer's shares.

Olga Samarets

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Sector: Consumer, Food
Company: Baltika

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