Research Notes

We revised our forecast for Far East Telecom due to more successful operations than we had assumed earlier and stronger macroeconomic indicators which have impacted the company's stock valuations.

• Recent actions by the operator's management (general director Anton Alexeev, in particular) meet with our approval: the company has seen positive changes in staff reduction, cost management and its attitude towards non-regulated services. The telecom provider special focus on value-added services is positively impacting its investment appeal.

• The operator's most recent financial statement showed slower growth (compared to sales) in operating profit and higher operating profit margin and OIBDA margin.

• As for negative factors, we would like to note that Far East Telecom's debt burden is quite heavy.

• We slightly changed our attitude towards the tax claims served against the telecom carrier a year ago. While earlier we thought that they depressed the fair value of Far East Telecom's equity capital, we now believe that they are of neutral impact. This is due to protracted court litigation and the fact that Far East Telecom has not lost any round in this litigation. Further evidence that our vision is close to the real state of affairs is the upgrade of the operator's rating outlook by Standard & Poor's.

• We still pin great hopes for improvements in the provider's financials on the arrival of the new owner following Svyazinvest's privatization, which should result in reforms at the company.

• In our view, the ongoing deregulation of the LD market in Russia should not adversely impact the telecom carrier's performance, since at any rate it has monopoly access to end subscriber lines.

Given our new take on Far East Telecom, we assign a Buy recommendation to both the common and preferred shares of this RTO.

Ivan Kobulaev

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