Research Notes

The Baltika brewery should consolidate Vienna, Pikra and Yarpivo by the end of the year. The merged company will become the largest brewery in Russia and account for 40% of production. The synergetic effect will enable the company to decrease its costs and yield additional income required for further development. According to our estimates, the value of the merged brewery will amount to approximately $7 bln.

• Growth in Baltika’s sales continues to overshoot the beer market’s expansion rate. In 2005 the company’s sales in kind increased 13%, whereas the domestic beer market advanced by only about 6%. The brewery’s sales rose 23% in monetary terms.

• We have valued Baltika as a merged company. Our forecast for financial and operating results starting 2007 includes results of the consolidation of Vienna, Pikra and Yarpivo. We expect average revenue growth to reach 9.1% in 2007-2014, and net profit growth to stand at 11%.

• The merged company will include 10 breweries with aggregate annual production capacity of about 40 mln hl. We expect Baltika’s market share to top 37% in 2007 and to reach 42% in 2014.

• Boosting the scale of production should enable the company to decrease its cost side due to improved operating efficiency in purchasing and logistics, as well as an increase in capacity utilization.

• We have calculated the target price of Baltika stocks including additional shares which should be issued by the brewery to swap its shares for securities in Vienna, Pikra and Yarpivo. Given that the current market price of the company’s shares is higher than our target price we reiterate our Sell recommendation both on Baltika’s commons and prefs.

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Olga Samarets

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