Research Notes

In the light of recent developments in Russia's telecom industry, we decided to upgrade our financial estimates of Siberia Telecom: on the whole, the company's business is rolling out in line with our expectations, although we had to make some downward adjustments to our forecasts.

• The privatization of Svyazinvest, which has long been viewed as the most effective driver of the current upturn in telecoms' stock market valuations, is unlikely to take place within the next two years. Moreover, according to our estimates, the odds that the state-owned stake will be transferred to the private sector are far below 50% and Svyazinvet's remaining under the state control is bound to adversely impact all RTOs. For that reason, our estimates and forecast for Siberia Telecom are based on the premise that no private owner will be able to gain control over the parent company.

• Nevertheless, we are largely upbeat about the cost-cutting measures unveiled and pursued by the top management of Svyazinvest and its subsidiaries. If implemented (and despite widespread skepticism concerning the efficiency of the Russian state-owned businesses, we have no serious reasons to believe that this could not be the case in the future), these measures could help Svyazinest's subsidiaries to become as efficient as private alternative fixed line operators.

• We revised downward our margins forecast, since competition in the area of highly cost effective services not constrained by state tariff regulations is likely to heat up.

• The recent reform of the long-distance telecommunications services segment produced a neutral impact on Siberia Telecom. On the one hand, the telecom's growth slowed down as a result of the reform, while, on the other hand, Siberia Telecom's margins received a significant boost. The introduction of the Calling Party Pays (CPP) principle made it possible for the operator to offset part of its losses associated with reduced revenues from LD telecom services.

As a result of the revision, our target prices for Siberia Telecom's common and preferred shares now stand in the range of $0.115-$0.095 and $0.089-$0.064, respectively. We assign a Hold recommendation to the telecom's common and preferred shares.

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