Research Notes

Evraz's recent acquisitions, i.e. a takeover of US-based steel maker Oregon Steel Mills, which can be viewed as part of ongoing consolidation in the global steel industry, will, in our opinion, stoke investor interest in the holding's production units, as the operating results of Evraz and its subsidiaries are likely to pick up as a result of this merger. Moreover, investors could reap a number of other benefits from consolidation of the global steel sector by buying into Evraz subsidiaries. Unlike NTMK, another of Evraz's key asset, ZSMK is currently significantly undervalued.

• Western-Siberian Iron&Steel Works (ZSMK) is part of Evraz Holding.
• ZSMK trades at a considerable discount to its Russian and foreign peers

• The company is currently in the process of a major upgrade program. ZSMK's ongoing efforts to expand its product line could help the company to diversify its revenues beyond core sources and boost its margins. ZSMK commissioned a slab production facility (manufacturing capacity 2.5 mln items) at one of its enterprises some time ago, which could help ZSMK to bolster its positions in the slab segment.

• ZSMK's impressive Q306 financial statement showed that the company's operating profit grew 30% q-o-q and 478% y-o-y, which was due to ZSMK's rising sales and favorable market conditions, among other things.

• The takeover of Oregon Steel Mills Inc. could resolve the sales problem for a number of Russian slab producers, as the North American steel company could be switched to the manufacture of high added value products using slabs from Russia (see our daily dated November 21, 2006).

• ZSMK was generous in it2 2005 dividends and has been so ever since (most recent H106 dividend payout totaled 63% of the company's net profit in the reporting period) which also adds to the producer's investment appeal.

• According to our estimates, the fair price of ZSMK's common shares is $260, up 98% against their current stock market valuations.

Although ZSMK's shares hold strong upside potential, there is a possibility that Evraz, which owns over 95% in the company, could launch a hostile buyout of ZSMK's shares. For that reason, we assign a Speculative Buy recommendation to ZSMK.

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Nataly Kocheshkova

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