Research Notes

Over the past five months Uralsvyazinform's commons and prefs have rallied at quite a rapid pace. For this reason and against the backdrop of some revised guidance by management and actual 2006 results, we updated our valuation model and target prices for the company's shares.

Traditionally we point to the operator's strong financial performance, since in terms of sales, profit margins and business diversification Uralsvyazinform has very strong indicators. Meanwhile, growth potential for profit margins is also quite robust, given that management intends to downsize staff 20% by 2009, which will push up EBITDA margin to 38-39%.

Introduction of the new tariff system will have an adverse impact on the operator's earnings, with aggregate per-line revenue dropping 6-8%, although this contraction will be largely offset by the company's more aggressive policy for the promotion of value-added services. Specifically, the operator's target to boost the number of xDSL subscribers 8 times in 2009 appeals to us.

Svyazinvest's privatization, which served as the primary upside driver for all RTO stocks, seems to have faded into oblivion. The government's plans with regard to the holding's restructuring have not yet been determined; its prospects look vague, while the state's policy towards strategic industries is not conducive to optimism on this issue. Alongside this, at the end of 2006 Svyazinvest's blocking stake was acquired by AFK Sistema, which only exacerbated uncertainty around the future of RTOs.

Russian RTOs also trade higher not only against their EM peers, but also those from developed markets. This fact, in our opinion, shows that the telecommunications industry is overheated from the investment point of view.

We made some minor amendments to our DCF model and revised upward our target price for Uralsvyazinform's commons by 7% to $0.54 and by 9% to its preferred shares to $0.038. Meanwhile, the recommendation on preferred shares was lifted to Hold and to Sell for commons. Notwithstanding Uralsvyazinform's strong positions, the current market conditions offer virtually no opportunities to gain decent returns from investments in the operator's shares.

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