Research Notes

In early April 2007 Siberia Telecom's management held an online conference on www.finam.ru. At that time, the operator's executives made guidance to the company's financial and operating performance in the years to come. As these forecasts turned out to be largely above our expectations, we decided to revise our valuation models.

One of the notable changes was considerable downsizing of Siberia Telecom's headcount. The primary reason behind this is growing network digitalization and the introduction of more advanced technologies (both software and hardware) which need fewer people to be involved in the company's activities.

Moreover, forecasts for the company's wireless operations underwent comparatively serious changes. General upbeat sentiments notwithstanding, we are less optimistic than top managers of telecom carriers about cellular activities at RTOs in general and those carried out by Siberia Telecom in particular. The major threat lies within the scope of actions taken by Big 3, since their active regional expansion could exert an adverse impact on RTO cellular business.

Svyazinvest's privatization seems to be no longer in focus, while the new driver for speculative players is restructuring of the holding and its subsidiaries. At the same time, we are not inclined to panic and build uncertainty factors into our valuation models, since the likelihood of one or another event of structural nature (mergers, business division by technologies applied, etc.) is not quite strong in the next 18 to 24 months.

The company's new analysis in comparison with global peers which shows convincing results that almost all Russian RTOs are overvalued against its peers both in developed nations and in emerging countries. We consider this to be further evidence that the market has been overheated by speculative players, as there are no fundamentals for such a state of affairs.

We made some minor amendments to our DCF model and raised the target price for Siberia Telecom's commons and prefs to $0.133 and $0.089, respectively. Meanwhile, the recommendation for the operator's common and preferred shares was changed to Hold. Despite Siberia Telecom's strong fundamentals the current market prices offer virtually no opportunity for hefty returns from investments in the company's equities.

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