Research Notes

On April 20, Far East Shipping Company released its FY06 consolidated financials. The report underscores development and optimization of the company's business. This is reflected stronger key margins, increased production assets and improved capital structure due to more active use of cheap sources of debt financing.

Based on the financials released and FESCO's strategy to establish a diversified transport operator, we have upgraded our target price of FESCO by 4% to $0.73 per common share. We reiterate our Buy recommendation.

Although the company released objectively upbeat financials, we believe this report does not fully reflect prospects of FESCO's business. All of the company's major projects are being implemented now. Therefore, the company has not yet fully capitalized on the synergy effect from cooperation of the acquired assets (see Desk Note “FESCO: A World Class Company” dated February 22, 2007). The sale of low income international container lines enabled the company to considerably strengthen margins which we view as a successful result, taking into account ongoing active restructuring. The fact that the fleet's book value advanced significantly reflects successful implementation of FESCO's strategy intended to expand and upgrade its container fleet.

We expect newly acquired assets to operate efficiently as part of the established logistics chain and believe that in the absence of negative trends in international trade, the company could considerably boost all headline financial indicators in the coming years.

We view the company's active investment strategy as modern and justified. Taking into account that the company gears toward intensive development, overall, we are upbeat on a rise in its leverage. According to our estimates, given the company's free access to cheap credit resources, stronger net debt helps improve capital structure and considerably reduce the company's WACC.

In February 2007, FESCO held an additional share issue of its shares of 25% of the charter capital, which made it possible to finance transactions to acquire railway carrier Transgarant and 50% in terminal operator National Container Company (NCC) without a considerable rise in its leverage. The company plans to hold the second additional share issue of 15% of the charter capital in order to finance investments in port infrastructure and rolling stock.

Clients of Finam Investment Company may receive full versions of analytical research reports translated into English by sending requests to the International Trading Department.

Vladimir Sergievskiy

* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.