Research Notes

Solikamskbumprom ranks in Top 3 of Russia’s primary newsprint manufacturers, commanding some 25% of the market. The enterprise represents a vertically integrated holding comprising ten logging entities and also its own TPP. According to our estimates, the company is undervalued compared to its foreign peers and its fair value is $1,257.80 per share which implies upside potential of 80% to the current stock valuations.

The main factors of the company’s investment appeal are as follows:

• Strong profit margins, outstripping the industry average. Under 9M06 performance Solikamskbumprom’s net margin improved over 18%, whereas the average net margin figure at Russian pulp and paper mills is not in excess of 10%.

• Solikamskbumprom is a relatively young concern which in recent years upgraded its milling machines with a view to lifting paper production standards to the international level. In addition, the productivity rate of paper units was increased which produced a positive impact on the enterprise’s newsprint production volumes.

• The quality of newsprint produced by Solikamskbumprom is in line with international standards. Exports generate around 54% of the company’s sales. The concern’s geography of sales is fairly wide: European countries, the United States, Turkey, Egypt, Indian, as well as China and Brazil, are the main sales markets. Meanwhile, in 2006 newsprint prices jumped some 20-25% in Europe and the US. Given stable demand the corporate export policy allows Solikamskbumprom to achieve strong financial results.

Growing interest of Western investors in the Russian timber industry, tightening state control over forest management, as well as measures to offer incentives for advanced wood processing, in the long-term outlook will dampen the risks of investing in the Russian timber industry and will also exert a positive impact on the stock liquidity of concerns listed on the stock market.

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Sergey Filchenkov

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