Research Notes

The FY06 and Q107 consolidated financial statements released by Novorossiysk Shipping Company are compelling evidence that the shipping company is able to capitalize on a favorable environment on the freight market. The company has displayed stable growth in all its headline financials amid higher efficiency of the fleet's operations.

Given the financials posted, stabilization in the tanker segment of the freight market and the successful implementation of Novoship's fleet upgrade program, we raised our target price by 2% for the shipping company's common and preferred shares to $2.80 and $1.64, respectively, reiterating our Buy recommendations for both categories of shares.

Thanks to stronger efficiency of the company's fleet management operations amid a stably positive climate on the freight market, the shipping company managed to achieve upbeat financial results. FY06 sales climbed slightly less than 30%. Meanwhile, the company succeeded in cutting costs, which led to improvements in all its profit margins. EBITDA margin was above 55%, whereas net margin (adjusted by earnings from the sale of vessels) climbed to 32%. The book value of the company's fleet surged more than 45% in the reporting period, which became possible after the successful execution of the fleet expansion and upgrade strategy. As part of this strategy Novoship is to commission 8 new tankers with an aggregate deadweight of 750,000 tons as early as in 2007. Novoship is looking to boost its total deadweight to 5 mln tons by 2010, at earliest.

An additional growth driver for the company's market value could be the upcoming merger of Novoship and Sovkomflot, Russia's two biggest tanker operators. By the end of this year, the state's stake in Novoship's equity capital will be contributed to Sovkomflot's charter capital, which implies legal independence of the companies. In our view, state authorities have selected the best merger option. On the one hand, they could take advantage of all benefits from joint operations in order to boost their own financial indicators. On the other hand, Novoship's minority shareholders will only benefit from more clearance around the merger, which was announced more than a year ago.

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Vladimir Sergievskiy

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