Research Notes

Initiatives by state authorities to form a favorable legislative and investment climate for the expansion of port business, coupled with a favorable strategic location, could allow Novorossiysk Sea Commercial Plant (NSCP) to turn into one of the most important international transportation hubs.

Despite the company’s 2006 lackluster financial performance, we remain largely upbeat about the development prospects of Russian port businesses and raise our target price for NSCP commons to $0.075, reiterating our Hold recommendation.

In his Annual State of the Nation Address to the Federation Assembly, Russian President Vladimir Putin emphasized that it is essential to create all conditions for the efficient development of the national transportation system as a whole and port facilities in particular. In our earlier Desk Note “Novorossiysk Sea Commercial Port: a Safe Haven” we drew investors’ attention to the substantial advantages of Russian transit routes linking Europe and Asia. Thus, with sufficient investments and more clarity in the national legislative framework, a favorable strategic location could ramp up the port’s turnover. In addition, the presidential initiative includes the option of rolling out port-based “free trade zones”, which imply tangible benefits, including in terms of corporate taxes.

An important factor underscoring the company’s strong financial standing was the placement of a $300 mln bond at an extremely attractive rate (7%). In the run-up to the company’s bond placement, Moody’s assigned a Ba1 corporate rating to NSCP.

Of no small importance was the disclosure of NSCP’s ownership structure ahead of the bond flotation. Disclosure of the company’s beneficial owners (board chairman Alexander Ponomarenko and State Duma member Alexander Skorobogatko control no less than 63% of the company’s equity capital) removed uncertainty over the port’s ownership structure.

Partnership with Russian Railways Co. (RRC) is of strategic importance to the company, as part of which a 16% stake in the port was assigned to the state-run railway monopoly on trust management terms. Strategic cooperation with RRC enables NSCP, on the one hand, to see a coordinated railway tariff policy pursued by RRC and, on the other hand, to enhance its own investment appeal, underscoring its loyalty to state authorities.

The most serious threat for the company remains potential redistribution of transportation flows in favor of actively developing North Western ports. However, taking into account the expected pace of growth in export/import flows and the expansion potential for transit shipment activities, we forecast NSCP’s turnover to grow at a steady pace even in view of the growing popularity of the country’s northwestern

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Vladimir Sergievskiy

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