Research Notes

In early October, Siberia Telecom released its H107 IFRS financial statement. We read these financials quite neutrally as the company showed no unexpected surprises. The next day the telecom operator's executives fielded questions raise by investors during an online conference held at www.finam.ru. During the conference some forecasts were unveiled which prompted us to revise Siberia Telecom's financial model and its fair price.

Management demonstrated moderate pessimism about the operator's development prospects in the mobile segment as top managers pointed to market saturation and do not expect to see very robust growth rates. In view of this fact, our projections for the company's wireless sales, ARPU and the customer base underwent considerable changes. As a result, mobile services no longer serve as a growth driver for the company's revenue, but still remain one of the high-yield areas of business.

In addition, management did not rule out the sale of Siberia Telecom's mobile assets and this information came as an unexpected surprise to the market. We believe that if the company divests its wireless assets in 2007-2008, this will be an excellent opportunity to gain a premium to the market price, since Big 3 mobile majors will be vying for the company's assets and a scenario cannot be ruled out whereby the buyer will overpay for the right to gain over 3 mln mobile subscribers in one fell swoop.

Alongside this, the company's core activities (fixed-line operations) have been expanding at a robust pace and looking at the company's first-half financial statement we upgraded our forecasts for Siberia Telecom's local voice and intrazonal earnings.

By and large, we revised upward our forecasts for both the company's consolidated revenues and opex. Sales were revised upward following the upgrade of forecasts for earnings from intrazonal connections and local voice services, while the cost side jumped on stronger expectations about the rate of growth in wages – wages are growing at a high pace in Russia and we do not see any solutions to the problem of a workforce shortage. As a result, EBITDA margin will go down from the range of 38-51% to the more pessimistic 31-41% during the years of the forecast period.

In view of the above changes we set the fair price for the company's commons at $0.151 and $0.103 for prefs as of year-end 2008. Since our latest update of Siberia Telecom's stock recommendation its commons have dropped 14% and prefs have plunged 21%, while the benchmark gained 7%. We believe this picture is unfair. At present, Siberia Telecom's commons and prefs are a solid investment vehicle and we rate them as Buy.

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