Research Notes

LSR Group is the largest vertically integrated construction holding in Saint Petersburg that specializes in executing projects in the residential and commercial real estate segments, and it also holds leadership on the regional construction materials market.

The company mulls going public in November on Russian and foreign exchanges, placing around 10-15% of its shares. Given the target placement range of LSR Group, the company will be able to net $550 mln to $1 bln.

According to our estimates, the strong investment appeal of the asset on fundamentals is primarily driven by the following factors:

• the company’s vertical integration, making it possible to gain a synergetic effect from the interaction of various business units. In view of dynamic growth in construction material prices this will allow the company to boost revenue with minimal deterioration in margins. According to our forecasts, the group’s ability to deliver strong margins will be the key upside driver for the company’s shares.
• Financial results in recent years have shown intensive expansion of the company’s business activities. In H107, sales skyrocketed over 82% in dollar terms primarily thanks to the favorable market environment owing to a spike in construction material prices and also higher sales volumes. Along with higher sales, LSR Group shows margins comparable with industry leaders. The group’s EBITDA margin came in at 21.5% in H107 compared to 17% in the same period a year ago.
• The company’s leadership positions on the Saint Petersburg market of construction materials and also the broad portfolio of projects in the residential economy-class real estate segment and some projects in the commercial real estate sector, form a diversified business structure of LSR Group. Overall, we view the group’s focus on economy-class housing construction as economically justified taking into account the high rate of obsolescence of the northern capital’s residential facilities. Based on estimates from independent appraiser DTZ, the value of LSR Group’s real estate development projects totaled some $4.9 bln as of June 30, 2007.

Our valuation of the fair price of LSR Group’s common shares is $95.60 per share. Since our fair share price is more than 15% above the upper end of the target placement range ($65-$82.50), we advise investors to participate in the company’s IPO at any price within the range.

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Sergey Filchenkov

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