Research Notes

High steel prices have helped the Ashinsky Metallurgical Plant to improve its financial results in 2007. The year end revenue of the company is to reach around USD 359 mn with net profit climbing to USD 56.4 mn. These numbers are significantly higher than last year results. Upgraded production facilities would boost rolled steel output, reduce production costs, and have a positive effect on the company’s revenues.

JSC Ashinsky Metallurgical Plant is one of the major rolled iron plate producers in Russia. It accounts for 6% of the total Russian output.

The investment program of the Ashinsky Metallurgical Plant plans USD 270 mn of capex till 2010. The majority of this is to be spent on the development and expansion of steel smelting facilities - raising the production rate from 650,000 tons to 800,000 tons. The company is focusing on raising the amount of steel produced in electric furnaces. This is to lead to lowering production costs and boosting profits.

During 9 months the major financial indicators of the company demonstrated strong growth. Revenue grew over 31% versus the same period in the last year. Operating revenue during the same period rose over 38%, net profit added up 17%. Current favourable conditions in the Russian steel market are a noticeable factor of such a strong performance.

Now the company’s shares are traded with P/E, EV/S and EV/EBITDA multiples at the level of 7.5, 0.98 and 4.2, respectively. This is much lower than the same ratios of foreign companies in developed markets (P/E=11.0, EV/S=1.3, EV/EBITDA=6.4) and emerging markets (P/E=12.4, EV/S=2.3, EV/EBITDA=8.8). The company’s multiples are also lower than the multiples of its Russian peers. This implies a strong upside potential for shares of the Ashinsky Metallurgical Plant.

According to our estimates which are based upon market multiples, the fair value of the Ashinsky Metallurgical Plant is USD 1.3 a share with a 53% upside.
If we take into account the possible redemption of all the treasury shares (around 50% of the company’s stock) then our estimated fair value is USD 2.6. This implies a 205% upside.

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Denis Gorev

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