Research Notes

Shipbuilding companies have not been popular with investors because of a slowdown of orders for Russian shipyards. Obsolete technology and fixed assets were among the reasons for the lack of orders and investments. Nevertheless, due to economic growth in Russia, some shipbuilding companies that were able to upgrade their facilities have started to receive domestic as well as international orders.

The additional growth driver for the ship building industry is state’s increased interest in developing the sector. This is likely to result in new government orders, preferential credits and some tax benefits aimed at facilitating the development of Russian ship-yards. We have highlighted two companies as the most attractive investment vehicles:

We believe that the major price drivers for these companies are the following factors:

• Upgraded facilities. Baltiysky Zavod and Severnaya Verf are already getting orders, while most of the other Russian ship-yards need to modernize their production equipment.
• Experience in producing sophisticated high-tech vessels. Presently, the companies have orders to produce high-tech vessels. Successful completion of these contracts would attract new customers.
• Development of government shipbuilding financing schemes and changes in the taxation of ship owners aimed to develop Unified Shipbuilding Corporation (USC). These measures would help to the operating and potential shipbuilding companies. Because customers are expected to eye primarily on them.
• Growth of government defense contracts. These contracts would help both companies to increase their order books.

Baltiysky Zavod and Severnaya Verf are not expected to enter USC in the near future. Investors do not need to worry about unfair valuation of their shares in case their shares are swapped into USC shares or the buyback price is discounted to the fair value of the companies.

Konstantin Romanov

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