Research Notes

Kalina Concern, Russia’s leading perfumery and cosmetics producer with strong and recognizable brands, has disclosed the key guidelines for its development and its financial targets for 2008 during a presentation party. We highlight the following upbeat drivers for the company’s stock:

• As a result of our visit to Kalina production units and attending a management presentation, we underscore improvements in the company’s information disclosure policy and readiness for open dialogue with the investment community;
• We are upbeat that T. Goryaev, Kalina’s founder, is actively involved in the company’s day-to-day activities and does not plan to reduce his current holding of 25% in the concern in the near future;
• In our opinion, the company’s current strategy to bring the proportion of brand-name products in its total sales to 94% in 2008, coupled with a rebranding campaign and renewed focus on premium brands, is to enable the company to increase its margins;
• The company has ambitious financial targets for 2008. Revenue is to jump 18% y-o-y to USD 463.7 mn and the operating margin is to widen to 11.3%, from 7.8% in 2006;
• EV/EBITDA 2007 and 2008 multiples for Kalina shares presently are at a respective 8 and 6.5, which is two times lower than the respective multiples for peers in developed and emerging countries.

We believe that improvements in the company’s corporate governance and its stake on premium brands in the achievement of set targets for 2008 are to make its shares more attractive for investors, which should reduce the discount on the company as compared with its peers in developed and emerging countries. We estimate the fair value of Kalina shares at USD 59,8 per share, with an upside potential of 70%, which corresponds to Buy recommendation.

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Sergey Filchenkov

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