Research Notes

Melnik is a vertically integrated agro-industrial company based in the Altai Territory. It is focused on processing crops and produces a diversified range of products. Favorable pricing conditions in the market and the company's strong position in processing are to become considerable upside drivers for the company.

Presently, Melnik's shares are traded with FY 2006 P/E and EV/EBITDA of 13x and 4.5x, respectively, which is considerably below the indicators of developed and emerging markets, as well as the Russian agro-industrial companies Razgulyai Group and Pava. Our recommendation is to buy Melnik's shares due to their considerable undervaluation. The target value of the company's shares is USD 2,313 per share, which implies an upside of more than 100%. Nonetheless, we highlight the low liquidity of the company's shares and insufficient transparency as potential risks.

The key factors of Melnik's stock are:

• Strong company positions in the market. The total capacity of Melnik's flourmill is more than 350,000 tons. This is more than 3.5% of the total Russian flour production. The company plans to increase this by 5% in the short-term.
• Business diversification. Nearly 65% of Melnik's production structure is attributed to all grades of flour, 23% to formula feed, 8% to alimentary products, 2% to cereals, 1% to bread, and 1% to sunflower oil production.
• Stable upturn in the manufacturing of products. The company's flour production grew by nearly 2% in 2006, while the market generally shows a downbeat performance.
• Focus on export. Melnik is among the TOP-5 largest Russian flour exporters.
• Extremely low P/E and EV/EBITDA as compared to peers from developed and emerging countries and the Russian peers – Razgulyai Group and Pava.

Sergey Filchenkov

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