Research Notes

NPO Saturn is a leading Russian jet engine designer and maker. The company successfully implemented a project to develop a state of the art engine for Russia's cutting edge Sukhoi SuperJet 100. The group cooperates with international companies to develop and produce jet engines and ground-based turbines. The French SNECMA Moteurs concern, the world's third largest gas turbine equipment producer, is the Saturn group's main foreign partner.

The need to re-evaluate the target prices for the company's shares has arisen due to substantial increases in costs of finance amid adverse conditions in the global financial markets. Another reason for the re-evaluation lies in delays in the company's core projects which make up a major part of its market value. The following changes were made to our evaluation:

• We extended the developmental timeframe of the engine for the Sukhoi SuperJet 100, due to delays in the jet certification.
• The engine for the Il-76 freighter, Russia's main military transport plane, is still undergoing tests. As a result, its deliveries may begin no sooner than late 2008.
• The company's margins are to grow at a slower pace, as its FY 2007 financials show. The margins may also be impaired by the growth of competition from imports.
• We raised our estimate of the cost of debt financing for the company in view of the global liquidity crisis.

As a result, we have downgraded our estimate of the company's fair value to USD 0.15, but the shares retain a considerable upside potential of 70%.

Konstantin Romanov

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