Research Notes

In early May the Sibirtelecom phone company released its 1Q 2008 financials under RAS and held an on-line conference to voice some of its projections and commentaries. In view of these events and the latest data on the industry and the company, we have revised our valuation model for the phone operator.

• The company posted sound performance in FY 2007 and 1Q 2008. The company managed to expand its OIBDA and net margins and reported marginal revenue growth. Although the weak revenue growth was anticipated, it may be considered impressive if compared with that of comparable companies. We also point out the job cuts at the company, which should have a beneficial effect on the company’s margins in the long term.
• It became known at the end of March that the Federal Tariff Service (FTS) is not planning an increase in the regulated tariffs on local telecom services, while in 2009-2010, the tariff growth is expected to be slower than the pace of inflation. In our estimates, we have taken into account the position adopted by the FTS, which may have negative effects on Sibirtelecom, and lowered our outlook for the company’s revenues from local phone services.
• The company reported growth in its cellular business in 2007. In particular, the company’s subscriber base grew much faster than the average for the entire industry. We have therefore raised our forecast for the company’s cellular business and now deem our previous forecast for this segment too pessimistic, given that the pressure exerted on the company by federal players on the market has been weaker than originally thought.
• At the start of the year, the company held tenders to raise debt finance. In the wake of the tenders, we may underscore several facts. To begin with, borrowing costs have risen from 7-8% to at least 10.5%. Secondly, Sibirtelecom has not experienced any problems with sources of finance, given the liquidity crisis. At the same time, higher borrowing costs have caused an increase in the discount rate, which may negatively affect the current value of the company’s future cash flows.
• Comparisons between the multiples for Sibirtelecom and its peers in Russia, developed countries and emerging markets have revealed a marked undervaluation of Sibirtelecom and all other Russian inter-regional telecom companies (Russian abbreviation MRK). This is one of the key reasons for undervaluation of the Russian telecoms industry as a whole.

As a result of the changes made to our financial model, Sibirtelecom’s estimated value has marginally increased in both common and preferred shares. We assign BUY recommendation to both types of shares, with a target price for the company at USD 0.165 per common share and USD 0.111 per pref as of year-end 2008. Both types of shares have a considerable upside potential and quotations for the company’s shares should rise in the near future.

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