Research Notes

The FY 2007 financials published by Severstal-Avto indicate that the company remains the leader among Russian automotive companies. The company continues to actively cooperate with foreign automakers and this strategy allows Severstal-Avto to operate in the most lucrative and fastest growing market segments, making modern and inexpensive vehicles, popular with buyers. In our view, the company currently has the best managerial team in the Russian automotive industry. We have revised the following aspects of our DCF model:

• The macroeconomic forecasts for changes in consumer price inflation, car factory prices and foreign exchange rates that have a considerable impact on projections for selling prices and production costs
• The revised estimate takes account of a joint project for the production of a new SUV model, to be put into operation in mid-2010. The project was recently announced by the company's management
• We have raised our outlook for production of Isuzu trucks, given the company's plans to double their output to keep up with growing demand
• We have raised our forecast for the required capital investments in the face of new projects devised by the company and the need to finance them
• We have taken note of changes that have occurred on the capital markets in the past six months. These changes have led to a reduction in the risk-free rate of return and a higher cost of debt financing.

Following the revision of our valuation model, we have raised the target price for Severstal-Avto common shares from USD 56.7 to USD 89.3 per share, with an upside of 50.1%, and assigned a BUY recommendation on the shares. We point at strong demand for automobiles in Russia amid growing personal incomes and the low level of car ownership in the country, and regard it as a key upside driver for the company's stock valuations. Amid the risks faced by the company, we highlight stiffening price competition on the market as foreign automakers open car factories in Russia.

Konstantin Romanov

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