Finam: : Investments : Research Notes : Uralsvyazinform: not the best time for an acquisition

In May Uralsvyazinform (URSI) released its 1Q 2008 financials calculated to RAS. Standard&Poor has also confirmed its credit rating for the company, giving us grounds to update our financial model for URSI in view of these new developments.

The financial statement has produced an ambiguous impression. We are wary of the ongoing stagnation in the fixed-line telecoms sector; the company's fixed telecom subscriber base rose by less than 1% in the year, which can hardly be considered a good result. At the same time, the company's Inter-access services expanded by 3.2% and its Internet traffic increased sevenfold, which must sharpen the company's appeal for investors.

On the whole, the state of the company gives no reasons for serious concern: the freeze of its tariffs is unlikely to be long-lived, while the decline of margins in 1Q 2008 was preceded by their steep rise in FY 2007. The volume of company debt is not critical for its operating results.

Two pieces of news deemed negative for inter-regional telecom companies (IRC) came in the spring. Firstly, the Federal Tariff Service said it did not plan to increase the regulated tariffs on local phone calls in 2008 and promised that the tariffs would rise slower than inflation in 2009 and 2010. Secondly, it became known that not a single IRC would raise its subscription fee under a limitless tariff in 2008 (URSI has already dropped earlier plans to raise its fee). All these factors, linked with the state's anti-inflationary measures, are likely to adversely affect the IRCs, a fact which was factored into our valuation model for the company, leading us to lower our projections for revenue in local telecom services.

Early this year, the company held auctions to raise debt finance, one of which, intended to raise RUB 1.5 billion, ended in failure. This emerged as yet another sign of the liquidity squeeze and caused the company's credit rating to be put under review. The subsequent loan bond issue, worth RUB 2 billion, was oversubscribed by investors, prompting the credit agency to confirm its company rating. We do not expect the crisis on the financial markets to exert a tangible impact on URSE in the long-term, as the company holds a stable market position and generates sizeable cash flows.

URSI is one of the most expensive IRCs in view of market multiples. On the one hand, there are grounds for this, as the company holds a leading position on the regional market and its financials are also stable. On the other hand, this shows that there are more undervalued vehicles for investment in the Russian phone industry.

Following the update of our valuation model for Uralsvyazinform, the fundamental value of its shares has decreased to USD 0.06 per common share and USD 0.034 per preferred share as of year-end 2008. We assign a HOLD recommendation on both types of shares. Despite the company's sound financials and its strong market position, its shares do not hold a significant upside potential under current conditions.

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Sector: Telecommunications, IT
Company: Uralsvyazinform

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Uralsvyazinform: not the best time for an acquisition

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