23 03 10 bridgtserte over troubled water

7/28/2019 23 03 10 Bridgtserte Over Troubled Water

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Forprofessionalinvestorsonly.Thisdocumenthasnotbeenpreparedinaccordancewithlegalrequirementsdesignedtopromotetheindependenceofinvestmentresearch. Pleaserefertoimportantdisclosuresandanalystcertificationattheendofthisdocument

MIKHAILPAK [email protected]

IOULIMATEVOSSOV [email protected]

NIKITAMELNIKOV [email protected]

Sector MktCap $2,534mn

Coverage MktCap $1,622mn

Fair MktCap $2,523mn

Upside potential 56%

2Mfairvaluesandratingsummary

Mostotrest Dalmostostroy

Rating BUY BUY

Fairvalue($) 1,374 183

Upsidepotential(%)

63% 68%

Bamtonnel

stroy(ord/pref)Mostootrjad19

Rating BUY BUY

Fairvalue($) 4,884/1,449 $2,841

Upside

potential

(%)

44%/78% 56%

Source:Atonestimates

ectorperformance

50% 25% 0% 25% 50%

Mosinzhstroy

Mostotrest

Khanty

Mansiyskdorstroy

Dalmostostroy

Mostostroyindustriya

RTSIndex

Bamtonnelstroy

Bamtonnelstroy(pref.)

Volgomost

Mostootrjad19

TransstroyCorp

Mostostroy11

Bamstroymekhanizatsia

6M YTD

RTSIndex

Source:Bloombergff

ote:Pricesasofclose22Mar2010throughouttheport.

Coverageinitiated:Russianbridgebuilders.InthisreportwelaunchourcoverageofRussiasbridgebuilders.WithmorethanadozentransportinfrastructureconstructionstockslistedinRussia,investorsarepresentedwithasomewhatperplexingchoice.Thus,withthisinmind,wecommenceourcoveragebyfocussingonthecompaniesprimedtobenefitfromsomeofthefollowingvalueaccretivethemes:exposuretopoliticallybackedhighprofileprojects;geographicdiversificationacrossRussia;improvedcorporategovernanceandtransparency;andstronggrowthpotential.

Hugeplannedstatespendingthefirstpointofcall:In2008thegovernmentadopted

aseriesofdevelopmentprogrammeswhichassumedmorethan$2trninstateinvestmentsintothetransportinfrastructuresectorover201030.Thisincluded$830bntobeinvestedintohighwayinfrastructure.Whiletheeconomicdownturnhaspulledthewindoutthestatessailswithregardstoitsspendingcapacity,wearguethatthestatecannotignorethedegreeofthemodernisationworksrequiredandinvestorsthereforecannotoverlookthepotentialgrowthopportunitiesintheturnaround.

MostotresttheOlympicsplay:OntopofbeingRussiasbiggestbridgebuilderwith5.5%marketshare,Mostotrestsorderbookincludesseveralprojectswhichwedeempoliticallytooimportanttosufferfrommajorcutbacks,suchaspreparationworksforthe2014WinterOlympicsinSochi.Inaddition,webelievethatthecompanysstrongfinancialprofile,withtheindustryshighest9M09EBITDAmarginofalmost20%(comingonthebackof30%YoYrevenuesgrowth)completesarobustinvestmentcasefor

Mostotrest.

Dalmostostroyabigfishinagrowingpond:WeconsiderDalmostostroytoofferthebestexposuretoRussiasFarEastregionasthecompanyisengagedintheoverhaulofVladivostoksinfrastructureintherunuptothe2012APECsummit anotherpoliticallysensitiveproject.Also,wenotethatDalmostostroysleadingroleintheregion,holding40%marketsharein2008,couldmakeitapotentialtargetforconsolidation.

Bamtonnelstroy tunnellingforvictory:RussiaslargesttunnelconstructioncompanyBamtonnelstroyholdsanorderbookof$2.1bnspanningthenextfiveyears.ThecompanyskeyprojectistheconstructionofahugetunnelsystemwhichisafundamentalpartoftheSochiOlympicspreparations.Moreover,Bamtonnelstroystandsoutfromitspeersforhavingafixeddividendpayoutratioof10%onitspreferred

shares,withacurrentdividendyieldof11%,onourestimates.

Mostootrjad19down,butfarfromout:WeviewMostootrjad19asthebestinvestmenttoolforgainingexposuretotheStPetersburgauthoritiesplanstoinvest$8.3bnintransportinfrastructureprojectsoverthenextthreeyears.Additionally,webelievethatthestockssluggishperformancein2009(23%)isnotanaccuratereflectionofthecompanys4Q09financials,whichweexpecttosurpriseontheupsideonceMostootrjad19releasesitsFY09financialreport(dueinApr2010).

Impulsegettingitrightfromthestart:InthisreportwealsodrawinvestorsattentiontoImpulse,ayoungblossomingplayerinRussiasbridgebuildingsector.WehighlightImpulseasitisshowingsignsofpotentialtobecomeRussiasfirstinfrastructureconstructioncompanywithhighcorporategovernancestandardsanddecentfinancial

transparency.Addedtothisisimpressivegrowthinfinancials(revenuesup47%YoYindollartermsin2009)anda$120mncontracttoconstructabridgeinVladivostok.

MARKETINGMATERIAL

SPECIALSITUATIONS

23March2010

TRANSPORT INFRASTRUCTUREBridge Over Troubled Water


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Contents

Investmentsummary ........................................................................................................ 3Roadinfrastructuresectoroutlook .................................................................................. 5

Sectorpresentation:Bridgingtheinfrastructuregap................................................ 5TooBadtogetWorse:Lackofinfrastructurearrestseconomicgrowth................... 5TooGoodtobeTrue:Thestatesspendingtobescaledback. ................................. 8TooPoliticaltoFail:APEC2012andSochiOlympics2014. ....................................... 9

Industryrisks ................................................................................................................... 12Roadinfrastructureindustryoverview .......................................................................... 13

Thecostsstructure:Buildingayellowbrickroad.................................................... 13Theindustrystructure:Thestateisthelifeblood.................................................... 16Themarketstructure:Assessingtheindustrysize. ................................................. 16Industry

structure

developments:

Potential

consolidation

in

sight......................... 18

Compnaypages

Mostotrest ............................................................................................................... 20Dalmostostroy.......................................................................................................... 29Bamtonnelstroy ....................................................................................................... 36Mostootrjad19 ........................................................................................................ 44Impulse .................................................................................................................... 51


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Investment summary

WiththisreportwecommenceourcoverageofRussiastransportinfrastructureconstructioncompanies.WehavechosentolaunchouranalysiswithcoverageofMostotrest,Dalmostostroy,BamtonnelstroyandMostootrjad19,towhichweassignBUYratings,aswearguethatthesecompaniesarebestpositionedtotakeadvantageoftheoverhaulofRussiastransportinfrastructuresystem.Specifically,thesecompaniesoperationsarefocussedonbridgeandtunnelconstructionprojects.Furthermore,inthisreportwealsopresentacaseforImpulse,arelativelynewadditiontoRussiasinfrastructureconstructionpeergroup,whoseholdingcompanyplanstolaunchaprivateplacementbyofferinganewshareissuein2010.

Figure1:Fairvalueandratingsummary

Figure2:Keyvaluationratios

Mostotrest Dalmostostroy Bamtonnelstroy Mostootrjad19

Valuationsummary

Fairvalue,common($) 1,374 183 4,884 2,841

Commonshareprice($) 845 109 3,400 1,825

Upside/downsidepotential 63% 68% 44% 56%

Rating BUY BUY BUY BUY

Fairvalue,pref.($) n/a n/a 1,449 n/a

Preferredshareprice($) n/a n/a 813 n/a

Upside/downsidepotential n/a n/a 78% n/a

Rating n/a n/a BUY n/a

Keyvaluationmetrics

Commonsharesinissue 1,241,200 669,222 98,688 75,776

Preferredsharesinissue n/a n/a 32,896 n/a

MktCap($mn) 1,049 73 362 138

Netdebt($mn) 37 34 22 39

EV($mn) 1,086 106 385 99

BV($mn) 269 68 153 75

P/Eratios(x)

2008 51.7 19.0 12.6 7.4

2009E 7.9 16.7 8.8 neg.

2010E

28.9

8.1

6.1

10.8

2011E 19.2 5.8 6.3 17.6

P/Sratios(x)

2008 0.9 0.4 1.0 0.3

2009E 1.0 0.5 1.0 0.6

2010E 1.3 0.4 0.9 0.4

2011E 1.1 0.3 0.9 0.4

EV/EBITDAratios(x)

2008 7.3 6.8 6.1 2.2

2009E 5.0 6.4 4.7 neg.

2010E 11.5 4.9 3.5 3.5

2011E 9.1 4.0 3.5 4.4

P/BVratio

(x)

3.9 1.1 2.4 1.8

Source:Bloomberg,Atonestimates

Company Ticker Fairvalue($) Currentprice*($) Upsidepotential Rating

Mostotrest MSTTRU 1,374 845 63% BUY

Dalmostostroy DMOARU 183 109 68% BUY

Bamtonnelstroy BTSTRU 4,884 3,400 44% BUY

Bamtonnelstroypf. BTSTPRU 1,449 813 78% BUY

Mostootrjad19 MSOTRU 2,841 1,825 56% BUY

*Referstocurrentmidmarketprice


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Figure3:Keyfinancials($mn)


Revenue($mn)

2008 1,155 188 367 538

2009E 1,004 155 350 233

2010E 819 197 411 374

2011E 939 239 417 387

EBITDA($mn)

2008 150 16 63 44

2009E 216 17 83 16

2010E 94 22 111 28

2011E 119 27 110 23

Netincome($mn)

2008 20 4 29 19

2009E 134 4 41 5

2010E 36 9 60 13

2011E 55 13 58 8

EBITDAmargin(%)

2008 13.0% 8.4% 17.1% 8.2%

2009E 21.5% 10.7% 23.6% neg.

2010E 11.5% 11.1% 27.0% 7.6%

2011E 12.7% 11.2% 26.3% 5.9%

Netmargin(%)

2008 1.8% 2.0% 7.8% 3.5%

2009E 13.3% 2.8% 11.7% 2.2%

2010E 4.4% 4.6% 14.5% 3.4%

2011E 5.8% 5.3% 13.8% 2.0%


Figure4:Recentstockperformance


1M 3.0% 0.5% 3.2% 1.4%

3M 34.2% 23.9% 8.3% 1.4%

6M 33.9% 30.5% 1.4% 3.9%

YTD 30.5% 22.5% 0.0% 1.4%

1Y 248.5% 17.8% 277.8% 39.8%

52weekhigh($) 845 120 3,625 2,150

52weeklow($) 243 70 881 1,305

Dailyt/o($) 829,838 62,241 64,475 97,592

Freefloat(%) 12.0% 16.4% 12.9% 24.8%

Freefloat($mn) 126 12 47 34



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5

Road infrastructure sector outlook

Sectoroverview:Bridgingtheinfrastructuregap

GiventhattheexportofnaturalresourcesisthelifebloodofRussiaseconomy,itwouldbenaturaltoassumethatRussiahasanadvancedtransportationnetworktofacilitatedeliveriesofthecountrysproduction.Onasimilarnote,RussiaalsoofferstheshortestroutebetweentheEUandAsiancountries.Ittakesupto30daystodelivergoodsbysea

fromAsiatoEuropewhileRussiasTransSiberianrailwaycanhalvethedeliverytimeto1215days.

However,asweoutlineinthisreport,decadesofunderinvestmentintoRussiasroadnetwork,thefinallinkbetweengoodsandtheirfinaldestination,hasleftthecountrysroadsystemtrailingthoseofbothdevelopedandemergingeconomies.ThishasnaturallyhadadetrimentalimpactontheRussianeconomy.

Figure5below,whichpresentsaninternationalcomparisonofvariouscountriesroaddensitiesrelativetotheirpopulationsandsize,shouldgiveinvestorsanideaofthehugecatchupworkthatRussiahastoembarkon(althoughanyreaderswhohaveexperiencedRussianroadsmorethan100kmfromMoscowwillalreadybealltoo

painfullyfamiliarwiththedirestateofaffairs).

Nevertheless,wearguethatthestatehasgraspedtheurgencyoftheproblemandiswillingandabletooutlaysubstantialinvestmentsothatRussiastransportindustrycanbegintoapproachitsvastpotential.

WethereforeanticipateanenormousimprovementinRussiasroadinfrastructureoverthecomingyearsonthebackofacceleratingstatespending.However,giventheextentofthemodernisationworksrequiredandthelonginvestmenthorizonimpliedbythestatesspendingplans,wehavetailoredourstockselectionprocesstoidentifycompanieswhichwebelievecancapturethegreatestbenefitsfromincreasedgovernmentexpenditurewithintheshortesttimeframe.

Toobad

to

get

worse:

Lack

of

infrastructure

arrests

economic

growth

AccordingtoRussiasMinistryofTransport,around62%ofRussianfederalhighwaysdonotcomplywithsafety,technicalorenvironmentalcriteria,whileapproximately13%ofbridgesneedtobecompletelyreplaced.

In2007,thenpresidentandcurrentPrimeMinisterVladimirPutinlambastedRussiastransportproblems,emphasisingthateconomiclossesstemmingfromthepoorstateofRussiastransportinfrastructureaverage$30bnayear.

Figure5underscoresthedegreetowhichRussiasroadinfrastructurelagsthoseofinternationalpeers.Forexample,intermsofroadnetworkdensity,Russiaholds46.1km

ofpavedroadsper1,000km2,whichlooksalarminglylowwhencomparedto187.2kminChina,557.7kminIndiaand459.5kminCanada.Infact,thedensityofRussiasexistingroadnetworkismoreonparwiththatofEthiopia(38.6km)andBurkinaFaso(46.3km).


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Figure5:Roaddensity:internationalcomparison

Russia

China

US

CanadaBrazil

India

Mexico

Turkey

France

Spain

Japan

Germany

UK

International

average

500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1.0 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0

Lengthofpavedroad(kmper 1,000inhabitants)

L

engthofpavedroadper1,0

00km

Source:IRF,USDT,Eurostat,Atonestimates

Atthesametime,wenotethatautotransporthasremainedthesecondlargestmethod

forshippinggoodsinRussiaoverthepastdecade(excludingpipelines,intermsoftonnekilometres).

However,Figure6exemplifiesthescarcityofroadinfrastructureinRussia,showinghowin2008theshareofcargotransportedbyautomobile(intermsofvolumerelativetodistance)wasjust9%vsmorethan40%intheUS,GermanyandFrance.Furthermore,wearguethatthissituationmeansthatRussiasautotransportationindustryremainsheavilyunderdeveloped.


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Figure6:Cargoturnoverbytypeoftransportation (excludingpipelines,tonnekm)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Russia

China

Azer

baijan

Armenia

G

eorgia

Kazakhstan

Kyrgyzstan

B

elarus

U

kraine

Moldavia

Poland

Ro

mania

B

ulgaria

H

ungary

Ge

rmany

France

Italy U

K

USA

Japan

Ra il wa y Aut o Se a Ot he r

Source:IRF,GKS,Eurostat,Atonestimates

WethusreiterateourviewthattheunderdevelopmentofRussiasroadtransportationnetworkistheproductofsignificantunderinvestmentoverthepastdecade,duringwhichRussiasspendingonhighwayinfrastructurehasaveragedamere1%ofGDP.ThisisfourtimeslowerthanexpenditureintheEUandsixtimeslowerthaninChinaoverthesameperiod.

Figure7:RoadspendingasashareofGDP(2008)

6.0%

4.7%

4.2%4.0%

3.7%3.6%

3.1%3.1%3.1%2.8%

2.5%2.5%

1.7%1.3%

1.1% 1.0%1.0% 0.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

China

Italy

Finland UK

CzechRepublic

France

Sweden

Norway

Croatia

Belgium

SouthKorea

Latvia

Ukraine

Switzerland

Russia

Spain

Austria

NewZealand

Source:IRF,Eurostat,ChinaStatisticalYearbook,Atonestimates

ThehugegrowthpotentialforRussiastransportinfrastructureindustrywouldthereforeappearobvious.However,aswediscussbelow,theprospectofthisgrowthbeingachievedhingesalmostentirelyonwhetherthestateinjectssufficientfinancing.


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Toogoodtobetrue:Thestatesspendingtobescaledback

Overthepast10yearsapproximately90%ofallprojectsinRussiastransportinfrastructureconstructionindustryhavebeenfinancedeitherbyfederalorregionalbudgets.During2008,RussiasTransportMinistryproposedseveralambitiousmodernisationprogrammesforRussiastransportationnetwork.

TheseprojectsincludeTheDevelopmentofRussiasTransportNetworkover201015(approvedbythegovernmentinMay2008),TheDevelopmentofRussiasRailwayTransportThroughto2030(approvedinJune2008)andfinallyTheTransportStrategyofRussiauntil2030(approvedinNov2008).Thesethreeprogrammescombinedimplymorethan$2trninstateinvestmentsintothesectorover201030(excludingspendingonoverlappingprojects).

Ofcoursetheseproposedspendinglevelsweredrawnupbeforethecrisis,inavastlymorefavourableclimateofhigheroilprices,greateravailabilityofcredit,andstrongereconomicgrowth.Thoughthestatehasyettoproviderevisedforecastsforitsspendingplans,forthesakeofourmodelswehaveproducedadjustedprojections,showninFigure8below.

Figure8:Statespendingonhighwayinfrastructure($bn)

0

5

10

15

20

25

30

35

40

45

50

2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Initialp la ns At onestimates

Source:MinistryofTransport,Atonestimates

For2009,weestimatethatthestatesspendingonhighwayinfrastructurefellbyaround55%to$7bn.Goingforward,weassumethatinvestmentintothesectordoesnotreturntothe200708levelsof$1719bnuntil2015.

Ontheupside,wenotethatalthoughspendingwasmassivelycutinmoneyterms,weneverthelessexpectphysicalvolumes,i.e.kilometresofroadsconstructed,numberofbridgesputintooperationetc,toseealesspronounceddecline.Webelievethiswouldlargelybeduetolowerconstructionmaterialsprices,i.e.cement,structuredsteel,concrete,andothers,whichhavefallen40%onaveragefromtheir2008peaksduetotheslowdownintheconstructionindustry.

Asaresult,weestimatethatatleast900kmofnewfederalhighwayswillbeconstructedin2010,oran11%decreaseon2009(thissharplycontrastswithanapproximate55%estimateddropindollarterms).


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Nevertheless,the1,010kmincreaseinRussiasfederalhighwaynetworkin2009expandedtheoverallnetworklengthbyanunexciting1.8ppts,whileChinashighwaysystemgrewbyabout6%YoYin2009,orby6,756kmaccordingtotheTransportUnifiedDevelopmentAssociation(TUDA).

StockselectionInlightofthemassiveinfluenceoffederalandregionalbudgets(aswellasstateowned

companiessuchasRussianRailways)ontransportinfrastructurespending,havingfinancedaround90%ofallprojectsoverthepastdecade,theuncertaintyovertheextentofthepullbackinstatespendingcomplicatesthestockselectionprocess.

Withthisinmind,weshiftourfocusawayfromplanstooverhaultheentiresectorandinsteadconcentrateoncompaniesundertakingprojectswhichwefeelareeitherpoliticallytooimportanttobecancelled,orwherestatespendinghasalreadybeenearmarkedforthenextthreeyears.Thissecondapproachalso,inourview,bringsthesectorwithinatighterinvestmenthorizon,inthecontextofstateprogrammeswithextremelydistant2030enddates.

Toopoliticaltofail:APEC2012summitandthe2014SochiWinterOlympics

WehavethereforesingledoutVladivostokandSochi,locatedatoppositeendsofthecountry,aslikelyfocalpointsforinvestmentintheshorttomediumterms.

APEC2012.LocatedinRussiasFarEastregion,VladivostokisduetohosttheAsiaPacificEconomicCooperation(APEC)summitin2012.

Establishedin1989,APECisaforumof21PacificRimcountrieswhichcooperateonregionaltradeandinvestmentwiththeobjectiveofenhancingeconomicgrowthandprosperityintheregion.APECestimatesthatitsmembersaccountforapproximately40%oftheworldspopulation,around54%ofglobalGDP,andabout44%ofworldtrade.

Inestimatingthecostsofhostingthe2012summit,theRussiangovernmenthas

downsizeditsfirstprojectionofspendingofaroundRUB382bn($14bn).Later,attheendof2008,thegovernmentestimatedexpenditureofRUB284bn($10.2bn),includingRUB202bn($7.3bn)earmarkedbythefederalbudget,necessarytocarryoutessentialinfrastructureimprovementsintheregion.Theseincludeupgradeworksonthesewagesystem,roads,bridges,andwaterpipesaswellastheconstructionofahugeconferencecentretohostthesummit.

Amongthemajortransportinfrastructureprojectsduetobeundertakenintheregion,wehighlightthebuildingofa3,150metresuspensionbridgefromVladivostoktoRusskyIsland(thelocationoftheplannedconferencecentre).AcontractworthRUB17.9bn($600mn)tobuildthisbridge,whichcrossestheGoldenHornBay,waswoninJune2008byPacificOceanBridgeCompany.

Additionally,alsointheregionUSKMOSTisundertakingasecondmajorbridgeprojectwhichcrossestheEasternBosphorustoRusskyIsland.PresidentDmitryMedvedevapprovedthisprojectandtheawardingofthecontracttoUSKMOSTasgeneralcontractorinAug2008.ThecontractwasvaluedatRUB32.2bn($1.1bn)by2012.


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Figure9:APEC2012


Separately,wenotethattheeconomicdownturnhasnaturallyraisedconcernsthatthestatewouldbeunabletocompletethesehugeredevelopmentprojectsintimeforthesummitandsowouldhosttheeventinStPetersburginstead.However,westressthatPutinhasstronglyemphasisedtheimportanceofhostingtheeventinVladivostokascurrentlyplanned.Forourpart,weseelittlelogicinhostinganAPECsummitintheEuropeanpartofRussia.

Stockstowatch:

Webelievethatatleasttwolistedcompanies,DalmostostroyandBamtonnelstroy,shouldbenefitfromtheplannedturnaroundinVladivostokstransportinfrastructure.WealsohighlightISKImpulsewhichweexpecttocapitaliseonbridgeconstructionactivityintheregion.Pleaserefertothecompanysectionsofthisreportforfurtherdiscussion.

XXIIWinterOlympicGamestobeheldinSochi2014.InMar2009,DeputyPrimeMinisterDmitryKozaksaidthatcoststoconstructthenecessarysportingfacilitiesandotherinfrastructurewouldbearoundRUB218bn($7.2bn).

Ontopofthis,thestateplanstobuildahighwayandrailwaybetweenAdlerandKrasnayaPolyana(connectingtheregionalairportwiththeskiresort)whichcouldcostafurtherRUB242bn($8.1bn),pushingthetotalconstructioncostsupto$15.3bn.

Thisfigureexceedseventhestatesinitialstrategyapprovedin2006,whichenvisagedspendingofRUB313.9bn($11.2bn),includingRUB185.8bn($6.6bn)offederalbudgetfunds.Thoughtheseare,admittedly,largesumsamidaweakeconomicclimate,westressthatmuchoftheinfrastructureplannedtobebuiltisnecessaryinordertocomplywiththeInternationalOlympicCommitteesstandards.Thisincentive,wefeel,improvesthelikelihoodoftheprojectsactuallycomingtolight.


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Figure10:ThecostofhostingpreviousOlympicGames($mn)

AmongtheproposedmajortransportinfrastructureprojectsinSochiwehighlightthefollowing:

Figure11:Selectedtransportinfrastructureconstructionprojects

Project TimeframeProject'svalue

($mn)

General

contractor

SectionofCentralhighwayinSochi:theDjugbaSochiM27federalhighway

200911 751Tonnelny

otrjad#44

TransportintersectiononM27federalhighway 200912 77.5 Mostostroy11

TransportintersectiononKurortnyProspect 200911 57.5 Mostotrest

Transportintersectionon"AdlerRing" 200911 164.6 Mostotrest

TransportintersectionofM27federalhighway 200911 100Inzhtransstroy

Corporation


Nevertheless,wereiteratethatthestandoutprojectoftheplannedtransportinfrastructureconstructionprogrammesintheregionisaparallelhighwayandrailwaybetweenAdlerandKrasnayaPolyana.Thisroadisintendedtoextend49kmandincludesixrailwaytunnels,threeautomobiletunnelsandthreeservicetunnels,withatotallengthof27,412km.Allinall,thenewhighwayshouldgivehometo28bridges,59caroverpasses,andthreenewtrainstations.ThecombinedroadfromAdlertoAlpikaServis(KrasnayaPolyana)shouldbefinishedby3Q11.Asnotedabovethestate,theprojectschieffinancer,hasestimatedthetotalcostofconstructingtheAdlerKrasnayaPolyanahighwayatRUB242bn($8.1bn).USKMOSTandBamtonnelstroyareengagedintheconstructionprocess.

Stockstowatch:

WebelievethatthelikesofBamtonnelstroy,Mostotrest,InzhtransstroyCorporationandTransstroyCorporationshouldbenefitthemostfromthetransportinfrastructureturnaroundinSochiasthesecompanieshavealreadywonconstructiontendersintheregion.Pleaserefertothecompanysectionsofthisreportformoreinformation.

Olympics Costtohost

2008SummerOlympics(Beijing) 34,000

2004SummerOlympics(Greece) 16,000

2014WinterOlympics(Sochi) 15,300*

2010WinterOlympics(Vancouver) 5,700

2000SummerOlympics(Sydney) 4,258

1996SummerOlympics(Atlanta) 1,800

2006WinterOlympics(Turin) 1,362

2002WinterOlympics(SaltLakeCity) 1,300

1998WinterOlympics(Nagano) 875

*EstimateaccordingtoMinistryofTransport,RussianRailways,andOlympstroy



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Industry risks

LikeothersmallcapRussianstocks,therisksbothtocompanyperformanceandminorityshareholdersforthenamescoveredinthisreportaresubstantial.WehaveoutlinedthekeythreatshereandattemptedtoreflecttheserisksinourcompanyspecificriskpremiumsincorporatedintoourWACCcalculations.

Mediocretransparencyandpoorcorporategovernance

WebelievethatbyfarthemostsignificantrisktominorityshareholdersinRussiastransportinfrastructureindustryispoortransparency.SectorcompaniesdonotproducefinancialstatementsonaconsolidatedbasisorinaccordancewithIFRS.

Shareholderstructuresarealsooftenhighlycomplex.Furthermore,veryfewcompanieshaveacodeofcorporategovernanceandevenfewerhaveestablisheddepartmentstocommunicatewithinvestorsandshareholders.

Thatsaid,wehaveobservedimprovementsintheindustry.Forexample,MostotrestplanstoprepareIFRSbasedfinancialreportsfrom2010whileBamtonnelstroyhasstartedpublishingitsquarterlyreportsunderRAS.

Inefficientprocedures

for

state

tenders

Therequirementsforcompaniestoparticipateinstatetendersforconstructionprojectsareratherlax.Thiscanthereforeresultinacompanywithapoortrackrecordorinsufficientcapacitywinningacontractsimplybyofferingaheftydiscounttothetendersstartingprice.

Oftenthiscompanythen,duetoalackofcapacity,hiressubcontractors(usuallyotherparticipantsfromthetender)tocompletetheproject,placingheavypressureontheothercompaniesmargins.

Nevertheless,webelievethatthedilapidatedstateofRussiastransportinfrastructureandthemassivevolumeoffundswhichthegovernmentintendstoinvestinthesector

arelikelytobestrongincentivesforthestatetograduallyimprovetheproceduresforitstenders.

Lowstockliquidity

Lowshareliquidityisanotherstrainonsectorstocks.ThecombinedaveragedailyturnoverforMostotrest,Dalmostostroy,BamtonnelstroyandMostootrjad19barelyexceeds$1mn.Also,mostsectorcompanieshavetheirshareslistedontheRTSBoardRussiasOTCmarket.

Almosttotaldependenceonstateorders

Theeconomicslowdownhasraisedthestrongpossibilityofaslashinthestatescolossaltransportinfrastructurespendingplans,whichwereoutlinedpriortothecrisis.Inlightof

thegovernmentsfundamentalroleinfinancingthevastmajorityofsectorprojects,wehaveconservatively modelleditsspendingonroadinfrastructuretobecutby50%in2010E,60%in2011E,60%in2012Eand60%in2013Efromtheexistinglevelsoutlinedinthecurrentstateprogrammes.Thesediscountsarebasedonoursubjectiveassumptions,whichwerederivedfromouranalysisoftheprojectsconstructionmaterialrequirements,aswellasthenecessitytoupgradeinfrastructureintheparticularregionsinvolved.


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Road infrastructure industry overview

Thecostsstructure:Buildingayellowbrickroad

Roadconstructionisanexpensivebusiness.InFigure12wepresentapproximateestimatesforthebreakdownoftheconstructioncostofonekilometreoftwolaneroadinordertoprovidereaderswitharoughideaoftheconstructioncostsinRussia.ThesecalculationsarebasedondatafromtheMoscowStateAutomobileandRoadTechnical

University(MADI).

Figure12:Breakdownofroadconstructioncosts(onekilometreoftwolaneroad)

Labourcosts,

10%

Otherexpenses,

4%Contingencies,

10%

Finishing,5%

Designand

engineering, 7%Projectingand

construction

supervision,6%

Roadexcavation

and ground

works,

13%

Baseline

construction

materials,45%

Source:MADI,Rosstroy,IRN,Rosavtodor,Atonestimates

Figure13:Constructionmaterialsneededtobuildonekilometreoftwolaneroadwith

aspeedlimitof80km/hr

Volume

(m2)

Volume

(m3)

Mass

(tonne)

Width

(cm)

Price

($/tonne

or $/m3)

Costs($)

Base:

Sand 12,930 3,795 25 27 101,199

Crushedstone4070mm 7,780 1,859 18 53 99,169

Asphalt: 7,000

BTypeSolidbitumenblendlabeledII

696 4 67 46,387

Granularbitumenblend 1,368 8 63 86,627

LiquidbitumenSG70/130 6 3 267 1,680

Finishing: 7,000

Blackcrushedstone1525mm 190 22 4,110ThickbitumenBND90/130 6 417 2,514

Totalcost 341,686

Source:MADI,Atonestimates

Basedonretailprices,wecalculatethatinRussiaaround$342,000(excludingVAT)isneededtopayforbaselineconstructionmaterialsinordertobuildonekilometreofstandardtwolaneroadwithaspeedlimitof80km/hr.

Althoughspendingonconstructionmaterialshashistoricallybeenthelargestcostcomponentinroadconstruction,Figure14showshowcostsonaverageincreaseby1.5xifabridge,overpassorintersectionisalsobuilt.


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14

Figure14:Constructioncoststobuildonekilometreoftwolaneroadwithan80km/hrspeedlimit($000sperkm)

0

150

300

450

600

750

900

1,050

1,200

1,350

Design a nd

engineering

Projecta nd

construction

supervision

Road

excavation

a nd ground

works

B as el i n e

construction

materials

Labourco sts F in is hi ng Co nti nge nci es Othe r

expenses

Total

expenses

+Bridge,

overpass,

intersection


Finally,apartfromdirectcostsassociatedwithroadconstruction,therelocationofexistinginfrastructuresuchasresidentialbuildingscanalsosubstantially increasethefinalbill.Thechartbelowdemonstrateshowsuchcostscandramaticallypushuptotalexpenditure.

Figure15:Constructioncoststobuildonekilometreoftwolaneroadwithan80km/hrspeedlimit($mnperkm)

0

5

10

15

20

25

30

35

40

45

50

Total expens es +Bridge,overpass,

intersection

Relocation ofexisting

infrastructure(Samara)


infrastructure(StPetersburg)


infrastructure(Moscow)


Overall,ourestimatessuggestthatconstructioncoststobuildonekilometreoftwolaneroadinthecityofSamara(amediumsizedcitywithapopulationof1.1mn)wouldbearound$1.7mn,whileitwouldcostmorethan$45mntoconstructthesameroadinMoscow.

Inlightofthesedramaticdifferences,webelieveitismoreappropriatetoassesseachprojectseparately.


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15

Figure16:Summaryofconstructioncosts

Coststoconstructonekilometreoftwolaneroad $perkm

Totalcosts,excludingbridgesandtherelocationofexistinginfrastructure 759,303

Totalcosts,includingbridgesbutexcludingtherelocationofexistinginfrastructure 1,236,128

Totalcosts(Samara),excludingbridges 1,655,636

Totalcost(StPetersburg),excludingbridges 14,667,969

Totalcost(Moscow),excludingbridges 45,759,303


WehavelistedbelowsomeoftheprojectsfeaturedintheTransportMinistrysstrategyknownasTheDevelopmentofRussiasTransportNetworkover201015.

Figure17:Selectedroadconstructionprojectsover201015

Project Length(km) Timeframe Totalcost($mn) Cost($mn/km)

M4Don(Moscow Voronezh RostovonDon Krasnodar Novorossiysk) 1,521 20102015 29,469 19.4

Moscow StPetersburg 626 20102015 18,917 30.2

CentralringroadinMoscowRegion 520 20102015 15,664 30.1

M5Ural(Moscow Ryazan Penza Samara Ufa Chelyabinsk) 1,155 20102015 6,773 5.9

M7Volga(Moscow Vladimir NizhnyNovgorod Kazan Ufa) 668 20102015 4,073 6.1

M1Belarus(Moscow Belarus) 97 20102015 2,163 22.3

M2Crimea(Moscow Tula Orel Kursk Belgorod Ukraine) 155 20102015 1,679 10.8

VelikyNovgorod UstLuga 261 20112015 1,653 6.3

M27Dzhugba(Sochi Georgia) 17 20102015 1,446 85.1

M9Baltic(Moscow Volokolamsk Latvia) 69 20112015 1,106 16.0

M8Kholmogori(Moscow Yaroslavl Vologda Arkhangelsk) 44 20102015 1,102 25.0

Average 23.4

Source:MinistryofTransport

Wealsonotethatroadconstructioncostsvaryconsiderablyfromcountrytocountry.

Figure18:Selectedroadconstructionprojectsworldwide

Project Country Cost($mn/km)

entvidKoseze(A2) Slovenia 74.8

TunnelunderYangtzeRiver China 73.6

A45 France 54.4

Sverepec Vrtier(D1) Slovakia 42.2

I5EverettHOV US 22.9

Krapina Macelj(A2) Croatia 20.4

Route87 US 19.5

M60project(planned) Hungary 16.4

US395NorthSpokaneFreeway US 14.5

Autobahn17 Germany 14.1

TheEgnatiamotorway(A2)(planned) Greece 12.0

VermiceMerdareHighway(planned) Kosovo 10.5

Autobahn20 Germany 8.8

SR527164thto132nd US 5.1

NewJerseyTurnpike US 3.5

GardenStateParkway US 2.8

OhioTurnpike US 2.2

JawaharlalNehruPort Dari India 1.9

Average

22.2

Source:IRF,Eurostat,USDT,TUDA,Atonestimates


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16

Industrystructure:Thestateisthelifeblood

Asmentioned,federalandregionalbudgetsaswellasspendingbystatecontrolledcompanieslikeRussianRailwayshavefinancedmorethan90%ofroadconstructionprojectsinRussiaoverthepastdecade,accordingtotheMinistryofTransport.Indevelopedcountriesthissharehasgenerallynottopped3040%.

Thissituationis,inourview,theproductoftheabsenceofeffectivelegislationgoverningprivateownershiporoperationofroadsinRussia.Simplyput,thelackofalawregulatingpublicprivatepartnerships(PPPs)inRussialargelypreventslocalandinternationalcompaniesfrominvestinginroadinfrastructure.Asaresult,thestateiscurrentlytheonlymajorsourceoffinancingforroaddevelopmentinthecountry.

Tenderprocess.Wenotethatin2008thestateintroducedanewlawtighteningthecriteriaforparticipatinginstatetendersforconstructionprojects.Forexample,participatingcompaniesshouldhavecompletedsimilarprojectsovertheprecedingfiveyearswithacumulativevalueofatleast20%ofthevalueofthecurrenttender.Also,participantsarerequiredtomakeadepositof1030%oftheprojectsvalueifitexceedsRUB500mn($16mn).

Theintroductionoftheseruleswasaimedatlimitingtheuseoffrontcompaniesandimprovingtendertransparency.Wenotethatpriortothislawcomingintoforcetherewerefrequentlyinstancesofcompaniesbeingcreatedwiththesolepurposeofwinningatenderatanycost,namelythroughdampeningprices.Usuallysuchfrontcompaniesdonothavesufficientexpertiseorcapabilitiestoexecutetheactualwork,leadingtodelaysintheprojectactuallymaterialising,costsoverruns,andlossesforsubcontractors.

Althoughinefficienciesinstatetenderprocessesremain,webelievethatthesearebeinggraduallyeliminated.

Financingprocess.Thefinancingscheduleusuallyincorporatesanimmediateadvancepaymentofaround510%ofthecontractsvalue.However,accordingtoour

conversationswithsectorcompanies,statefinancingthroughouttheyearcanbeirregularinitstiming.Thisfactorthusrequiresroadbuilderstoutilisetheirownfundsaswellascreditfacilitiestofinanceworkingcapital.

Constructionprocess.Oneofthemostinterestingfeaturesoftheroadconstructionprocessisthatthegeneralcontractorusuallysubcontractsupto30%ofthecontract.Forexample,thiscouldincludegroundworkswhereitisimpracticaltorelocatethegeneralcontractorsownmachineryorwhenthegeneralcontractordoesnothavesufficientexpertiseincertainareas,suchasinsewagesystems.

Themarketstructure:Assessingtheindustrysize

ThereareavastnumberofextremelysmallcompaniesoperatinginRussiastransport

infrastructureindustry,andsoinordertoquantifythemarketintermsofrevenueswehavepreparedasampleofthesecompanies.UsingtheSPARKInterfaxdatabase,ourmainscreeningcriteriawerethatthesamplecompaniesshouldhavealicencetoconstructroadsandbridgesand2008RASrevenuesshouldexceedRUB1bn($33mn).Wealsonotethatoursamplecompaniesaggregaterevenuesaccountedforaround97%ofthesectorstotalrevenuein2008.

Wenotethatsince100outofthe150companiesselectedareeitherclosedjointstockcompaniesorlimitedliabilitycompanies,themostrecentyearwherethereisavailableannualfinancialdataforallofthecompaniesis2008.

OurestimatesindicatethatthesamplecompaniesrevenueshavegrownataCAGRof

50%since2005andreached$20.6bnintotalrevenuesby2008.Thisfigureisconsistentwiththestatesspendingonroadinfrastructurein2008of$19.7bn.


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17

Figure19:Roadconstructionmarket($bn)

6

9

15

21

0

5

10

15

20

25

2005 2006 2007 2008

Revenues Operatingprofit Net

income

50%CAGR

Source:SPARKInterfax,Atonestimates

Wehavealsolistedthetop20transportinfrastructureconstructioncompaniesbyrevenueandnetincome.Wehavehighlightedthelistedcompaniesinoursamplewithitalics.

Figure20:Top20transportinfrastructureconstructioncompaniesbyrevenue,2008

($mn)

Company Revenue Operatingprofit Netincome

Mostotrest(MSTTRU) 1,155 128 20

Mosinzhstroy(MIST

RU)

1,009

22

2

InzhtransstroyCorporation 896 35 16

STROYTREST 653 7 5

Transyzhstroy 563 47 41

Mostootrjad19(MSOTRU) 538 38 19

TransstroyCorporation(KTRSRU) 536 9 1

USKMOST 526 9 5

Transmonolith 519 0 13

Yamaltransstroy(YATSRU) 492 30 17

VAD 419 2 3

Volgomost(VLGMRU) 415 51 24

KHMDS 376 38 25

Bamtonnelstroy(BTSTRU) 367 47 29

POVozrozhdenie 344 0 1

Mostostroy11(MSTSRU) 305 69 41

UKTransyzhstroy 293 3 3

Uralmostostroy 292 41 27

GPR1 258 11 6

Dormost(DRMORU) 251 2 0

Industrytotal 20,644 1,197 597

Source:SPARKInterfax


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18

Figure21:Profitabilityoftop20transportinfrastructureconstructioncompanies,2008

($mn)

Company Netincome Operatingmargin(%) Netmargin(%)

Transyzhstroy 41 8.3% 7.3%

Mostostroy11(MSTSRU) 41 22.5% 13.4%

Bamtonnelstroy 29 12.8% 7.8%

Transsignalstroy(TRSS

RU)

29

18.3%

13.9%

Uralmostostroy 27 14.1% 9.4%

MTFMO4 27 27.5% 13.7%

KHMDS(HMDSRU) 25 10.0% 6.7%

Volgomost(VLGMRU) 24 12.3% 5.7%

Mostotrest 20 11.1% 1.8%

PILON 19 22.3% 17.4%

Mostootrjad19(MSOTRU) 19 7.0% 3.5%

Yamaltransstroy(YATSRU) 17 6.1% 3.5%

InzhtransstroyCorporation 16 3.9% 1.8%

TMK 16 17.6% 11.8%

PERMDORSTROY 15 8.3% 6.1%

NVDS 12 13.7% 12.5%

Tunneldorstroy 12 8.8% 5.8%

SKMostVostok 12 17.6% 11.1%

SIBDORSTROY 10 26.6% 20.8%

UFSKMOST 10 9.6% 5.8%

Industrytotal 597 5.8% 2.9%

Source:SPARKInterfax

OuranalysissuggeststhatMostotrestisRussiaslargesttransportinfrastructureconstructioncompanyinrevenueterms.AlthoughthecompanysmarketshareacrossRussiawasjust5.5%in2008,MostotrestwastheleadingbridgebuilderintheMoscow

region

with

a

share

of

more

than

17%,

on

our

estimates.

Thatsaid,webelievethattheindustryshighfragmentationcreatesanexcellentpotentialbackdropforconsolidation.

Industrystructuredevelopments:Potentialconsolidationinsight

RussiastransportinfrastructureconstructionindustrywasmarkedbyhighM&Aactivityover200508asmanysectorcompaniesfoughttocementtheirmarketpositionsinanticipationofsharpgrowthinstatespending.

Duringthatperiod,holdingcompanyRUCOM,togetherwithotherpartners,acquiredcontrolinNovosibirskavtodor(2008revenuesof$91mnunderRAS)andDalmostostroy(2008revenuesof$188mnunderRAS).RUCOMalsocombinedwithRussianRailroadstogaincontroloverMostotrest(2008revenuesof$1.2bnunderRAS).

Inaddition,Infrastructura(aRussianinfrastructureconstructioncompanyinwhichRomanAbramovichheldanundisclosedstakeuntilitwassoldin2009tohisbusinesspartnerValeryAbramson,accordingtoKommersant)boughtinfrastructureconstructionassetsfromSistemaHALS.ThecompanyhasalsorecentlycompletedtheacquisitionofMosinzhstroy(2008revenuesof$1bnunderRAS).


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Figure22:Sectorcompaniesaffiliations,2008

OAOMostootrjad19

OAOYamaltransstroy

ZAOVAD

OAOVolgomost

OAOKHMDS

ZAOPOVozrozhdenie

ZAOUralmostostroy

OAOMosinzhstroy

OAOGPR1

OAODormost

OAOSibmost

OAOMostotrest

OAOMostostroy11

MTFMO4

OAOTransstroyCorporation

ZAOTransmonolith

OAOTonnelnyotryad44

ZAOTransyzhstroyOOO

UK

Transyzhstroy

OAOSTROYTREST

OAOUSKMOST

OAOBamtonnelstroy

ZAOUFSKMOST

OOOTonnelnyotryad12

OOOInzhtransstroyCorporation

OAODalmostostroy

OAONovosibirskavtodor

Revenuescale:$100mn

ZAOINFRASTRUCTURA

OAOMOSTOTREST

OAOTRANSSTROYCORPORATION

OAOUSKMOST

ZAOTRANSYZHSTROY

COMPANIESSATELLITES

Source:SPARKInterfax,Atonestimates

Goingforward,weexpectthepaceofM&Aactivityinthesectortoresumeafterthecreditcrunchinducedslumpin2009.Specifically,weidentifyatleastfourgroupsofcompaniesthatweexpecttobelookingtostrengthentheirmarketpositions:Mostotrest,Infrastructura,TransstroyCorporationandUSKMOST.

Weexpectthesecompaniestoexpandthroughacquiringregionalbridgebuildersandbridgeconstructionmaterialsproducers.Also,potentialmergerswithsatellitecompaniesareverylikely,inourview.Wenote,forexample,thatMostotrestandMostootrjad19arelongtermpartnerswhohavecooperatedonanumberofprojectsinMoscowandSt.Petersburg.Meanwhile,Dalmostostroy(controlledbyoneofMostotrestsmajorshareholders)hasofficiallyaccumulated1%ofthesharesof

Mostootrjad19.

Asafurtherindicatorofthispossibletrend,wenotethatMostotrestacquireda25%stakeinMostostroy11inearlyMar2010(2008revenuesof$305mnunderRAS),andisrampingupitstransportinfrastructureprojectsinRussiasTyumenregion.


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MOSTOTREST

BUY

Fair value $1,374


Bloombergcode MSTTRU

Reuterscode MSTT.RTS

Price,local($) 845

Price,GDR($) n/a

Upsidepotential,local 63%

Upsidepotential,GDR n/a

ADRratio(x) n/a

Sharedata

No.ofordinaryshares 1,241,200

Dailyt/o($) 829,838

Freefloat(%) 12.0%

Freefloat($mn) 126

Marketcapitalisation($mn) 1,049

Enterprisevalue($mn) 1,086

Majorshareholder

MAR O`POLOINVESTMENTSLTD 50.3%

FINANCIALS($mn)

2008

2009E

2010E

Revenue 1,155 1,004 819

EBITDA 150 216 94

Netincome 20 134 36

EPS($) 16.3 107.6 29.3

VALUATION

P/E(x) 51.7 7.9 28.9

P/S(x) 0.9 1.0 1.3

EV/EBITDA(x) 7.3 5.0 11.5

EV/Sales(x) 0.9 1.1 1.3

P/B(x) 6.2 3.3 3.2

RoE

(%)

12% 42% 11%EV/3Yorderbook(x)

0.4 0.4 0.4

PERFORMANCE

1month 3%

3months 34%

12months 248%

52weekhigh($) 845

52weeklow($) 243

WeinitiatecoverageofMostotrestwithaBUY.OurDCFmodelyieldsa12monthfairvalueof$1,374percommonshare,implying63%upsidepotential.

RussiaslargestbridgebuilderMostotrestisRussiaslargestlistedtransportinfrastructureconstructioncompanyintermsofrevenues.AlthoughthecompanysmarketshareacrossRussiawasjust5.5%in2008,MostotrestwastheleadingbridgebuilderintheMoscowregionwithmarketshareinexcessof17%,accordingtoourestimates.

withthepotentialtobecomeevenbigger.InFeb2010,thecompanyrevealedthatithadboughta25%stakeinMostostroy11.Althoughthedealpricehasnotbeendisclosed,thisstakecouldhavebeenvaluedat$25mn,basedonMostostroy

11smarketpriceatthetime.ThisacquisitionreinforcesourviewthatMostotresthasastrongbalancesheetandhasthepotentialtobecometheconsolidationcentreforRussianbridgebuildingassets.

Stronganddiversifiedorderbook...HeadquarteredinMoscow,MostotresthasextendeditsoperationsacrossRussia.Weestimatethecompanysorderbookatabout$3bn,whichweexpecttosecureasteadyrevenueflowover200911.

InadditiontoprojectsinMoscowandStPetersburg,whichweestimatetoaccountforabout47%ofthecompanyscurrentorderbook,MostotrestisengagedinthereconstructionoftheM4Donfederalhighway($357mn),theconstructionoftheAdlerRinginSochi($165mn),aroadintersectionontheM27DjugbaSochiGeorgiafederalhighway($100mn),abridgeprojectinSochi($60mn)andothers.

onthebackofahealthyfinancialprofile.InmidNov2009,Mostotrestreleasedstrong3Q09RASfinancialresults.ThecompanypostedanEBITDAmarginof19%onrevenueof$307mn(+40%QoQ).Atthesametime,netincomegrewby4.7xQoQto$47mn.Inroubleterms,Mostotrestsrevenuewasup28%YoY.For9M09,theEBITDAmarginincreasedby11pptsYoYto21%,whilenetincomereached$108mn.

Webelievethatthesignificantimprovementinprofitabilitywaslikelytheresultofthedropinrawmaterialsprices.Basedon9M09RASfinancials,MostotresthasbecomeRussiasmostprofitablelistedbridgebuilderbyEBITDAmargin.

Improvementintransparencyshouldsupportvaluations.MostotrestsboardofdirectorsmeetinginmidJan2010approvedthecompanystransfertoIFRSandthehiringofKPMGtopreparethecompanysconsolidatedfinancialsfor200809.Weregardthisasapositivesteptowardsbettercompanytransparency,whichshouldinturnsupportthecompanysstockperformance.

Being Number One has its Perks



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21

Mostotrest in brief

Figure23:Shareholderstructure Figure24:Keyfinancialmetrics($mn)

19% 13%

20%

8%5%

14%

6%

13%

Hustell Tra ding IBHB&HRI Rea l i nves t EventusMadura Hol di ngs AcronE on a Co mme rci a l Fre efloat

0

200

400

600

800

1,000

1,200

1,400

2008 2009E 2010E 2011E 2012E

3%

1%

5%

9%

13%

17%

21%

25%

Revenues EBITDANetincome EBITDAmargin(%),rhsNetmargin(%),rhs

Source:Companydata Source:Companydata,AtonestimatesFigure25:2009ECoGSbreakdown Figure26:Geographicaldiversification

37%

31%

6%

6%

5%

3%

12%

Raw materials Wages&socialspendingServices RentFuel&energy DD&AOther

RUSSIAMoscow

SochiVladivostok

Tyumen

Rostov

Saint Petersburg

Source:Companydata,Atonestimates Source:Companydata

Figure27:Mostotrestsaffiliationswithleadingindustrygroups

RUCOM

MarcOPolo

Investments

RussianRailways

Novosibirskavtodor

NPV

MOSTOTREST

Mostostroy11

75%+

25%

Dalmostostroy

50%+

Source:SPARKInterfax,Companiesdata,Atonestimates


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22

Valuation

WehaveusedaDCFmodeltoestimateMostotrestsfairvalue,assuminga3%terminalgrowthrateandaWACCof13.0%.

Figure28:DCFmodel($mn)

2010E 2011E 2012E 2013E 2014E 2015E

Operatingprofit

69

93

180

224

318

298

Tax 14 19 36 45 64 60

NOPLAT 55 74 144 179 254 239

DD&A 25 27 28 31 34 38

Capex 29 33 41 47 56 59

Changeinworkingcapital 54 24 42 31 47 15

FCF 105 44 89 132 185 203

WACC 13.0%

DiscountedFCFs 418

Terminalvalue 2,029

Netdebt,2010E 43

Fairequityvalue 1,705

Numberofshares 1,241,200

Fairvalue($) 1,374

Currentprice($) 845

Upside/(Downside)potential 63%

Impliedvaluationratios

EV/EBITDA(x) 17.6 13.9 8.0 6.5 4.7 4.9

P/E(x) 46.9 31.2 13.4 10.3 7.0 7.5

EV/S(x) 2.0 1.8 1.4 1.2 1.0 1.0


Figure29:Fairvaluesensitivityanalysis

Terminal

growth/WACC10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0%

1.5% 1,705 1,518 1,367 1,243 1,139 1,051 975

2.0% 1,787 1,581 1,416 1,282 1,171 1,078 998

2.5% 1,880 1,651 1,471 1,326 1,206 1,106 1,022

3.0% 1,986 1,730 1,532 1,374 1,245 1,138 1,047

3.5% 2,109 1,820 1,600 1,426 1,286 1,171 1,075

4.0% 2,252 1,923 1,676 1,485 1,333 1,208 1,105

4.5% 2,421 2,041 1,763 1,550 1,383 1,249 1,138


Figure30:

Upside/downside

sensitivity

analysis

Terminal

growth/WACC10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0%

1.5% 102% 80% 62% 47% 35% 24% 15%

2.0% 111% 87% 68% 52% 39% 28% 18%

2.5% 122% 95% 74% 57% 43% 31% 21%

3.0% 135% 105% 81% 63% 47% 35% 24%

3.5% 150% 115% 89% 69% 52% 39% 27%

4.0% 167% 128% 98% 76% 58% 43% 31%

4.5% 187% 142% 109% 83% 64% 48% 35%



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23

Model assumptions

Revenue

WeforecastMostotrestsrevenueusingthecompanysexistingorderbook.Atthesametime,forpotentialnewcompanycontractsoverourforecastperiodweexaminedRussiasTransportStrategythroughto2030toidentifyprojectswhereMostotrestmayparticipate.WethenselectedprojectswhichalignwithMostotrestsgeographicalfocus,

takingintoconsiderationthecompanystrackrecordinspecificregions.

Also,forthesakeofconservatism,wediscountedthestatesspendingontheselectedprojectslistedinthegovernmentsinvestmentprogrammeby50%in2010E,60%in2011E,60%in2012Eand60%in2013E.Thesediscountsarebasedonoursubjectiveassumptions,whichwerederivedfromouranalysisoftheprojectsconstructionmaterialrequirements,aswellasthedegreeofnecessitytoupgradeinfrastructureintheparticularregionsinvolved.

Thirdly,weweightedMostotrestsrevenuefrompotentialcontractsbyasubjectiveprobabilityofbetween65%and80%,basedonourassumptionsonthecompanyslevelofinvolvementineachproject.Wethencalculatedourfinalestimateofthecompanys

revenueflowover201015E.

Figure31:Mostotrestsprojectedrevenuefrommajorprojects($mn)

0

10 0

20 0

30 0

40 0

50 0

60 0

70 0

80 0

2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

KAD(48551 2km) Adler'sRing

BridgereconstructionoverVolga M10 KurortnyprospectM27 Djugba Sochi

M4Don M7Volga

CentralringroadinMoscowRegion MoscowSPBHighway

Source:Companydata,MinistryofTransport,Atonestimates

Wenotethat,duringtheabovedescribedmodellingprocess,apartfromselectingprojectsfromMostotrestshomeregions,i.e.wherethecompanyhasastrongtrackrecord(Moscow,StPetersburg,andRostov),weassumedthatthecompanycouldbidforanumberofinfrastructureconstructionprojectsacrossRussia.Toerronthedownside,weweightedthecompanyspossiblerevenuesfromsuchprojectsbyaprobabilityof2530%.

Finally,inadditiontoconstructionprojects,wemodeltheproportionofrevenuesfrommaintenanceservicesremainingrelativelyflatat1012%overourforecastperiod.


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CoGS

RawmaterialsandlabourcostshaveaccountedformorethanhalfofMostotrestsexpensesoverthepastfiveyears.Goingforward,wedonotexpectanysignificantchangesinthecompanysCoGSstructure.

Weestimatethatstructuredsteel,cement,concreteandgravelaccountedformorethan67%ofallrawmaterialsconsumedbythecompanyover200509.

Aftertherallyinrawmaterialspricesin2007,asignificantcorrectiontookplacein2009onthebackoflowdemandfromconstructioncompanies.

Figure32:Averagewholesalepricedynamicsforbaselineconstructionmaterials

Changein2007 Changein2008YoYchangein

10M09

Portlandcement +70106% 1525% 56%

Concrete +44% +3% 53%

Gravel +10% +15% 39%

Sand +12% +18% 28%

Asphaltmix +11% +36% 11%

Reinforcedconcretesections +3555% +8% 9%

Rebars +1416% 0% +12%

Source:BuildersAssociationofRussia

TheBuildersAssociationofRussiahasindicatedthatconstructionmaterialpricesstartedtotentativelycreepupinNovDec2009,despitepriceshistoricallytendingtoweakenduringthispartoftheyear.

AccordingtotheMoscowStockExchange,cementpricesstabilisedoverDec2009Feb2010at$7375pertonne.

Figure33:Cementprices($pertonne) Figure34:Rolledmetalproductsindex(Jan2008=100%)

0

35

70

105

140

175

210

2000 2002 2004 2006 2008 Feb 2010

90

105

120

135

150

165

180

Ja n0 8 Ma y08 Se p08 Jan09 Ma y09 Se p09 Jan10

Source:Rucem Source:Rusmet


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Giventhedramaticfluctuationsinroadinfrastructureconstructioncostsandrequirementsforconstructionsmaterialsfromprojecttoproject,weestimatedMostotrestsexpenditureonthesecostcomponentsbytrackingthecompanysaveragepricepaidforconstructionmaterialsforthelinearmetreoverthepastfiveyears.WethenmodelledthispricetogrowinlinewithourforecastCPIrateover201015.

Asaresult,weprojectMostotrestsspendingonconstructionmaterialsgrowingata

CAGRof12.0%over200915.

Thesecondbiggestiteminthecompanyscoststructureislabourexpenses.In3Q09thecompanysheadcountwas14,690employees.Goingforward,wedonotanticipateanysignificantchangesinMostotrestsnumberofpersonnelandhencemodeltheaveragesalarytogrowinlinewithourCPIforecastplus3ppts(thisadjustmentistoreflectthehighercostoflivinginMoscow,wherethecompanyoperates,comparedwithotherRussianregions).

EBITDA

Over200508MostotrestsfullyearEBITDAmarginfluctuatedbetween1013%.However,in2009itjumpedto30%in1Q09.Itdroppedbackto13%in2Q09androse

againto24%in3Q09.

Figure35:EBITDAmarginforecast

10%

7%

8%

13%

12%

13%

18%

19%

22%

20%

22%

24%

13%

30%

14%

16%

13%

1%0%

5%

10%

15%

20%

25%

30%

35%

200

5

200

6

200

7

1Q0

8

2Q0

8

3Q0

8

4Q0

8

200

8

1Q0

9

2Q0

9

3Q0

9

2009

E

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

Source:Companydata,Atonestimates

WelargelyattributethewiderEBITDAmarginstothecollapseinrawmaterialprices.Inaddition,MostotrestmanagedtocurbSG&Agrowthto19%YoYin9M09,whilerevenuesexpanded28%YoYoverthesameperiod.


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26

Although2009islikelytobeexceptionallystrongintermsofEBITDAmarginsforMostotrest(weforecasta22%marginvs13%in2008),weanticipatethecompanysprofitabilitydecreasingto12%in2010onthebackofanumberofprojectsinSochiandMoscowreachingtheirpeakconstructionphasesandthusdemandinglargescalepurchasesofconstructionmaterials.Lookingfurtherahead,weforecastMostotrestsEBITDAmarginrecoveringto2009levelsonlyby201314thankstoimprovementsinconstructiontechnologyandthefinalstagesoftransportinfrastructureconstruction

projectsinSochi,Rostov,MoscowandStPetersburg.

Netincome

Weapplyastandard20%corporatetaxrateinourforecasts.Wealsoassumenodividendpaymentsasthecompanydoesnothaveadefineddividendpolicyandhasnotpaidoutdividendssince2005.

Balancesheetandcashflowstatement

Mostotresthasahealthybalancesheetwithanetdebt/EBITDAratioof40%for9M09.Althoughthecompanyheldaround$200mninshorttermborrowingsattheendof3Q09(87%ofthetotaldebt),webelievethatthisdebtburdenismanageable.

Firstly,Mostotrestscashpositionatthispointwas$130mn.Secondly,thestatesrequirementthatconstructioncompaniesdeposit1030%ofaprojectsvalueinordertoparticipateinatendermeansthatbridgebuilderstendtoholdalargeportionofshorttermdebtontheirbalancesheet.

Mostotresttypicallyentersasmanytendersaspossibleinordertoimproveitschancesofwinningandsomusthavesufficientfundsonhand.Furthermore,giventhatatenderprocesscanlastforseveralmonths,bridgebuilderssometimeshavetodrawcredittosupporttheirliquiditypositions.

WealsonotethatMostotresthasrelativelylowcapexrequirements,whichhistorically

havenotexceeded5%ofrevenue.Sincewedonotmodelthecompanymakinganysignificantacquisitionsduringourforecastperiod,weassumethatthecompanywouldbeabletofinanceitscapexthroughitsownoperatingcashflow.

Westressthatthislowlevelofinvestmentdoesnotgenerallyresultinproblemswithcapacitydeficitsasbridgebuilderscanusuallyeasilylocatesubcontractorstocompleteprojects.However,weestimatethatthisapproachresultsinthecompanysacrificing35%ofaprojectsgrossmargin.


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27

Financial forecasts

Figure36:RASIncomestatement($mn)

2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Revenues 1,155 1,004 819 939 1,165 1,336 1,594 1,680

COGS 913 730 673 763 881 990 1,137 1,236

Grossprofit 242 274 146 176 284 346 458 444

SG&A 114 80 77 83 104 122 140 145

Operatingprofit 128 194 69 93 180 224 318 298

EBITDA 150 216 94 119 208 255 351 337

EBIT 78 189 66 91 178 223 317 298

Financialexpenses 38 21 19 21 18 14 12 11

Nonoperatingprofit 28 70 57 45 34 26 20 15

Nonoperatingexpense 79 75 60 47 36 27 20 15

Pretaxprofit 44 168 47 70 161 209 305 287

Incometax 21 34 9 14 32 42 61 57

Netincome 20 134 36 55 128 166 243 229


Figure37:RASBalancesheet($mn)

2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Inventories 164 148 121 139 162 182 209 227

VAT 2 3 3 3 4 4 5 5

Accountsreceivable 147 205 148 172 215 247 295 310

STinvestments 151 25 21 20 18 16 14 12

Cashand ashequivalents 58 198 233 286 332 422 577 759

Totalcurrentassets 522 581 526 620 731 870 1,100 1,314

PP&E 103 115 111 122 135 149 168 187

Constructioninprogress 13 16 15 16 18 20 23 25

LTinvestments 5 6 5 4 3 3 2 2

Other 4 4 4 4 4 4 4 4

Totalnoncurrentassets 126 141 135 146 160 176 198 218

Totalassets 648 722 661 767 891 1,046 1,297 1,532

STborrowings 260 207 152 177 147 119 100 87

Accountspayable 186 160 131 150 175 196 225 245

Othercurrentliabilities 0 7 6 5 4 3 3 2

Totalcurrentliabilities 446 375 288 332 326 318 328 334

LTborrowings 28 28 38 32 29 25 24 24

Deferredtaxliabilities 5 3 2 2 2 1 1 1

Totalnoncurrentliabilities 34 31 41 34 30 27 25 25

Totalliabilities 479 406 329 366 356 345 353 358

Totalequity 168 316 332 401 534 701 944 1,174

Totalequity&liabilities 648 722 661 767 890 1,046 1,297 1,532



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28

Figure38:RASCashflowstatement($mn)

2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Cashflowsfromoperatingactivities

EBIT 78 189 66 91 178 223 317 298

Adjustmentsfor:

DD&A 22 22 25 27 28 31 34 38

Operatingcashflowsbeforeworkingcapitalchanges 100 211 91 117 206 254 351 336

(Increase)/decreaseininventories 36 16 27 18 22 20 27 18

(Increase)/decreaseinreceivables 79 59 57 24 43 32 48 16

(Increase)/decreaseinothercurrentassets 169 126 4 2 2 2 2 2

(Decrease)/increaseinpayables 50 26 30 20 24 22 29 20

Netchangeinothernoncurrentassets&liabilities 0 4 0 0 0 0 0 0

Cashgeneratedfromoperations 23 272 150 96 167 225 307 324

Incometaxpaid 24 34 10 15 33 43 62 58

Interestpaid 38 21 19 21 18 14 12 11

Netcashflowsgeneratedfromoperatingactivities 39 217 121 60 117 168 233 254

Cashflowsfrominvestingactivities

Capex 47 37 29 33 41 47 56 59

Netcashusedininvestingactivities 47 37 29 33 41 47 56 59

Cashflowsfromfinancingactivities

Proceedsfromborrowings 122 0 12 19 0 0 0 0

Repaymentofborrowings 33 47 45 8 36 32 20 14

Dividendspaidtoshareholders 0 0 0 0 0 0 0

Netcash(usedin)/generatedfromfinancingactivities 89 47 33 10 36 32 20 14

FXadjustments 38 7 24 16 6 0 1 0

Netchangeincash 34 140 35 53 46 89 156 182

Cashatthebeginningoftheyear 93 58 198 233 286 332 422 577

Cashattheendoftheyear 58 198 233 286 332 422 577 759



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29

DALMOSTOSTROY

BUY

Fair value $183


Bloombergcode DMOARU

Reuterscode DMOAI.RTS

Price,local($) 109

Price,GDR($) n/a



ADRratio(x) n/a

Sharedata

No.ofordinaryshares 669,222

Dailyt/o($) 62,241

Freefloat(%) 16.4%

Freefloat($mn) 12

Marketcapitalisation($mn) 73

Enterprisevalue($mn) 106

Majorshareholder

DCC(nominee) 62.6%

FINANCIALS($mn) 2008 2009E 2010E

Revenue 188 155 197

EBITDA 16 17 22

Netincome 4 4 9

EPS($) 5.7 6.5 13.4

VALUATION

P/E(x) 19.0 16.7 8.1

P/S(x) 0.4 0.5 0.4

EV/EBITDA(x) 6.8 6.4 4.9

EV/Sales(x) 0.6 0.7 0.5

P/B(x) 1.1 1.1 0.9RoE(%) 6% 7% 11%

EV/3Yorderbook(x)

0.2 0.2 0.2

PERFORMANCE

1month 0%

3month 24%

12month 18%

52weekhigh($) 120

52weeklow($) 70

WeinitiatecoverageofDalmostostroywithaBUYrating.BasedonaDCFmodelweestimatea12monthfairvalueof$183percommonshare,implying68%upsidepotential.

AttractiveexposuretoRussiasFarEastHeadquarteredinKhabarovsk,DalmostostroyistheleadingbridgeconstructioncompanyinRussiasFarEastregion.Thecompanysrevenuein2008was$188mn,withabout64%ofthisgeneratedfromtheconstructionofrailwaybridgesand27%fromroadbridges.Thecompanyestimatesthatitheldabout40%ofthebridgeconstructionmarketinRussiasFarEastin2008.

andthetransportinfrastructureturnaroundforAPEC2012.VladivostokistohosttheAsiaPacificEconomicCooperationsummitin2012.In2008,theRussianstateoutlinedspendingofaroundRUB284bn($10.2bn),includingRUB202bn($7.3bn)earmarkedbythefederalbudget,tooverhaultheregionsinfrastructureinpreparationforthesummit.Addingsupporttothestatesplans,PrimeMinisterVladimirPutinhasspecificallynamedstatespendingonAPEC2012projectsasatoppriorityandanareawherecutbacksduetotheeconomicclimateshouldbelimited.

InNov2008,DalmostostroysignedasubcontracttobuildabridgeovertheGoldenHornBayinVladivostok. ThecompanyshouldreceiveaboutRUB7.2bn($240mn)inrevenuesfromthisprojectuntil2011.Inaddition,Dalmostostroysigned$180mninnewcontractsinlate2009,increasingthecompanysoverallorderbookto$680mn

over

2010

12.

Improvementsincorporategovernanceapotentialtrigger...DalmostostroystandsoutamongitssectorpeersforcreatingacorporaterelationsdepartmentinDec2008inanattempttoimproveitscorporategovernance.Also,thecompanyreportsquarterlyfinancialresultstimely,whileitsannualreportsruncomprehensiveanalysisofthecompanysplans,includingcapextargets.

However,areasforimprovementareaplenty.Thecompanystillhasmuchtodoonthisfront.Forinstance,afterDalmostostroywonthecontracttoconstructabridgeovertheGoldenHornBayinNov2008,itwasrequiredunderRussianlawtomakeabuybackoffertoitsshareholdersasthecontractsvalueexceededthecompanysnetassetvalue(NAV)atthetimebymorethan50%.ThecompanysetthebuybackpriceatRUB3,590pershare($137pershare),oraround10%belowthemarketpriceof$150atthetime.

Also,inMay2009Dalmostostroyannouncedplanstoparticipateinatender(whichwaslatercancelled)toreconstructabridgeovertheAmurRiverinKhabarovsk.Giventhatthepotentialcontractsvalue(RUB9.2bn,$306mn)exceededthecompanysNAV,Dalmostostroyoffereditsminorityshareholdersabuybackoption.However,thepricewassetatRUB999.09pershare($31pershare)whilethemarketpricewas$85.

AtickettotheFarEast.WebelievethatDalmostostroycouldbeviewedasatemptingacquisitiontargetforconsolidationandexposuretoRussiasFarEastprojects.ThecompanycouldultimatelyendupinMostotrestsorbit,inourview.

Building Up Russias Eastern Corner



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30

Dalmostostroy in brief


63%

21%16%

DalmostostroyBC DCC(nominee) Others

0

50

100

150

200

250

300

2008 2009E 2010E 2011E 2012E

0%

3%

5%

8%

10%

13%

15%


Source:Companydata Source:Companydata,Atonestimates

Figure41:

2009E

CoGS

breakdown

Figure

42:

Geographical

locations

37%

12%

4%

3%

2%

13%

29%

Rawmaterials Wages &social spendingServices RentFuel&energy DD&AOther

RUSSIAMoscow

Vladivostok

Saint Petersburg

Source:Companydata,Atonestimates Source:WorldFactBook,Companydata,Atonestimates

Figure43:Dalmostostroysaffiliationswithleadingindustrygroups

RU

COM

MarcOPolo

Investments

RussianRailways

Novosibirskavtodor

NPV

MOSTOTREST

Mostostroy11

75%+

25%

Dalmostostroy50%+



31/57

31

Valuation

WeusedaDCFmodeltoestimateDalmostostroysfairvalue.Weapplieda3%terminalgrowthrateandaWACCof14.0%.


2010E 2011E 2012E 2013E 2014E 2015E

Operatingprofit

18

22

28

34

28

38

Tax 4 4 6 7 6 8

NOPLAT 15 17 22 27 23 30

DD&A 4 5 6 6 7 7

Capex 10 12 13 9 9 7


FCF 8 5 14 23 37 17

WACC 14.0%

DiscountedFCFs 60

Terminalvalue 157

Netdebt,2010E 31

Fairequityvalue 122

Numberofshares 669,222

Fairvalue($) 183

Currentprice($) 109



EV/EBITDA(x) 7.0 5.7 4.5 3.8 4.4 3.4

P/E(x) 13.6 9.7 6.8 5.1 5.8 4.2

EV/S(x) 0.8 0.6 0.6 0.6 0.8 0.6


Figure

45:

Fair

value

sensitivity

analysis

Terminal

growth/WACC11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0%

1.5% 230 205 184 166 151 138 127

2.0% 240 212 190 171 155 142 130

2.5% 251 221 197 177 160 145 133

3.0% 263 231 204 183 165 150 136

3.5% 278 241 213 189 170 154 140

4.0% 294 253 222 197 176 159 144

4.5% 313 267 232 205 182 164 148


Figure46:Upside/downsidesensitivityanalysis

Terminal

growth/WACC10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0%

1.5% 111% 88% 69% 52% 39% 27% 16%

2.0% 120% 95% 74% 57% 43% 30% 19%

2.5% 130% 103% 81% 62% 47% 33% 22%

3.0% 142% 112% 88% 68% 51% 37% 25%

3.5% 155% 121% 95% 74% 56% 41% 28%

4.0% 170% 133% 104% 81% 61% 46% 32%

4.5% 187% 145% 113% 88% 67% 50% 36%



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32

Model assumptions

Revenue

WeusedDalmostostroyscurrentorderbook,whichamountsto$650mn,toestimatethecompanysrevenuesoverthenextthreeyears.Forlateryears,inasimilarapproachtoourforecastsforMostotrest,weassessedwhichconstructionprojectsincorporatedintothegovernmentsTransportStrategythroughto2030couldinvolve

Dalmostostroy.

Again,forthesakeofconservatism,wereducedthestatesspendingontheselectedprojectsby50%in2010E,60%in2011E,60%in2012Eand60%in2013E.

Furthermore,indeterminingourrevenueestimates,weweightedDalmostostroyspossiblerevenuesfromthesepotentialadditionalcontractsbyacertainsubjectiveprobability(5070%).

Figure47:Dalmostostroysprojectedrevenuefrommajorprojects($mn)

0

50

100

150

200

250

300

2009E 2010E 2011E 2012E 2013E 2014E 2015E

M60 reconstruction733.5750km ZAOMetallurgShaftSpecStroyBridgeoverObriverin Novosibirsk GoldenHornBayM60 Ussuri 51 , 53, 55 BaikalM53 Baikal(UlanUde) Overhaul: 56 LenaYakytskMagadan M54 Yenisey


Asaresult,weforecastDalmostostroystotalrevenuestogrowataCAGRof7.5%overourforecastperiodandreach$240mnby2015.

CoGS

ThecompanysCoGSstructureissimilartoMostotrests,withtheexceptionofservices,whichweestimateconstituted12%ofDalmostostroysCoGSin2009vs6%forMostotrest.Thisdifferenceis,inourview,duetoDalmostostroysrelativelysmallsizecomparedwithMostotrest(thelattersrevenueswere6xhigherin2008).

Nevertheless,giventhatbridgeconstructionisbothcompaniesprimaryactivity,webelievethatourassumptionsregardingMostotrestsrawmaterialscostscanbeappliedtoDalmostostroy.

Asforlabourcosts,weforecastDalmostostroysaveragesalarytogrowinlinewithourCPIforecast.


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33

EBITDA

DalmostostroysEBITDAmarginhasremainedrelativelyflatinrecentyears,hoveringaround13%over200507.Althoughthe2008EBITDAmargincontractedtojust8%(likelyimpactedbythesurgeinconstructionmaterialsprices)weexpectthatbasedonthecompanysstrong9M09results,DalmostostroyshouldproduceanEBITDAmarginofatleast10%in2009.

Goingforward,weconservativelyprojectDalmostostroysEBITDAmargintobelargelyunchangedoverthenextfewyearsandforecastanimprovementonlyin2013.


11%

14%

13%

11%

8%

11%11% 11%

14%

16%

18%

19%

10%

14%

8%

7%

10%

3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2005

2006

2007

1Q08

2Q08

3Q08

4Q08

2008

1Q09

2Q09

3Q09

2009E

2010E

2011E

2012E

2013E

2014E

2015E


Netincome

Wehavemodelledastandard20%corporatetaxrate.WealsoassumethatDalmostostroypaysnodividendsoverourforecastperiodtakingintoconsiderationthatthecompanydoesnothaveaformaldividendpolicy.Thatsaid,thelasttimeitdidpay

dividendswas2006whenthecompanydistributed$1.2mn,or20%ofitsRASnetincome.


Dalmostostroyisfreeofdebtissues,inourview,withanetdebt/equityratioof0.2xattheendof3Q09.Thatsaid,likeitssectorpeerMostotrest,Dalmostostroyalsohasalargeportionofshorttermborrowingswhichareusedasfordepositsduringconstructiontenders.

Nevertheless,goingforwardweexpectthatDalmostostroywouldbeabletofinanceitscapexthroughitsownoperatingcashflow,providedthatitdoesnotlaunchanylargescaleM&Adeals.


34/57

34

Financial forecasts


2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Revenues 188 155 197 239 249 249 193 239

COGS 175 136 172 209 213 206 158 193

Grossprofit 13 19 26 30 37 43 35 46

SG&A 0 5 7 8 9 9 7 8


EBITDA 16 17 22 27 34 41 35 45

EBIT 9 9 14 19 25 33 27 37




Pretaxprofit 6 6 11 16 22 30 26 36

Incometax 2 1 2 3 4 6 5 7

Netincome 4 4 9 13 18 24 21 29



2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Inventories 35 31 39 47 47 46 35 43

VAT 1 1 1 1 1 1 1 1


STinvestments 16 10 9 7 6 5 4 4

Cashandcashequivalents 0 3 2 3 15 33 51 67

Totalcurrentassets 112 100 103 114 128 146 139 172

PP&E 12 17 24 30 34 38 38 39



Totalassets 137 130 144 162 179 199 192 227

STborrowings 37 37 33 31 30 27 7 6



Deferredtaxliabilities 3 2 2 2 2 2 2 2



Totalequity 66 66 78 92 110 134 155 185

Totalequity&liabilities 137 130 144 162 179 199 192 227



35/57

35


2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E


EBIT 9 9 14 19 25 33 27 37

Adjustmentsfor:

DD&A 3 3 4 5 6 6 7 7








Incometaxpaid 2 1 2 3 4 6 5 7

Interestpaid 4 4 3 3 3 3 1 1



Capex 12 10 12 13 9 9 7 8

Netcashusedininvestingactivities 12 10 12 13 9 9 7 8




Dividendspaidtoshareholders 0 0 0 0 0 0 0 0


FXadjustments 1 4 3 1 0 0 0 1






36/57

36

BAMTONNELSTROY

BUY

Fair value (ord.) $4,884


Fair value (pref.) $1,449


Bloombergcode BTSTRU

Reuterscode BTSTI.RTS

Price,ord.($) 3,400

Price,pref.($) 813Upsidepotential,ord. 44%

Upsidepotential,pref. 78%

Sharedata


No.ofpreferredshares 32,896

Dailyt/o($) 64,475

Freefloat(%) 13%

Freefloat($mn) 47



Majorshareholder

SKMOST 87.1%


Revenue 367 350 411

EBITDA 63 83 111

Netincome 29 41 60

EPS($) 219 312 454

VALUATION

P/E(x) 12.6 8.8 6.1

P/S(x) 1.0 1.0 0.9

EV/EBITDA(x) 6.1 4.7 3.5

EV/Sales(x) 1.0 1.1 0.9

P/B(x) 2.5 2.0 1.6

RoE(%) 20% 23% 26%

EV/3Yorderbook(x)

0.3 0.3 0.3

PERFORMANCE

1month 3%

3months 8%

12months 278%

52weekhigh($) 3,625

52weeklow($) 881

WeinitiatecoverageofBamtonnelstroy withaBUY.OurDCFmodelyieldsa12monthfairvalueof$4,884percommonshare,suggesting44%upsidepotential.BasedonaDDMmodel,weestimateafairvalueforBamtonnelstroyspreferredstockof$1,449pershare,or78%upsidepotential.

Russiaslargesttunnelconstructioncompany...BamtonnelstroyisRussiaslargesttunnelconstructioncompanywithacurrentorderbookofaround$2.1bnspanningthenextfiveyears.ThecompanyfaceslimitedcompetitioninRussiagiventhatitisoneofthefewcompaniestoholdtunnelheadingequipmentcapableofconstructingrailroadtunnelsupto13metersindiameter.

undertakingconstructionprojectsinSochi.BamtonnelstroyisengagedintheconstructionofatunnelsystemalongtheAdlerKrasnayaPolyanahighway,whichis

beingbuiltintherunuptotheSochiWinterOlympics.WebelievethatPresidentMedvedevsvisittoBamtonnelstroysconstructionsitesinSochiunderscoresthecompanysimportanceasoneofRussiasleadingconstructionplayers.

Improvementintransparencyshouldsupportvaluations.In2009Bamtonnelstroybrokewithtraditionbypublishingits9M09RASfinancialreport.Priortothisrelease,therewasalmostatotalabsenceofinformationonthecompanysfinancialprofile.WeviewthisdevelopmentasasignthatBamtonnelstroyisstrivingtoimproveitstransparencyandcorporategovernance,whichcouldlendsubstantialsupporttothecompanysstockperformance.

Ahealthyfinancialprofile.OverthepastfiveyearsBamtonnelstroyhasmaintaineditspositionasoneofRussiasmostprofitableinfrastructureconstructioncompanies.

Its9M09EBITDAmarginof20%wassecondonlytoMostotrests23%.AndwhileMostotresthasonlyrecentlyimproveditsprofitability(historicallyitsEBITDAmarginhadnotpreviouslyexceeded13%),Bamtonnelstroysaveragemarginoverthepastthreeyearshasstoodat23%.

Acompellingcaseforpreferreddividends.Bamtonnelstroyspreferredsharesbearafixedpayoutratioof10%.Weestimatethecurrentdividendyieldat11%.

Exposuretoalargeinfrastructureconstructioncompany.WebelievethatBamtonnelstroycouldbeviewedasaninvestmenttoolforgainingindirectexposuretoSKMOST,oneofRussiaslargestinfrastructureconstructioncompanies,giventhatSKMOSTowns87%ofBamtonnelstroy.WeestimatethatSKMOSTs2008consolidatedrevenuesurpassed$1.3bn.Althoughthereislittleevidenceofa

potentialconsolidationofBamtonnelstroy,wearguethatsuchamovewouldsupportthecompanysvaluations,onthereasoningthatifBamtonnelstroybecamepartofalargercompany,itcouldreceiveadditionalordersfromSKMOST

Going for Gold



37/57

37

Bamtonnelstroy in brief


13%

87%

SKMOST Other

0

100

200

300

400

500

2008 2009E 2010E 2011E 2012E

0%

6%

12%

18%

24%

30%


Source:Companydata Source:Companydata,Atonestimates

Figure

54:

2009E

CoGS

breakdown

Figure

55:

Geographical

diversification

39%

10%

4%

3%

6%

8%

30%

Rawmaterials Wages&social spendingServices RentFuel &energy DD&AOther

RUSSIAMoscow

Sochi

VaninoKrasnoyarsk

IrkutskNovosibirsk

Source:Companydata,Atonestimates Source:WorldFactBook,Companydata,Atonestimates

Figure56:Bamtonnelstroys affiliationswithleadingindustrygroups

OAOUSK

MOSTBAMTONNELSTROY

85%+ 100%

OAOSTROY

TREST

SKMGHolding

75%+

OOOTonnelnyotryad12

100%

ZAOUFSKMOST

50%+



38/57

38

Valuation

WehaveusedaDCFmodeltocalculateourfairvalueforBamtonnelstroyscommonshares.Weincorporatea3%terminalgrowthrateandaWACCof13.5%.


2010E 2011E 2012E 2013E 2014E 2015E

Operatingprofit

69

86

81

99

77

54

Tax 15 17 16 20 15 11

NOPLAT 55 69 64 79 61 43

DD&A 25 29 28 25 24 22

Capex 33 25 22 22 22 22


FCF 39 72 59 89 63 38

WACC 13.5%

DiscountedFCFs 247

Terminalvalue 364

Netdebt,2010E 16

Fairequityvalue 485

Numberofshares 98,688

Fairvalue($) 4,884

Currentprice($) 3,400



EV/EBITDA(x) 4.2 4.2 3.7 4.6 6.0 5.1

P/E(x) 8.1 8.4 6.5 8.3 11.7 9.1

EV/S(x) 1.1 1.1 1.0 1.1 1.3 1.2


Figure

58:

Fair

value

sensitivity

analysis

Terminal

growth/WACC10.5% 11.5% 12.5% 13.5% 14.5% 15.5% 16.5%

1.5% 5,682 5,256 4,904 4,607 4,354 4,134 3,942

2.0% 5,850 5,387 5,008 4,691 4,423 4,191 3,990

2.5% 6,040 5,532 5,122 4,783 4,498 4,253 4,041

3.0% 6,254 5,695 5,249 4,884 4,579 4,320 4,097

3.5% 6,499 5,878 5,389 4,994 4,667 4,392 4,156

4.0% 6,782 6,085 5,546 5,116 4,764 4,470 4,221

4.5% 7,111 6,321 5,722 5,252 4,871 4,556 4,291


Figure59:Upside/downsidesensitivityanalysis

Terminal

growth/WACC10.5% 11.5% 12.5% 13.5% 14.5% 15.5% 16.5%

1.5% 67% 55% 44% 36% 28% 22% 16%

2.0% 72% 58% 47% 38% 30% 23% 17%

2.5% 78% 63% 51% 41% 32% 25% 19%

3.0% 84% 67% 54% 44% 35% 27% 20%

3.5% 91% 73% 59% 47% 37% 29% 22%

4.0% 99% 79% 63% 50% 40% 31% 24%

4.5% 109% 86% 68% 54% 43% 34% 26%



39/57

39

ToestimateBamtonnelstroyspreferredsharesfairvalue,wehaveusedaDividendDiscountModel(DDM)inwhichweassumea3%terminalgrowthrate,acostofequityof15.2%,andafixedpayoutratioof10%.

Figure60:DDMmodel($mn)

2010E 2011E 2012E 2013E 2014E 2015E

DPS 181 175 227 177 126 163

DiscountedDPS 181 152 171 116 71

Costofequity 15.2%

Growthinperpetuity 3%

Sumofdiscounteddividendsperpreferredshare 692

TV 1,334

DTV 757

Fairvalue($perpreferredshare) 1,449

Currentprice($perpreferredshare) 813




40/57

40

Model assumptions

Revenue

WeusedBamtonnelstroyscurrentorderbookasabasisforestimatingthecompanysrevenueflowoverthenextfiveyears.Asdiscussed,theshininglightinBamtonnelstroysorderbookistheconstructionofahugetunnelsystemintheSochiregion.

Figure61:

Breakdown

of

Bamtonnelstroys

tunnel

project

in

Sochi

Length(metres) Timeframe

Tunnelsystem1

Railwaytunnel 2,524 1Q092Q13

Servicetunnel 2,366 1Q092Q13

Automobiletunnel 2,296 1Q092Q13

Tunnelsystem4

Railwaytunnel 449 3Q093Q11

Tunnelsystem5

Railwaytunnel 2,857 2Q093Q11

Servicetunnel 2,838 2Q093Q11

Automobiletunnel

1,367

2Q09

3Q11

Tunnelsystem6

Railwaytunnel 407 2Q093Q11

Overalllength:

Totallength 49,000

Highway 21,565

Railwaytunnel 10,409

Servicetunnel 9,329

Automobiletunnel 7,698

Bridges 28

Overpasses 59

Investments(RUBbn) 242

Source:Bamtonnelstroy

Figure62:Bamtonnelstroysprojectedrevenuefrommajorprojects($mn)

0

50

100

150

200

250

300

350

400

450

2009E 2010E 2011E 2012E 2013E 2014E 2015E

Tunnelsystem1 Tunnelsystem4Tunnelsystem5 Tunnelsystem6Kuznetsovskytunnel SmallNovorossiysktunnelSayanoKoshyrnikovotunnelsystems TuapseAdlertunnelsystemsKrasnoyarskmetro Novosibirskmetro



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CoGS

ThecompanysCoGSstructurediffersfromapurebridgebuildersduetothehighershareofDD&A,whichweestimateat6%forBamtonnelstroy.ThehigherproportionofDD&Aistheresultoftheuseofmorecomplexandexpensiveequipmentsuchasroadheadersandtunnelexcavatorsemployedintunnelconstruction.

Nevertheless,thetwobiggestitemsinthecompanysCoGSremainrawmaterialscostsandlabourexpenses.Wehavemodelledrawmaterialscostsmovinginlinewithourestimatesoutlinedearlierinthisreport.ForlabourcostsweforecastthecompanysaveragesalaryrisinginlinewithourCPIforecast,adjustedupwardby2ppts.Wehavemadethisadjustmentinordertoreflectthefactthattunnelconstructionrequiresalargershareofhighlyqualifiedengineers,designersandmachineryoperators.

EBITDA

Asstatedabove,BamtonnelstroyhasremainedoneofRussiasmostprofitabletransportinfrastructureconstructioncompaniesoverthepastthreeyears.


27%

20%

18%

21%

24%

26%

22%

21%20%

25%

19%

25%

17%

0%

5%

10%

15%

20%

25%

30%

2005

2006

2007

9M08

2008

9M09

2009E

2010E

2011E

2012E

2013E

2014E

2015E


GoingforwardsweforecastBamtonnelstroysEBITDAmargintoremainwithinarangeof1926%.

Netincome

Wekeepthecompanyscorporatetaxrateconstantat20%inourforecasts.Withregardstodividends,Bamtonnelstroyspolicystatesthatitpayout10%ofitsRASnetincomeaspreferreddividends,whichwehaveincorporatedintoourmodel.


Bamtonnelstroyhasagenerallysolidbalancesheetwithanetdebt/equityratioof0.5xfor9M09.Asaresult,webelievethecompanyshouldbeabletofinanceitsfuturecapexthroughitsownoperatingcashflow.


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Financial forecasts


2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Revenues 367 350 411 417 445 413 372 397

CoGS 299 263 305 315 323 316 299 309

Grossprofit 67 87 106 101 121 97 72 88

SG&A 21 18 21 21 22 21 19 20


EBITDA 63 83 111 110 127 101 77 91

EBIT 41 63 81 78 97 76 54 69


Incomefromassociates 7 4 4 4 3 3 3 2



Pretaxprofit 38 56 75 72 93 73 52 67

Incometax 5 12 15 14 19 15 10 13

Netincome

29

44

60

58

75

58

41

54



2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Inventories 8 18 21 21 25 25 24 25

VAT 4 4 5 5 5 5 5 5


STInvestments 25 21 20 18 17 15 14 13

Cashandcashequivalents 65 51 85 134 183 242 273 318

Totalcurrentassets 189 155 201 249 310 363 389 440

PP&E 14 22 29 28 25 24 24 24


LTinvestments 86 74 70 64 59 53 48 44


Totalassets 312 290 343 383 433 478 498 544

STborrowings 48 30 37 33 25 22 11 10



LTborrowings 64 43 33 26 15 12 11 10



Totalequity 143 178 230 279 344 394 429 475

Totalequity&liabilities 312 290 343 383 433 478 498 544



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2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E


EBIT 41 59 81 78 97 76 54 69

Adjustmentsfor:

DD&A 16 13 25 29 28 25 24 22








Incometaxpaid 5 11 15 14 19 15 10 13

Interestpaid 4 7 7 6 4 3 2 2



Capex 50 42 33 25 22 22 22 22Netcashusedininvestingactivities 50 42 33 25 22 22 22 22




Dividendspaidtoshareholders 4 6 8 8 10 8 6 7


Adjustments 3 4 1 0 0 0 0 0






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MOSTOOTRJAD 19

BUY

Fair value $2,841


Bloombergcode MSOTRU

Reuterscode MSOTI.RU

Price,local($) 1,825

Price,GDR($) n/a



ADRratio(x) n/a

Sharedata


Dailyt/o($) 97,592

Freefloat(%) 25%Freefloat($mn) 34



Majorshareholder

Management 38.3%


Revenue 538 233 374

EBITDA 44 16 28

Netincome 19 5 13

EPS($) 246 68 169

VALUATION

P/E(x) 7.4 27.0 10.8

P/S(x) 0.3 0.6 0.4

EV/EBITDA(x) 2.2 6.3 3.5

EV/Sales(x) 0.2 0.4 0.3

P/B(x) 1.8 1.8 1.5

RoE(%) 24% 7% 14%

EV/3Yorderbook(x)

0.1 0.1 0.1

23 03 10 bridgtserte over troubled water

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