Daily analyst comments

Sistema-Invest, part of AFK Sistema, has signed a package governance agreement with the majority holders of Bashkir fuel and energy companies: Bashneft, Ufaorgsintez, Bashkirnefteprodukt, the Ufa Oil Refinery, Novoil and Ufaneftekhim. In line with the reached accords, Sistema Invest will act as a sole executive body at four companies that currently control the Bashkir fuel and energy complex. Sistema currently holds blocking packages of up to 30% in the aforementioned companies. The holding purchased these share packages in August-October 2005 from Bashkir Capital, controlled by Ural Rakhimov, for about USD 600 million.

This package agreement implies a series of measures in the area of corporate governance to be jointly implemented by AFK Sistema and Bashkir fuel and energy companies’ management and majority shareholders. Particularly, these include measures aimed to increase Bashkir companies’ transparency, implement unified accounting standards and standardize their business processes, as well as widen the channels of company managers’ interaction with the investment community. In addition, these measures aim to boost Bashkir fuel and energy companies’ productiveness and optimize their cost management systems. The agreement also implies measures to increase Bashkir companies’ investment attractiveness, including the reinforcement of their corporate governance mechanisms, the enhancement of access to capital markets, including foreign markets, and to strengthen the company BoDs’ directives.

In our view, this event is positive for investors and minority shareholders of Bashkir fuel and energy companies due to an expected elimination of the largest part of corporate risks, which has been the reason behind the above companies’ undervaluation for quite a long time. Sistema should help to improve companies’ corporate governance quality and their transparency, increase their capacity load and reduce risks, which should finally boost their cash flows and investment attractiveness.

Additionally, if Bashkir companies fully pass under Sistema’s control, and according to the company’s spokespersons, Sistema expressed certain interest in the acquisition of controlling packages in Bashkir companies, they could serve as basis for the creation of a unified petrochemical holding. Sistema is unable to acquire controlling packages in Bashkir fuel and power utility companies for the time being, since their owners are currently under court proceedings. However, in our opinion, controlling packages in these companies will be sold to Sistema by the federal government irrespective of the outcome of the proceedings.

We assign the following target prices for Bashkir fuel and energy companies’ securities: USD 0.79 per share for the Ufa Oil Refinery (RTS: UNPZ), USD 0.74 per share for Novoil (RTS: NUNZ) and USD 1.74 for Ufaneftekhim (RTS: UFNC). The ratios between target and market prices of all these securities correspond to BUY recommendations.