Research Notes

Novoship's formal valuation as part of the merger with Sovkomflot turned out to be in line with our fair valuation of the shipping company. We believe that the valuation approved by the Russian Federal Property Management Agency (Rosimushchestvo) sends an important positive signal that prices will be close to market conditions moving ahead.

As a result of changes in macroeconomic conditions and a reduction in specific risks associated with investing in Novoship shares, we upgraded 12-month target price of the company's common and preferred shares to $3.36 and $2.07, respectively. Our recommendation is downgraded to Hold due to higher stock valuations.

Stable market conditions in the first half of 2007 put pressure on the freight market. As a result, key tanker indexes posted losses in the range of 20-25% during the summer months. In early autumn, freight rates increased slightly due to a seasonal rise in demand for crude and product transportation. In our opinion, development prospects of the freight market will be mostly predetermined by two main factors: stronger crude and product consumption and aggregate deadweight trends of global tanker fleets. The above factors will largely offset each other, which will stabilize the long-term development trend with possible seasonal fluctuations.

According to our estimates, a shift in macroeconomic trends will negatively impact the company's financials in the future. Higher inflation will give rise to stronger opex. Ongoing ruble appreciation will also put pressure on the company's financial performance, since Novoship generates the bulk of earnings in US dollars and the bulk of costs are paid in rubles.

We view as the most important factor an objective reduction in specific risks associated with investing in the shipping company's shares due to improved corporate policy and clarification about the details of the merger with Sovkomflot. This was the main reason behind a cut in the required ROE that we factored into our model.

An important growth driver for Novoship shares further down the road could be the fact that the company's shares are the only way for private investors to enter ahead of schedule the charter capital of the merged company to be formed on the basis of Novoship and Sovkomflot.

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Vladimir Sergievskiy

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