Research Notes

The Kuibyshevazot chemical company has recently improved its financial performance on the successful implementation of investment projects and strong international prices for its products. We have raised our estimate of the fair value of Kuibyshevazot shares in view of the company's projected FY 2007 financials and on expectations that the company will maintain its fast pace of development.

In 2007 Kuibyshevazot increased production on its entire product mix. Record growth was seen in outputs of caprolactam, ammonium nitrate and carbamide. The company targets caprolactam (its core product) production growth of 20%, to 190,000 tons a year, by 2010.

The company makes high added value products, in particular, polyamide-6. In 2007, the company increased polyamide output by 2.2x to 72,000 tons. Towards 2009, the company aims to bring its polyamide production capacity to 150,000 tons annually.

The mineral fertilizer market, on which Kuibyshevazot earns a hefty chunk of its revenue, is now conducive to the company. Since the start of 2008, the price of ammonium has risen by 8%, carbamide by a staggering 68% and ammonium nitrate by 21%.

The company reported strong financial results for FY 2007. The statement shows that revenue rose 43.8% y-o-y to USD 673.6 mn. The EBITDA margin expanded by 3.2x to USD 143.7 mn and net profit advanced by 2.6x to USD 77.4 mn. The company's strong financial performance in 1Q 2008 has given us grounds to project a year-end revenue of around USD 909 mn, EBITDA of USD 267 mn and net profit at USD 166 mn.

In mid-May, 2008, the Magnitogorsk Iron & Steel Works (Russian abbreviation, ММК) and Kuibyshevazot signed a statement of intent to establish joint benzene production at Kuibyshevazot, to the tune of 50,000 tons a year, by 2010-2011 (benzene is a feedstock for caprolactam production). The company's in-house benzene production would enable it to bring the risk of sporadic raw material supplies to the minimum and economize on costly benzene imports.

In early 2008, Kuibyshevazot shareholders approved a deal to sell the International Finance Corporation (IFC) up to 3.5% of the company's common stock. A major portfolio investor would help protect the interests of Kuibyshevazot minority shareholders and would help to arrange a public offering for the company, as was confirmed by the company's first-published IFRS report released May 29.

In line with the revised estimate of the company's fair value, we raise our target prices for Kuibyshevazot to USD 6.56 per common share and USD 3.40 per preferred share and reiterate our BUY recommendation on both types of shares.

Michael Frolov

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