Research Notes

The Far Eastern Shipping Company (FESCO) is planning an SPO at 20% of its uplifted capital. The issue is to be distributed by open subscription. The placement price is set at USD 1.08 per share for both the existing shareholders and new investors. The company’s existing shareholders are able to exercise their pre-emptive right to buy out the shares within five working days, starting on July 9. Under an open subscription, bids will be accepted until July 18.

We approve of the company’s ambitious strategy to establish a multi-modal transport operator. We consider the company’s stake on development of inter-modal container shipments to be absolutely justified, given the current global trends towards the containerization of cargo and the rapid growth of imports.

The company’s aggressive policy towards buying assets in the key areas of its business is likely to continue in the upcoming years, given its wide-scale investment program, worth USD 1.3 billion and effective until 2011. We expect the company to achieve a full-blown synergy effect from the interaction of its assets within two to four years. In light of this, we recommend the company’s shares largely to investors with a long-term investment horizon.

Due to the constant changes in the group’s business structure and the uncertainty surrounding its future acquisitions, we do not have an official recommendation on the company’s shares. As a benchmark for investors, we refer to our estimate of the group’s fair value based on its market multiples of 2008. The estimate puts the fair price of the company at USD 1.40 per share, which implies an upside potential of 30% to the placement price.

We point out heightened volatility on the freight market, uncertainty over Russian Railways Company’s future tariff policy and Russia’s underdeveloped transport infrastructure among the most serious risks faced by the group.

We also note that the group’s high market multiples and its considerable leverage could touch off a local downturn in quotations for its shares amid instability on global financial markets and investors’ aversion to risks.

Our recommendation is to take part in the SPO, considering the fundamental attractiveness of the company’s business.

Vladimir Sergievskiy

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