Research Notes

Motovilikhinskie Zavody (Motovilikha Plants) is a holding company for ferrous metals and machinery producers. By operating in these two adjacent sectors, the company hedges itself against rising steel prices, which adds to its appeal in the face of current market conditions. Both the metal products and machinery made by the company are in strong demand on the market, giving it the potential to boost its revenue by 25-30% annually for the next two to three years.

According to our estimates, we assign a BUY recommendation on the company’s common shares, estimating their fair value at USD 0.312, which implies an upside potential of 83.4% to the current stock valuations. In our view, the company’s shares will be driven by:

• The ongoing surge in steel prices, which jumped by 47% in Russia and 78% on the world steel market in 1H, 2008. This should have a positive impact on the company’s revenue and profitability this year.
• Strong demand for oil-field equipment, which is being driven by the gradual depletion of the deposits owned by Russian oil companies. Maintaining production at current levels will require hefty investments in geological prospecting and drilling operations.
• Infrastructure development projects in Russia are fuelling demand for truck-mounted cranes. According to Sergei Shishkarev, chairman of the State Duma Committee on Transportation, the state budget is to earmark RUB eight trillion (about USD 343 billion) for road infrastructure development in Russia between 2010 and 2015.
• An increase in the number of defense contracts should boost sales in the arms production sector. The current government arms program specifies that the state will spend nearly USD 137.2 billion, or RUB 3.2 trillion on armaments and the purchase and repair of military equipment.
• The company is gaining on rising steel prices, as its metal division brings in roughly half of its revenue.

Konstantin Romanov

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