Research Notes

The main factors which add to the investment appeal of Novo Ufimsky Refinery, also known as Novoil, are expectations of a high dividend payout and a reduction in corporate risks once AFK Sistema assumes managerial control. Based on the company’s current market value, its targeted profit for this year and its dividend payouts in the previous years, the dividend yield on its common shares may exceed 30% and that on preferred shares may surpass 70%.

Starting in 2006, all companies in the Bashkir fuel and energy sector, including Novo Ufimsky Refinery, have been paying high dividends. The reason may lie in the ongoing legal efforts to hand control of the sector back to the state. Quite understandably, Bashkir authorities, as the prime shareholder, seek to keep the profits for themselves before the federal state retakes control of the sector. The ongoing court hearings against the owners of these assets may be closed in the future, provided control of the sector passes over to AFK Sistema, which increases the likelihood that dividends for 2008 will be paid.

Based on the company’s current market value, its profit targets for this year and its dividend payouts in previous years, the dividend yield on its common shares may exceed 30% and that on preferred shares may surpass 70%. In light of this, the company’s preferred shares hold a special appeal. In our opinion, only the company’s new owner could prevent a dividend payout for 2008 should the court cases be closed and control of the Bashkir energy ceded to AFK Sistema. In our view, however, this scenario is unlikely.

With AFK Sistema in control of the sector, we expect Novoil to streamline its managerial system, enhance transparency, increase capacity utilization and substantially reduce risks, thereby boosting cash flows and raising its investment appeal.

Novo Ufimsky Refinery is a leading oil-processing plant in Bashkortostan. The company has been enjoying stable cash flows, owing to product quality and a steady growth in its oil refining operations and tariffs.

For the time being, quotes for the company’s shares are unjustifiably low, which, in our view, makes the shares an attractive vehicle for investment. Our estimates put the fair price of one common share in Novoil at USD 0.74, with an upside potential of 118%, which corresponds to a BUY recommendation.

The fair value of one preferred share in the refinery should be USD 0.44, which implies an upside potential of 238% to current stock valuations and corresponds to a BUY recommendation.

Michael Frolov

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