Daily analyst comments

On May 14, Uralsvyazinform (URSI) released its unaudited non-consolidated RAS financials for 1Q 2008. As usual, we should highlight the weaknesses of Russian Accounting Standards: RAS reports incorrectly reflect data for subsidiary companies, EBITDA and net profit indicators. Nonetheless, in the case of URSI, which provides its basic range of services not through subsidiary companies, but through branches consolidated within RAS, we may draw certain conclusions on the company’s development and quality of operations.

The operator’s revenue in ruble terms rose by just 7%, which may be considered a neutral reading (we expect 6% growth as of the year-end) in spite of its small absolute value: tariffs for local communication have not been indexed during the last year, which led to stagnation in the segment. Due to the Federal Tariff Service’s activities, URSI’s core business, local fixed communications, showed very insignificant growth both in natural terms (customer base rose by less than 1%) and in monetary terms (upturn in revenue was close to zero). The fact that the operator has not increased the number of wired segment customers looks rather surprising; however, the company’s management failed to provide any comments in this respect.

The positive aspect of the report was growth in the share of internet access services in the operator’s total revenue by over 3% on the backdrop of an incredible rise in traffic: more than 7x during the year. We are upbeat on the reinforcement of this business segment, since it is evident that the company cannot rely on a considerable growth of tariffs for regulated services in the near future. In the meantime, the specific share of new services (11.5%) is still low and is not able to outweigh negative news from the regulated segment.

Cellular communications showed an 11% growth of income amid a 19% upturn in the number of subscribers. This is an object lesson for another trend, which we mentioned in our materials: cellular communications are on the verge of real saturation, and further focus on growth of the subscriber base would not lead to either an upturn in revenue or to rise in the subscriber base. However, URSI pays a lot of attention to the growth of ARPU; particularly, it actively tries to implement convergent (all-in-one) communication services and encourages active use of mobile communications.

A 2.9% downturn in EBITDA margin on the backdrop of more than 10% decrease in the number of the company’s employees was negative news (labor remuneration is one of mobile operators’ largest item of expenses). The main reason for margin downturn is a rise in operating expenses (services of third-party organizations and communication operators, rental fee, etc) caused by inflation in Russia. At the same time, we expect the company’s EBITDA in FY 2008 to be around 31%. Therefore, we cannot say that the downturn in EBITDA in 1Q was critical.

URSI: Financials 1Q 2008, RUB mn

Our analysis of the report indicates that the company is highly dependent on state regulation, since, despite quite a strong cellular business, growth of the company’s revenue cannot be considered sufficient. Given the fact that the Federal Tariff Service announced an insignificant rise in tariffs for regulated communication services (considerably below inflation), we believe that the report has revealed the operator’s problems. However, these problems did not come as a surprise to us and had largely been taken into account in our forecasts.

In the meanwhile, we plan to perform a more detailed study of the operator’s report and update our financial model for the company in the near future. However, since the target price is not likely to be considerably changed, we leave unchanged the estimated values for the company’s commons and prefs at USD 0.064 and USD 0.04, respectively, and reiterate our Buy recommendation for both types of stocks.