Daily analyst comments

Transneft posts FY 2008 IFRS results


	Transneft

Capitalization: 1 689 154 176,04 $

Preferred shares
Rating	Buy
Price	1 086,36 $
Target price	2 144,00 $

Price changing
week	month	year
0,4%	-2,9%	73,6%

01.07.09 11:33

The FY 2008 IFRS report from Transneft has turned out to be above market expectations. Transneft’s operating performances were also robust: the volume of oil product transportation showed a steady upward trend, which helped the company boost its operating margin.

On June 30, Russian oil transportation giant, Transneft (RTS: TRNFP) released its consolidated ruble-denominated FY 2008 financial report audited to IFRS. In 12M 2008, Transneft posted a 24% y-o-y increase in revenue, up to RUB 275 billion. Revenues from domestic oil supplies advanced more rapidly than from export supplies, as crude exports were unprofitable for oil companies in 2H 2008, and a significant portion of external supply was redirected to the domestic market. The overall oil flow dropped 1.2% in 2008, mainly due to a major downturn in oil production by small companies at the end of the year. The average crude and oil product transportation rate surged 33% in FY 2008, thanks to the Federal Tariff Service’s fee policy and a considerable increase in revenue from oil product transportation, up RUB 16 billion.

Table. Transneft: key financials FY 2007 and FY 2008, RUB million

	2007	2008	2007/2008
Revenue	221,942	274,977	23.9%
Opex	-134,848	-157,484	16.8%
Operating income	95,297	126,731	33.0%
EBITDA	126,189	160,798	27.4%
Net income	60,139	70,506	17.2%
EBITDA margin	56.9%	58.5%	+1.6 pp
Net margin	27.1%	25.6%	-1.5 pp

Transneft’s EBITDA advanced 27% to RUB 161 billion. At the same time, the rate of opex growth slowed, mainly thanks to an 85% downturn in oil purchases and a fall in electricity expenses, which rose by only 12%. As for crude purchases, Transneft tried to substitute them with oil product transportation services, as a significant volume of export crude supply was redirected to Russian oil refineries, which caused an overall upsurge in oil product yield. As a result, Transneft allocated more than RUB 3 billion to oil product purchases. For reference, in 2007, the company did not transport oil products at all. Therefore, we may conclude that oil market conditions had a positive impact on Transneft’s operating results.

On the downside, we note a 63% upsurge in labor costs. As a result, the share of labor costs in Transneft’s overall expenses advanced from 18% to 25%, which outweighed the company’s achievements in crude and oil product supply structure optimization. In view of the above factors, Transneft was able to just slightly improve its EBITDA margin, up to 58%.

Transneft’s net income grew by 17% to RUB 70.5 billion, but its net margin fell to 26%, mainly due to a RUB 31 billion loss from currency translation differences. Additionally, the company’s debt load rose sharply and its Net Debt/Equity ratio soared from 19% to 32%. However, we do not expect any troubles with company’s financial stability in view a USD 10 billion loan recently attracted from China.

In general, Transneft showed robust operating indicators, except for a few large expenditure items. In our opinion, the market should respond positively to the publication of Transneft’s FY 2008 report.

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