Daily analyst comments

On July 2, 2009, AvtoVAZ (RTS: AVAZ) announced FY 2008 financials audited to IFRS. The company’s revenue grew by 5.2% y-o-y to USD 7.7 billion. At the same time, the car manufacturer reported a USD 1.04 billion operating loss and a USD 1 billion net loss.

Table 1. AvtoVAZ: key financials FY 2008 on FY 2007, USD million

We are downbeat on the FY 2008 financial report from AvtoVAZ. Due to an upturn in prices for steel and auto components, the car maker’s manufacturing costs grew at an outrunning pace compared with revenue. As a result, AvtoVAZ gross income dropped 39% to USD 699 million. Inefficient control over administrative expenses, which rose by 25.3%, was another negative factor. In addition, the company’s sales expenses rocketed by almost 29%.

On the upside, we note a growth in the average vehicle price: up 11.9%, in line with our estimates, which enabled AvtoVAZ to boost revenue by 5.2% even amid a 6% downturn in sales. Additionally, we note that about RUB 10.7 billion, or USD 430 million of the car maker’s FY 2008 loss was due to a capital asset revaluation carried out according to the DCF model: a sharp increase in the discount rate and high residual value forced the company to write off part of capital asset BV in a lump sum.

In our opinion, AvtoVAZ will most likely close FY 2009 at a loss. In 5M 2009, the company’s productive output plummeted by 67% y-o-y. In addition, AvtoVAZ management reported that the company’s raw materials costs had not lowered in 1H 2009. According to management estimates, in 6M 2009, AvtoVAZ lost about RUB 10 billion, or USD 323 million.

The fair value of AvtoVAZ is USD 0.47 per common with a 13% upside and a HOLD rating, and USD 0.19 per preferred share with a 97% upside and a BUY rating.