Fixed-line telecoms

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					Fixed-line telecoms
Telecoms
Glitnir note
October 16th, 2007

      North-West Telecom vs. RTS
      15%
      10%
                                        A wake-up call for regional telecoms – strong fundamentals
        5%
        0%
       -5%                              Despite the fact that Regional Telecom Operators (RTOs) have issued very strong results,
     -10%
     -15%
                                        the market does not seem to have reacted much on them, and following a short rally a few
     -20%
     -25%
                                        weeks ago, the market appears to be once again neglecting the segment. Meanwhile, their
     -30%
     -35%
                                        strong fundamentals coupled with new, favourable regulations make them an attractive
     -40%
                                        investment play even without factoring in the speculative upside risk implicit in Svyazinvest‟s
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                                        upcoming privatization.
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                 SPTL RM       RTSI



                                        All of Russia‟s RTOs have already reported their 1H07 IFRS results. The published figures
              CenterTelecom vs. RTS     highlighted improved profitability thanks to a range of newly-introduced lucrative regulations
      10%
                                        and cost-cutting measures. Top lines were specifically supported by the introduction of the
        5%
                                        Calling Party Pays standard, a new local tariff system, and the recently liberalized long-
        0%
                                        distance market. At the same time, even against the current background of capital markets
       -5%                              instability, debt refinancing does not look like a problem for Russia‟s telecom operators.
     -10%


     -15%
                                        While we view the entire RTO segment positively, we are particularly upbeat on North-
                                        West Telecom, which in addition to strong fundamentals also offers an attractive preferred
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                 CTLK RM       RTSI
                                        stock play (with a combination of a healthy dividend yield and a wide discount to ordinary
                                        stock).
             Uralsvyazinform vs. RTS
      15%

      10%

        5%
                                        Key growth drivers
        0%

       -5%

     -10%                               The lion‟s share of the y-o-y increase in RTOs‟ top lines in 1H07 was due to an increase in
     -15%

     -20%
                                        local calls revenues (which constitute 30%-50% of RTOs‟ revenue mixes). The new local
     -25%                               tariff system in effect since February 2007 as well as the Calling Party Pays scheme
     -30%
                                        introduced in July 2006 continue to support revenues from local calls. Far-East Telecom,
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                                        CenterTelecom, and Sibir Telecom demonstrated the strongest revenue growth dynamics,
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                 URSI RM       RTSI
                                        adding 47%, 27%, and 23% to their local-services top lines in y-o-y terms. In
                                        Uralsvyazinform‟s case, on the other hand, revenues from local services grew only 9% y-o-y
             Far-East Telecom vs. RTS   due to the fact that the company set its tariffs near the lower end of the price range defined
      15%

      10%
                                        by government regulators (in order to avoid eroding its subscriber base). However, the
        5%                              company plans to revise its tariffs upwards soon.
        0%

       -5%

     -10%
                                                                       Local services growth dynamics
     -15%

     -20%                                                                                                                  50%
                                                                     300                                                   45%
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                                                                                                                           40%
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                                                                                                                           35%
                                                            USD mn




                 DLSV RM       RTSI
                                                                     200                                                   30%
                                                                     150                                                   25%
                                                                                                                           20%
                                                                     100                                                   15%
                                                                                                                           10%
 CONTACT                                                             50
                                                                                                                           5%
 Anna Sidorova                                                         0                                                   0%
 +7 495 545 0535
 anna.sidorova@fim.com




                                                               1H06 revenues f rom local services   1H07 revenues f rom local services
                                                               y-o-y change, %



                                                                                                             Source: Company data, Glitnir estimates




                                                                                                                                                 1/7
                                                     Value-added services are expected to become the next major growth driver for RTOs
                                                     thanks to skyrocketing demand for broadband services on Russia‟s highly unsaturated data
                                                     services market. Value-added services continue to gradually gain ground in the revenue
                                                     structures of Russian RTOs, having expanded at a weighted average growth rate of 50% y-
                                                     o-y in 1H07. Value-added services constituted 12.7% of North-West Telecom‟s revenue
                                                     structure in 1H07, a 3.7 pp y-o-y gain and the fastest growth rate among Russia‟s RTOs.

                                                     Far-East Telecom, on the other hand, enjoys the largest exposure to value-added services
                                                     at 15% of its total sales mix, up 1.7 pp y-o-y. Across the segment, value-added services
                                                     contribute a median 10% to RTOs‟ revenues. Based on their current growth rate and the
                                                     more than threefold weighted-average increase in subscriber base since 1H06, we are
                                                     confident that the contribution of value-added services to the revenue structures of Russian
                                                     RTOs will continue to grow going forward.

                                                                              Internet services booming in 1H07 IFRS
                                                                                Value-added            Value-added services'             Broadband subscribers,
                                                                              services, bn RUB         share in revenues, %                    thousands
                                                                             1H06 1H07 y-o-y, %        1H06 1H07 y-o-y, pp          1H06 YE06 1H07 y-o-y, % y-t-d, %
                                                      CenterTelecom           0.8     1.2      59%     5.6%    7.6%      2.0 pp       50     115 187        274%          63%
                                                      South Telecom           1.0     1.3      31%      12%     13%      1.7 pp       46      69 105        130%          52%
                                                      North-West Telecom      0.9     1.5      70%     9.0%     13%      3.7 pp       33      91 163        394%          78%
                                                      Volga Telecom           1.0     1.5      48%     8.6%     10%      1.6 pp       52     120 187        260%          55%
                                                      Uralsvyazinform         1.1     1.6      48%     7.1%    8.6%      1.5 pp       41     115 192        370%          67%
                                                      Sibir Telecom           1.0     1.5      41%     7.4%    8.7%      1.3 pp       27      65 107        296%          65%
                                                      Far-East Telecom        0.7     1.1      65%      13%     15%      1.7 pp       60
                                                                                                                                       0      99 138
                                                                                                                                               0     0      131%          38%
                                                      Total or median         6.5     9.7     50%*     8.6%     10%      1.7 pp      308     560 1,079     250%*         93%*
                                                      * weighted average for segment


                                                                                                                              Source: Company data, Glitnir estimates



                                                     “First” among equals
                                                     North-West Telecom‟s 1H07 IFRS results once again proved that the company is a clear
                                                     leader among RTOs both in terms of its growth rate and profitability dynamics (this
                                                     tendency was also demonstrated by 1H07 RAS). The company grew revenues 29% y-o-y
                                                     and OIBDA 42% y-o-y (the best dynamics among Russian RTOs in 1H07, except for Far-
                                                     East Telecom, whose revenues were boosted by its consolidation of Sakhatelecom).
                                                     North-West Telecom‟s EBIT grew 60% y-o-y in 1H07, outstripping the median 56% among
                                                     its peers, while on the profitability level, the company showed the highest 1H07 OIBDA
                                                     margin among Russian RTOs (39%, compared to a median of 35%).

                                                                 1H07 IFRS results strong, margins healthy and growing
                                                                                       1H06                           1H07                          y-o-y, %
                                                        USD mn                 Sales OIBDA EBIT Net           Sales OIBDA EBIT Net           Sales OIBDA EBIT            Net
                                                        Sibir Telecom           511         185   118 66       652      229   128    74      28%      23%   8.3%     12%
                                                        CenterTelecom           502         168    73 7.4      626      222   108    50      25%      32%    49%     n.m.
                                                        Uralsvyazinform         571         186    87 32       731      245   136    53      28%      32%    56%     66%
                                                        North-West Telecom      355         126    66 37       458      178   105    63      29%      42%    60%     68%
                                                        South Telecom           309         105    42 12       377      136    71    28      22%      30%    69%     n.m.
                                                        Volga Telecom           412         161    88 54       554      210   109    62      34%      30%    24%     14%
                                                        Far-East Telecom        187          61    36 13       278       90    56    30      49%
                                                                                                                                           #DIV/0!    48%    56%     n.m.
                                                        Median                                                                               28%      32%    56%     40%

                                                                                       1H06                             1H07                            y-o-y
                                                                              OIBDA    EBIT    Net             OIBDA    EBIT    Net            OIBDA    EBIT    Net
                                                                              margin, margin, margin,          margin, margin, margin,         margin, margin, margin,
                                                                                %       %       %                %       %       %               pp      pp      pp
                                                      Sibir Telecom                 36%      23%       13%        35%         20%      11%       -1.2 pp   -3.5 pp       -1.5 pp
                                                      CenterTelecom                 34%      14%      1.5%        35%         17%     7.9%        1.9 pp    2.8 pp        6.4 pp
                                                      Uralsvyazinform               33%      15%      5.6%        34%         19%     7.3%        0.9 pp    3.3 pp        1.7 pp
                                                      North-West Telecom            35%      18%       10%        39%         23%      14%        3.5 pp    4.5 pp        3.2 pp
                                                      South Telecom                 34%      14%      3.9%        36%         19%     7.3%        2.2 pp    5.3 pp        3.5 pp
                                                      Volga Telecom                 39%      21%       13%        38%         20%      11%       -1.3 pp   -1.7 pp       -2.0 pp
                                                      Far-East Telecom              32%      19%      7.1%        32%         20%      11%            pp
                                                                                                                                                 -0.20%         pp
                                                                                                                                                            0.90%             pp
                                                                                                                                                                          3.60%
                                                      Median                        34%      18%      7.1%        35%         20%      11%        0.9 pp    2.8 pp        3.2 pp


                                                                                                                              Source: Company data, Glitnir estimates

                                                     Uralsvyazinform‟s 1H07 figures also looked quite assuring. The company was Russia‟s
                                                     unbeatable leader in revenues (USD 731 mn in 1H07, up 28% y-o-y), while profitability was
                                                     also impressive (OIBDA and EBIT margins of 34% and 19%, respectively, and completely
                                                     in line with the median among Russian RTOs).


                                                                                                                                                                     Volga


                                                                                                                                                                     Sibir
Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia                                                                                                       2/7
                                                                                                                                                                     N
                                                                                                                                                                S
                                                     Volga Telecom, as always, demonstrated strong 34% y-o-y growth in revenues and 30% y-
                                                     o-y growth in OIBDA, resulting in an OIBDA margin of 38% (the second-most impressive
                                                     1H07 results in terms of OIBDA margin and revenue growth). While profitability slipped y-
                                                     o-y due to wages appreciation, we aren‟t really disturbed, as the company had kept wages
                                                     unchanged for several years, and only in 2006 finally decided to perform a wage increase.

                                                                              Rapid growth and healthy profitability in 1H07 IFRS

                                                                                                                40%
                                                                                                                                              North-West
                                                                                                                39%
                                                                                                                                               Telecom
                                                                                                                38%                                        Volga Telecom




                                                                                           OIBDA margins, %
                                                                                                                37%
                                                                                                                           South Telecom
                                                                                                                36%
                                                                                                                                     CenterTelecom
                                                                                                                35%
                                                                                                                                         Sibir Telecom
                                                                                                                34%
                                                                                                                                            Uralsvyazinform                    Far-East
                                                                                                                33%                                                            Telecom
                                                                                                                32%
                                                                                                                31%



                                                                                                                                              Revenue growth, %



                                                                                                                                                                       Source: Company data, Glitnir estimates



                                                     Debt burden – unlikely a problem
                                                     Uralsvyazinform, Sibir Telecom, and South Telecom have historically been high-leveraged
                                                     operators, and in 1H07 all saw their debt burdens increase compared to YE06.
                                                     CenterTelecom was the only RTO to successfully streamline its debt and decrease its net
                                                     debt from USD 888 mn at YE06 to USD 846 mn at the end of 1H07. Nevertheless, all four
                                                     of Russia‟s most leveraged RTOs managed to keep short-term debt below 45% of their
                                                     overall debt structures. North-West Telecom witnessed an increase in short-term debt to
                                                     53% of the overall debt structure, but the operator is the least indebted Russian RTO, and
                                                     as such we‟re relatively undisturbed by this gain.

                                                                                                                                   Net debt, 1H07 IFRS
                                                                                                                        USD mn                       YE06 1H07 y-o-y, %
                                                                                                                        Sibir Telecom                 758 829      9.3%
                                                                                                                        CenterTelecom                 888 846     -4.7%
                                                                                                                        Uralsvyazinform               957 984      2.8%
                                                                                                                        North-West Telecom            360 398       11%
                                                                                                                        South Telecom                 778 804      3.3%
                                                                                                                        Volga Telecom                 474 497      4.9%
                                                                                                                        Far-East Telecom              245 279       14%


                                                                                                                                                                       Source: Company data, Glitnir estimates


                                                                                                                         Russian RTO debt burdens

                                                                                    0.30

                                                                                    0.25                                            CenterTelecom    Uralsvyazinform
                                                                  Interests/OIBDA




                                                                                                                                         846               984                South Telecom
                                                                                                                                                                                   804
                                                                                    0.20                                Far-East
                                                                                                                        Telecom
                                                                                                                          279
                                                                                    0.15 North-West
                                                                                                              Telecom
                                                                                                                398                                                Sibir
                                                                                    0.10                                                                          Telecom
                                                                                                                           Volga Telecom                            829
                                                                                                                                497
                                                                                    0.05
                                                                                           1.1                              1.6                2.1                2.6                3.1
                                                                                                                                                Net debt/OIBDA


                                                                                                                                                                       Source: Company data, Glitnir estimates



                                                     Prefs offer speculative play
                                                     Another distinctive feature of RTOs that shouldn‟t be overlooked is the historical discount
                                                     between preferred shares and common stock. Since it‟s become clear that RTO preferred
                                                     and common stock won‟t be consolidated under a single security until privatization actually
                                                     goes forward, this discount has become ever more pronounced.

Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia                                                                                                                                    3/7
                                                     The situation is especially interesting in the case of North-West Telecom. The company
                                                     sold its 15% stake in Telecominvest for USD 410 mn in July 2007. The deal is expected to
                                                     be finalized by mid-October, according to the latest reports, and will most likely positively
                                                     affect North-West Telecom‟s preferred stock price performance.

                                                     The 15% stake is accounted at a very low value on North-West Telecom‟s RAS balance
                                                     sheet. Given that dividends are accrued based on RAS financials, we forecast a FY07
                                                     dividends payment of USD 0.061 per ordinary share (a 4% dividend yield) and USD 0.16
                                                     per preferred share (a 15% dividend yield). This sizable dividend yield, coupled with
                                                     Svyazinvest‟s recently announced plan to shift to quarterly dividend payments from annual
                                                     ones, makes North-West Telecom preferred stock an attractive investment opportunity.

                                                     RTOs already have a positive track record of huge dividend payments, especially in the
                                                     case of Far-East Telecom, which paid out huge dividends in 2003 when mobile assets
                                                     were sold to MTS, with USD 8 mn paid out in dividends for 2004 and USD 6 mn for 2005.
                                                     Given that the stake in Telecominvest will be paid for in cash, we do not expect the
                                                     company‟s BoD to block the payment of dividends (which was the case with MGTS, where
                                                     net income was inflated by a non-cash one-off due to an assets revaluation). Currently,
                                                     North-West Telecom prefs trade at a 33% discount to common stock; however, we expect
                                                     that gap will narrow following completion of the sale of the stake in Telecominvest.

                                                     It‟s interesting to note that Far-East Telecom‟s preferred stock actually traded for a time at
                                                     a premium to its common stock due to dividend payout expectations (also following an
                                                     assets disposal, see the graph below).

                                                                                    Excessive prefs discount to ords
                                                                                                            Current YTD median
                                                                                                           discount, discount, %
                                                                                     Sibir Telecom              -36%            -31%
                                                                                     Center Telecom             -38%            -35%
                                                                                     Far-East Telecom           -13%           -0.2%
                                                                                     South Telecom              -32%            -28%
                                                                                     North-West Telecom         -33%            -29%
                                                                                     Uralsvyazinform            -39%            -33%
                                                                                     Volga Telecom              -33%            -30%


                                                                                                              Source: Bloomberg, company data, Glitnir estimates


                                                                                 Prefs to ords discount increasing*

                                                                                                                                                      15%




                                                                                                                                                      0%




                                                                                                                                                      -15%




                                                                                                                                                      -30%




                                                                                                                                                       -45%
                                                               Sibir Telecom            CenterTelecom               Far-East Telecom      South Telecom
                                                               North-West Telecom       Uralsvyazinf orm            Volga Telecom

                                                          * Three-month trailing median discount of prefs to ords


                                                                                                              Source: Bloomberg, company data, Glitnir estimates



                                                     Possible risks in connection with Svyazinvest privatization
                                                     Svyazinvest privatization should benefit RTOs in terms of development of new services,
                                                     costs control, and capex streamlining. At the same time, risks from the privatization remain
                                                     dependent on how the process is ultimately executed (various proposals are currently
                                                     being considered). The greatest risk for investors from Svyazinvest‟s privatization is that
                                                     their new owners could strip Russia‟s RTOs of their mobile assets and/or convert the
                                                     companies into cost centres.




Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia                                                                                      4/7
                                                     However, RTOs (including Far-East Telecom and North-West Telecom) have already
                                                     begun selling their 2G mobile assets close to their peak values. For these companies, the
                                                     mobile segment wasn't providing much profit and faced difficulties in terms of further
                                                     development from fierce competition with the „Big 3‟. As such, from our point of view, the
                                                     risk of assets stripping is marginal.

                                                     Rather, we believe it's quite unlikely that RTOs will see their assets stripped following
                                                     privatization, as existing legislation leaves little freedom for value reshuffling (at least in
                                                     terms of traditional, regulated services).


                                                     Conclusion
                                                     In our opinion, the market has unjustifiably overlooked RTOs since spring of this year.
                                                     Strong fundamentals, coupled with favourable revisions to government regulations and
                                                     encouraging trading opportunities in preferred shares, keep us optimistic about the RTO
                                                     segment as a whole, with North-West Telecom our favourite stock deserving of closer
                                                     attention.

                                                                                        Company valuations
                                                                          Current                            2007E
                                                                           price,                                            EBITDA     Net
                                                                           USD EV/EBITDA EV/Sales P/Sales P/Earnings P/Book margin, % margin, %
                                                       South Telecom          0.19   4.91    1.73    0.71      12.99    1.32     35%       5.4%
                                                       Sibir Telecom          0.11   4.93    1.46    0.99      12.50    1.77     30%       7.9%
                                                       CenterTelecom          0.93   2.94    1.81    1.20      15.95    3.36     62%       7.5%
                                                       Far-East Telecom       5.05   4.27    1.34    0.95        9.68   1.61     31%        10%
                                                       Volga Telecom          5.72   5.34    1.91    1.51      14.00    2.15     36%        11%
                                                       North-West Telecom     1.78   6.47    2.23    1.84      15.01    1.69     34%        12%
                                                       Uralsvyazinform        0.06   6.96    2.19    1.61      19.17    2.86     31%       8.4%
                                                       Median                 n/m    4.93    1.81    1.20      14.00    1.77     34%         8%
                                                       Peers
                                                       Comstar-UTS          11.99    8.89    3.74    3.52      37.81    2.20     42%         9%
                                                       Golden Telecom       88.00   11.39    2.94    2.88      30.31    3.51     26%        10%


                                                                                                                      Source: Bloomberg, Glitnir estimates




Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia                                                                                5/7
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in investment activities with companies mentioned in the Report. In preparing this Report, the Author(s) assumed that the issuers mentioned in the Report disclose information in the amount and under
the procedure stipulated by the securities legislation of the Russian Federation for issuers who publicly place securities. This Report and the Information is based exclusively on publicly-available
information, which is deemed to be reliable, however ZAO FIM Financial Services makes no representation that this Information is accurate or comprehensive, and it should not be relied upon as such.
ZAO FIM Financial Services makes no representation that this Report has been released to all readers simultaneously, nor that ZAO FIM Financial Services will update this material on a regular basis
or that it will correct inaccuracies contained in this Report.




Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia                                                                                                                                6/7
Contact Information

Hanna Loikkanen                                                                                         Managing Director                              +7 495 545 0535



Equities Moscow
Eero Saloranta                                                                                          Head of Equities                               +7 495 545 0535
Ilya Matushkin                                                                                          Head of Trading                                +7 495 545 0534
Igor Maksimov                                                                                           Trader                                         +7 495 545 0539
Vladimir Mikhailov                                                                                      Head of Equity Sales                           +7 495 545 0537
Ivan Legenchuk                                                                                          Senior Equity Sales                            +7 495 545 0540
Maria Bratchikova                                                                                       Equity Sales                                   +7 495 545 0541
Maxim Romodin                                                                                           Equity Sales                                   +7 495 545 0538




Research Moscow
Bahrom Umarbekov                                                                                        Oil & Gas                                      +7 495 545 0535
Anna Sidorova                                                                                           Telecoms                                       +7 495 545 0535
Sergei Kanin                                                                                            Metals and Mining, Industrial                  +7 495 545 0535
Maria Klimova                                                                                           Consumer                                       +7 495 545 0535
Ilya Koupreyev                                                                                          Utilities                                      +7 495 545 0535
Dmitry Astakhov                                                                                         Utilities                                      +7 495 545 0535
Oksana Lossevskaya                                                                                      Banking                                        +7 495 545 0535
William Gross                                                                                           Editor/Production Manager                      +7 495 545 0535




Equities Helsinki
Hans Segercrantz                                                                                        Head of Equities                              +358 9 613 46 271
Marcus Björksten                                                                                                                                      +358 9 613 46 204
Thomas Pirker                                                                                                                                         +358 9 613 46 222
Jarmo Riikonen                                                                                                                                        +358 9 613 46 337
Henrik Rinta                                                                                                                                          +358 9 613 46 437
Antti Salo                                                                                                                                            +358 9 613 46 305
Antti Auvinen                                                                                                                                         +358 9 613 46 381
Oscar Eklöf                                                                                                                                           +358 9 613 46 513




Derivatives, Sales Trading Helsinki
Pekka Ollikainen                                                                                        Head of Derivatives                           +358 9 613 46 224
Markus Liimatainen                                                                                                                                    +358 9 613 46 422
Sami Listola                                                                                                                                          +358 9 613 46 419
Antti Pajukka                                                                                                                                         +358 9 613 46 321
Toni Pisano                                                                                                                                            +358 8 311 41 00




Research Helsinki
Jussi Hyöty                                                                                             Telecom, Strategy (Head of Research)          +358 9 613 46 286
Kim Gorschelnik                                                                                         Retail, Consumer Goods                        +358 9 613 46 234
Risto Puolanne                                                                                                                                        +358 9 613 46 468
Anna Rosenlof                                                                                           Retail, Consumer Goods                        +358 9 613 46 304
Teemu Saari                                                                                             Technology                                    +358 9 613 46 514
Jarkko Soikkeli                                                                                         Economist, Metal                              +358 9 613 46 447
Sampo Timonen                                                                                           Pulp and Paper, Chemicals                     +358 9 613 46 310
Raine Vammelvirta                                                                                       Operators, Telecom Subcontractors             +358 9 613 46 443
Pasi Väisänen                                                                                           IT-Software & Services                        +358 9 613 46 311
Jari Westerberg                                                                                         Construction, Media                           +358 9 613 46 217

                                                                             email: firstname.surname@fim.com

                                            This contact information includes employees of both Glitnir Bank Ltd and ZAO FIM Financial Services.
                                          Outside Russia FIM Securities Ltd is the disseminator of analysis produced by ZAO FIM Financial Services.




Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia                                                                                            7/7