MRSK Holding Publishes Good 2008 IFRS Results

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1 RUSSIA Electric Utilities MRKH RX BUY Price, USD 0.12 Price Target, USD 0.22 Upside, % 88% MRKHp RX BUY Price, USD Price Target, USD Upside, % 147% 28 October 2009 MRSK Holding Publishes Good 2008 IFRS Results Capitalisation & stock data (current) Market cap, USD mn 5,003 Net debt (2008), USD mn 4,217 EV (incl. minority int.), USD mn 13,923 Shares outstanding, mn 42,494 Free float (estimated) 37% Local shares per GDR/ADR n/a Share price dynamic, 2009 YTD 600% 400% 200% 0% -200% 12-Jan 12-Mar 12-May 12-Jul 12-Sep MRKH RX Equity MRKHp RX Equity RTS Index Ratios 2008A EV/EBITDA 5.2 P/E 11.3 Dmitry Skryabin dmitry.skryabin@vtbcapital.com Mikhail Rasstrigin mikhail.rasstrigin@vtbcapital.com Olga Doronina olga.doronina@vtbcapital.com Yesterday, MRSK Holding reported its consolidated 2008 IFRS results. This is the first set of consolidated numbers which includes the performance of both the holding and its subsidiaries (representing almost the entire distribution sector). As such, they are an important milestone, representing a meaningful improvement in visibility over the company s earnings flow. The results are strong, with revenues growing 24% YoY (in rouble terms) to RUB 398bn, slightly ahead of the 22% YoY tariff growth. The majority of revenues, 82%, came from electricity transmission and they were up 22%, while revenues from connection fees grew 59%. Overall costs were up 24% YoY (roughly the same as overall revenues) to RUB 334bn. EBITDA increased 24% to RUB 66bn while the bottom line grew 45% YoY to RUB 11bn (the latter was supported by the income from selling part of the equity stakes in other utilities which the holding received when RAO UES was reformed). The EBITDA and profit margins were a healthy 16.7% and 5.0%, respectively. Our estimates of revenues and EBITDA were substantially lower than the numbers reported by the company (36% and 33%, respectively). Overall, the reported numbers put MRSK Holding at 5.2x 2008 EV/EBITDA and 11x 2008 P/E. We are reiterating our positive outlook for the company and see news on the following items as possible triggers: the valuation of assets for RAB transition purposes, the tariff growth for next year, the particular regions which are to switch to RAB next year and (potentially) about consolidation. In our view, MRSK Holding remains one of the best exposures to the electricity distribution segment due to its liquidity. We believe that the stock s current correction is on the back of market weakness and thus provides a good buying opportunity. We are reiterating our Buy recommendation for MRSK Holding and 12-month Target Price of USD 0.22, which implies 88% upside potential from the current level. VTB Capital All prices are as of VTB Capital and/or VTB Group do and seek to do business with companies covered in their research reports. Thus, investors should be aware that the firms may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 MRSK Holding 2008 consolidated IFRS results 2007A 2008A % Chng, YoY 2008E % Diff, est. vs actual % Chng, YoY USD mn Revenues total (including) 12,580 16, % 10, % 321, , % RUB mn Transmission 10,447 13, % 9, % 267, , % Connection 847 1, % % 21,655 34, % Sales % 16,761 21, % Other % 16,137 15, % Costs -10,549-13, % - 8, % -269, , % Transmission -2,609-4, % -66, , % Purchased electricity -2,647-2, % -67,716-66, % Labour -2,168-2, % -55,470-62, % Other -3,125-4, % -79, , % EBITDA 2,091 2, % 1, % 53,496 66, % EBITDA margin 16.6% 16.7% 0.1pp 17.3% 0.6pp 16.6% 16.7% 0.1pp EBIT 1,041 1, % % 26,628 32, % Interest expense % % -3,419-5, % Profit for the year % % 13,953 19, % Profit margin 4.3% 5.0% 0.6pp 3.3% -1.7pp 4.3% 5.0% 0.6pp Minority interest % 6,361 8, % Net Income % 7,592 11, % Source: Company data, VTB Capital Research 2

3 Disclosures VTB Capital Equity rating definitions BUY: 12-month target price exceeds the market price by 20% or more (as of the publishing date) HOLD: 12-month target price is no less than the market price but does not exceed it by more than 20% (as of the publishing date) SELL: 12-month target price is below the market price (as of the publishing date) 3

4 VTB Capital Research team Head of Research Alexey Yakovitsky Strategy Economy Commodities Ivan Ivanchenko Aleksandra Evtifyeva Wiktor Bielski Andrey Amelin Neil MacKinnon +44 (0) Dmitri Fedotkin Elena Tyagovtseva Oil and gas Metals and mining Utilities Lev Snykov Alexander Pukhaev Dmitry Skryabin Svetlana Grizan Igor Lebedinets Evgeny Pivovarov Mikhail Rasstrigin Olga Doronina Industrials, Transportation, Materials Telecommunications Retail, Real Estate Elena Sakhnova, CFA Vladimir Bespalov Victor Klimovich Maria Kolbina Tatiana Prokina Georgy Tarakanov Kevin Whyte Media, Technology Consumer Goods Oil Services and Pipes Anastasia Obukhova Ivan Kushch Olga Danilenko Financials Fixed Income Derivatives Dmitry Dmitriev Mikhail Galkin Kirill Nikiforov Mikhail Shlemov Svetlana Aslanova Maxim Korovin Kiti Pantskhava, CFA

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