Gazprom. RESEARCH August 11, Target: 2,92 USD (+38.4%), BUY. 1Q 2016 results. Gazprom and RTS index

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1 RESEARCH August 11, 2016 Gazprom 1Q 2016 results IAS net profit of Gazprom for 1Q 2016 formed bn RUB vs the consensus forecast at 357 bn RUB. The estimate has reduced 5.1% vs the similar period of the previous year. EBITDA reduced 24% to bn RUB, having exceeded the market s expectations significantly and formed 1, bn RUB vs the forecast of 1,661 bn RUB 5% growth vs the estimate for 1Q Sales from gas selling by the company grew 7.2% at the expense of the growth of sales from export to far abroad by 16% (growth of the actual volumes of export has compensated prices reduction easily), at that, the sales from selling to the states of the former Soviet Union have reduced 26%, sales in Russia grew 1.8%. The positive effect of the currency reestimation at bn RUB (133 bn RUB has been expected) has provided for a significant support to the net profit. For 1q 2016, the free cash flow of Gazprom has formed bn RUB, thus the given estimate turned out to be significantly above targets (consensus provided for the result near zero), which became possible at the expense of the changes in the circulating capital for bn RUB. We assume the financial results of Gazprom for 1Q are mildly positive, at that, for 2-3Q we expect the results to reduce significantly vs the 1Q as the given period involves the lowest export prices for gas in dollar terms. Besides, the estimates will be pressed by the ruble that got stronger vs 1Q (which will partially be compensated by the profit from currency reestimation). The company confirmed its targets on the export volume to the far abroad at bn cubic meters (vs the bn cubic meters for the previous year) and its targets on the annual average export price for the far abroad which is expected to form USD per K cubic meters. The investment program for the current year has nearly unchanged volume as well: the sum investment spending of Gazprom for the year are expected to form trillion RUB. 120% 110% 100% +7 (495) research@veles-capital.ru Target: 2,92 USD (+38.4%), BUY 90% 80% 70% Analyst: Tanurkov Vasiliy VTanurkov@veles-capital.ru Gazprom and RTS index 60% GAZP RTS Index Sources: markets data; estimation: Veles Capital Company profile Information on Gazprom Bloomberg Ticker GAZP Price of os., USD 2,11 52 week Low/High os., USD 1,50 / 2,62 Target price of os., USD 2,92 Upside os., % 38,4 Shares outstanding os Market CAP, mln USD EPS 2015, USD 0,55 EV, mln USD Excluding treasury stocks Source: company s data; estimation: Veles Capital Financial estimates dynamics (E) 2017 (E) Sales, mln USD EBITDA, mln USD Net Income, mln USD EPS, USD 0,55 0,55 0,77 EBITDA Margin, % 28,3 20,9 29,2 Net Margin, % 13,0 15,0 17,4 EV / S EV / EBITDA P / E 0,78 0,90 0,75 2,76 4,32 2,56 3,85 3,83 2,73 ROIC, % 7,9 4,8 9,5 ROE, % 8,9 8,3 10,7 Source: company s data; estimation: Veles Capital Given analytic materials of Veles Capital can only be used in information purposes. The company does not guarantee completeness of given information and its reliability, as well as it is not responsible for any straight or consequential loss resulting from a non-purpose use. Given document cannot be considered as the reason for buying or selling either, one or another shares. All rights on this bill belong to Veles Capital. Reproduction and/or spreading of the analytic materials Veles Capital cannot take place without a company s authorization. Veles Capital 2016

2 For the current year, we expect the sales to reduce in dollar terms by 13.3% to 86.9 mn USD and the net profit to grow 0.4% to bn USD. In case 25% of IAS net profit is paid off, dividends of Gazprom form 9.2 RUB per share, meaning the dividend yield of Gazprom forms 6.7% vs the current quotes. If the payoff ratio forms 50%, then dividend yield forms 13.5%, making Gazprom one of the leaders by the dividend yield at the Russian market. We confirm the previous estimation of the fair cost of the stock of Gazprom as of the end of 2016 at the level of 2.92 USD per share. The growth potential vs the current quotes forms 38.4%, we keep the recommendation BUY. August 11, 2016 page 2

3 Gazprom financial model, mln USD (E) 2017(E) (E) 2017(E) Income Statement Sales WACC Risk-free rate, % 5,1 5,2 5,0 5,0 5,0 Operational Expense (less D&A) Income tax rate, % 22,1 48,8 13,0 15,8 20,0 EBITDA Cost of equity (cs), % 12,1 12,2 12,0 12,0 12,0 D&A Market risk, % 5,0 5,0 5,0 5,0 6,0 EBIT Beta leveraged 1,0 1,0 1,0 1,0 1,0 Nonrecurring issues Specific risk, % 2,0 2,0 2,0 2,0 2,0 Interest Expense Cost of debt, % 6,6 6,7 6,5 6,5 6,5 Nonoperational Income/Expense Specific risk, % 1,5 1,5 1,5 1,5 1,5 Pretax Income WACC, % 10,8 10,2 10,2 10,3 10,1 Income Tax Expense Minority Interest Free Cash Flow Net Income NOPAT D&A Balance Sheet CAPEX Lon Term Assets Net Change in Working Capital PPE and Intangible Free Cash Flow Other LTA WACC, % 10,8 10,2 10,3 10,1 Current Assets Discount factor 0,90 1,00 1,00 0,91 Receivables, Inventories and Other CA Discounted free cash flow Short Term Investments Cash and Equivalents Common stock valuation Total Assets TGR, % 3,0 Equity Discount cash flow sum (+) Shareholders Equity Discounted terminal value (+) Minority Interest EV Long Term Liabilities Net debt (-) Long Term Debt Minority interest (-) Other Preffered Stocks (-) 658 Current Liabilities MC Short Term Debt Fair value of common stock, USD 2,92 Payables Total Liabilities and Equity Sensibility TGR Cash Flow Statement Operating Activity WACC 2,0 1,5-47 % 2,0-43 % 2,5-38 % 3,0-33 % 3,5-27 % 4,0-20 % 4,5-13 % Net Income ,0-37 % -31 % -25 % -19 % -11 % -2 % +8 % D&A тек. -24 % -17 % -9 % +0 % +10 % +22 % +36 % Net Change in Working Capital ,0-7 % +2 % +13 % +25 % +39 % +56 % +76 % Other ,0 +15 % +27 % +42 % +59 % +80 % +105 % +137 % Investment Activity CAPEX Market Multipliers, 1х Investments in Subsidiary EV / Sales 0,5 0,5 0,8 0,9 0,8 Other EV / EBITDA 1,3 1,9 2,8 3,9 2,6 Financial Activity EV / EBIT 1,5 2,5 4,0 6,1 3,6 Net Change in Debt P / E 1,5 12,6 4,0 3,5 2,8 Net Change in Equity P / BV 0,2 0,3 0,3 0,3 0,3 Dividends Other Net change in cash and cash equivalents Ratios EBITDA Margin, % 38,8 28,4 28,3 23,0 29,5 Net Margin, % 20,8 2,8 13,0 16,7 17,6 EBITDA / interest expense, 1х 47,6 35,5 25,7 18,0 22,9 Investments / Sales, % 27,9 19,6 27,0 26,2 24,1 ROE, % 12,0 2,4 8,9 9,4 10,6 ROIC, % 12,7 7,8 7,9 5,9 9,4 Debt / EBITDA 0,9 1,1 1,7 2,3 1,8 Net Debt / EBITDA 0,5 0,7 1,0 1,4 1,1 Debt / Equity 0,2 0,3 0,3 0,3 0,3 Source: company, estimates: Veles Capital August 11, 2016 page 3

4 Information disclosure The statement of an analyst and confirmation of the responsibility withdrawal The given report is prepared by the analyst (-s) of the Investment Company Veles Capital. The given estimations in the present report reflect personal opinion of the analyst (-s). The award of the analysts does not depend, never depended and will not depend upon the specific recommendations or estimations, provided in the present report. The award of the analysts depends upon the general efficiency of the business of the Investment Company Veles Capital, determined by the investment benefit of the company s clients and also upon the incomes from other types of activity of the Investment Company Veles Capital. The given report, prepared by the Research Department of the Investment Company Veles Capital, is basing on the public information. The present review was prepared independently from other Departments of the Investment Company Veles Capital, and any recommendations and judgments, presented in the given report reflect only the view point of the analyst (-s), participated in making of the present review. Due to that consideration, the Investment Company Veles Capital considers being necessary to state that the analysts and the Company are not responsible for the content of the given report. The analysts of the Investment Company Veles Capital do not take overall responsibility to regularly up-date the information, contained in the present report, and also to announce about all changes, introduced to the present review. Provided analytical material of the Investment Company Veles Capital could be used only with information aims. The company does not guarantee the completeness and preciousness of provided information in the given report and its reliability, and also is not responsible for direct and indirect losses from using of the given materials. This document cannot serve as a basis for purchase and selling any securities, and cannot also be considered as an offer from the part of the Investment Company Veles Capital. The Investment Company Veles Capital and (or) its subsidiaries along with the staff, directors and analysts of the Investment Company Veles Capital have the right to purchase and sell any securities, mentioned in the given review. The Investment Company Veles Capital and (or) its subsidiaries can serve as a market-maker or have the liabilities for underwriting of companies securities, mentioned in the given review, can purchase or sell them for clients, and also make any actions, which do not contradict the Russian law. The Investment Company Veles Capital and (or) its subsidiaries can also be interested in the possibility of providing the companies, mentioned in the present review, with the investments and bank or any other services. All rights for the given bulletin belong to the Investment Company Veles Capital. The reproduction and/or distribution of the analytical materials of the Investment Company Veles Capital are prohibited without the written permission of the Company. Veles Capital The principle of recommendation assignment The investment recommendations are given based on the evaluation of the company s share yield. The basis for the calculation of the expected company s cost is the evaluation by the discounted cash flows method (DCF). In some estimations the method of comparable coefficients, and also the mixed estimation (by DCF method and by comparable coefficients method) are applied. All recommendations are assigned based on the determined by us the fair cost of the shares within the nearest 12 months. At the present moment the investment scale of the Investment Company Veles Capital is the following: BUY corresponds to the growth potential of the shares within the nearest 12 months by 15% or more. ACCUMULATE corresponds to the growth potential of the shares within the nearest 12 months for 5-15%. HOLD corresponds to the growth (reduction) potential of the shares within the nearest 12 months from -5% to 5%. REDUCE corresponds to the reduction potential of the shares within the nearest 12 months from 15% to 5%. SELL corresponds to the reduction potential of the shares within the nearest 12 months by 15% or more. In some cases the deviations from the evaluation scale given above, based on which the recommendations are assigned, are possible. That fact relates to the high volatility of some securities in particular, and market in the whole, and also to the individual characteristics of one or another issuer. In order to get additional information and specifications please contact the Research Department of the Investment Company Veles Capital. August 11, 2016 page 4

5 Trade Department Evgeni Shilenkov Head of Department Pavel Altukhov Managing director Roman Nazarov Head of Equity Brokerage Department Alexey Nikogosov Trader Akexander Tsvetkov Trader Artem Moskovsky Trader Research Department Ivan Manaenko Head of Department Vasiliy Tanurkov Oil and gas, Chemicals and fertilizers Alexander Kostyukov Utilities Artur Navrotsky Debt Markets Yury Kravchenko Banking, Money market Egor Dakhtler Financials Mikhail Kantolinsky Sales-trader Vladimir Martynenko Sales-trader Russia, Moscow, , Krasnopresnenskaya nab. 12, Entr. 7, floor 18 Tel.: 7 (495) , Fax: 7 (495) Cyprus, Nicosia Kennedy, 23 GLOBE HOUSE, 5th floor 1075 Tel: +357 (22) , Fax: +357 (22) August 11, 2016 page 5

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