Investment RisksBUSINESS RISKS: Lower revenues as the result of a drop in demand for construction services due to worsening economic conditions. Poor economy can lead to the government cutting its spending on infrastructure projects, which will, in turn, hit the company’s revenues. However, this is somewhat smoothed as development of infrastructure is among the country’s top priorities and the government seems to be committed to executing the FTP even under weak macroeconomic situation. Risk of the company being unable to win tenders for new projects. The competition in the infrastructure construction market is increasing intensively making it harder for the company to attract new projects. Nevertheless, Mostotrest’s diversified business model and thorough expertise together with its excellent track record helps successfully bid for new projects. Higher than expected costs can jeopardize profitability under fixed contract prices. The company is not compensated for increases in project costs due to inflation in construction materials prices or other circumstances. As almost a third of the materials used in construction is produced internally, Mostotrest can handle the inflation of up to 17% without pressure on margins. Failure of debtors to meet their obligations. The company is reliant on funds it receives during the second half of the year from customers to finance its day-to-day operations and failure of the latter to make their payments will cause serious liquidity problems. However most of the customers are government bodies which do not normally delay payments. Delays in preparation works represent a significant risk to timing of the company’s projects execution. POLITICAL RISKS: Changes in government policy regarding the allocation of investments among different sectors of the economy represent a significant risk that can negatively affect the company’s business. The major shareholders have strong connection with Russian authorities which helps Mostotrest strengthen its position, however, should these shareholders lose favor the company’s business will be adversely affected. OTHER RISKS: Risk of overstated revenues due to the use of IAS11 revenue recognition principle under which the company recognizes revenues to the amount of costs incurred plus acceptable margin. Overoptimistic margins can bias the revenues thereby misleading the public. Low trading liquidity might impede the convergence of the equity’s market price to fundamental value derived on the basis of our analysis.
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| Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Russia, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock. |
APPENDIX A - FINANCIAL STATEMENTS (1/3)
