Cost of sales share in Revenue sticks to existing trend

To estimate total expenses we forecast separately cost of sales, administrative expenses, financial cost and other expenses. Historically, cost of sales has constituted about 86% of revenues, where services of subcontractors, materials and personnel expenses have constituted about 82% of cost of sales. We forecast services of subcontractors, materials and personnel expenses as a share of Company’s revenue, because these types of expenditures directly depend on new contracts, which are reflected in Company’s revenue. We believe that services of subcontractors’ shares in revenue will increase from 48.5 to 50% due to the existing trend in rising of its share in revenue. We assume that materials share in total revenue will also rise from 13.5% to 15% by 2017 due to the significant rise in materials prices in 2011 and further consequent price reduction. We suppose that personnel expenses share in total revenue will remain the same as in 2011 (10.6%).

As result of the analysis we arrive at a target price of RUB281 per share, implying 54% upside to the current price.

The sensitivity of the share price to the terminal growth rate, WACC and the share of FTP implementation is summarized below in Table 6 & 7.

Table 6. Sensitivity analysis WACC Terminal Growth Rate   0.5% 1.5% 3.0% 4.5% 6.0% 16.5%           16.0%           15.5%           15.0%           14.5%

Table 7. Sensitivity analysis % of FTP Terminal Growth Rate   2.0% 2.5% 3.0% 3.5% 4.0% 32.4%           37.4%           42.4%           47.4%           52.4%

Source: A-Team analysis