1,30 1,20 1,10 1,00 0,90 0,80 / S EV / OIBDA P / E

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1 Ivestmet compay Research July 30, 2008 CTC Meda Busess expads Russa, Moscow, , Krasopreseskaya ab. 12, 7 th gate, 18 th fl. Tel.: 7 (495) Fax: 7 (495) Aalyst: E-mal: Recommedato BUY Ilya Fedotov [email protected] Bullet momets Prcpal estmates Yesterday, CTC Meda has publshed ts 2Q ad 1H 2008 US GAAP report. Amog ew features of the facal report was the cosoldato of purchased assets such as D chael, Costaflm ad Soho Meda, the compaes producg cotet. CTC Meda s quarter reveue creased by +26.3%, due to the merger wth the gve compaes, however, the growth was partally provded by atural factors. The reveue growth rate was hgher tha the expeses growth rate ad as a result, OIBDA marg added +2.1 p.p. ad reached 42.5%. 1,30 1,20 1,10 1,00 0,90 Compay s shares vs. the RTS dex The compay cofrmed ts plas to ga m USD of sales ad 45-48% of OIBDA marg. Takg to accout the purchased compaes, CTC Meda expects sales at m USD ad OIBDA marg at 42-46%. We have corrected our model, cludg the results demostrated by purchased assets. As a result, our estmato hts the lowest level of compay s forecasts, formg 650 m USD. Takg to accout the gve chages, we have estmated a ew prce of CTC Meda, whch formed 32.6 USD per share (the prevous value was 32.9 USD. The ma reaso of fall was decrease of egatve et debt, due to purchase of ew assets. Accordg to compay s data, the prce of purchased compaes 1H 2008 formed 313 m USD, excludg the cash assets. I spte of the fall, CTC Meda s stll a terestg target for vestors wth potetal growth, formg 53%. We cofrm BUY recommedato at compay's securtes. 0,80 0,70 26/07/07 19/09/07 13/11/07 07/01/08 02/03/08 26/04/08 20/06/08 RTS CTCM Iformato about CTC Meda Tcker NASDAQ CTCM Market prce, USD M / max prce durg last year, USD / Far prce at year ed, USD Upsde (dowsde), % 53.1 Total shares, uts 152,124,096 MC, m USD 3,239 EV, m USD 2,932 Facal values (US GAAP) (П) 2009 (П) Sales, m USD OIBDA, m USD Net come, m USD OIBDA marg, % Net come marg, % Facal coeffcets (П) 2009 (П) EV / S EV / OIBDA P / E ROIC, % ROE, % Gve aalytc materals of Veles Captal ca oly be used formato purposes. The compay does ot guaratee completeess of gve formato ad ts relablty, as well as t s ot resposble for ay straght or cosequetal loss resultg from a o-purpose use. Gve documet caot be cosdered as the reaso for buyg or sellg ether, oe or aother shares. All rghts o ths bll belog to Veles Captal. Reproducto ad/or spreadg of the aalytc materals Veles Captal caot take place wthout a compay s authorzato. Veles Captal 2008

2 Facal results of CTC Meda CTC Meda US GAAP facal results, m USD 1H 2007 Chg., % 1H Q 2007 Chg., % 3Q 2007 Chg., % 4Q 2007 Chg., % 1Q 2008 Chg., % 2Q 2008 Sales, c CTC Chael Domashy Chael D Chael /d /m 12 /d /m /d /m /d /m /d /m 12 CTC etwork Domashy etwork D Network /d /m 2 /d /m /d /m /d /m /d /m 2 Producto compaes /d /m 15 /d /m /d /m /d /m /d /m 15 CIS operatos /d /m 2 /d /m /d /m /d /m Expeses (132) 40.8 (186) (67) 4.2 (70) 10.3 (77) 8.9 (84) 22.7 (103) c. amortzato (12) (6) (6) 23.2 (8) 4.8 (8) (2) 54.5 (3) Operatg proft Operatg proft marg, % EBITDA EBITDA marg, % Iterest payable (0) (2) (0) /m 0 /m (0) (0) (2) Other o-operatg come/expeses Icome before tax Icome before tax marg, % Icome tax (30) 21.0 (36) (18) (9) (24) (15) 40.1 (21) Morty terest (2) (2) (2) (1) (2) (1) (1) Net come Net come marg, % Note: the chage of percet values are gve percet pots Source: compay's data; Estmato: Veles Captal July 30, 2008 page 2

3 Facal model of CTC Meda Icome statemets of CTC Meda, m USD (F) 2009 (F) 2010 (F) 2011 (F) 2012 (F) 2013 (F) Sales ,067 1,171 1,280 Costs (59) (93) (147) (217) (279) (394) (486) (563) (646) (697) (757) OIBDA OIBDA marg, % EBIT EBIT marg, % Iterest expeses (3) (7) (9) (2) (0) (0) (9) (9) (0) (0) (0) No-operatg come (losses) (0) (0) (0) (0) 7 15 EBT EBT marg, % Icome tax (11) (18) (25) (49) (63) (75) (91) (105) (101) (115) (129) Morty terest (1) (2) (3) (5) (6) (7) (10) (13) (13) (15) (17) Net come Net come marg, % Source: compay's data, Estmato: Veles Captal Balace sheets of CTC Meda, m USD (F) 2009 (F) 2010 (F) 2011 (F) 2012 (F) 2013 (F) ASSETS No-curret assets PPE ad tagble assets Other o-curret assets Total o-curret assets Curret assets Ivetores Accouts recevable Other curret assets Short-term vestmets Cash ad equvalets Total curret assets ,106 1,459 1,853 Total assets ,033 1,296 1,484 1,815 2,193 2,615 LIABILITIES Shareholder's equty Authorsed captal Other Retaed eargs ,265 1,616 2,007 Total shareholder's equty ,017 1,308 1,615 1,966 2,358 Morty terest No-curret labltes Log-term borrowgs Other o-curret labltes Total o-curret labltes Curret labltes Accouts payable Short-term borrowgs Other curret borrowgs Total curret labltes Total labltes ,033 1,296 1,484 1,815 2,193 2,615 Source: compay's data, Estmato: Veles Captal July 30, 2008 page 3

4 Statemets of cash flow of CTC Meda, m USD (F) 2009 (F) 2010 (F) 2011 (F) 2012 (F) 2013 (F) Cash flows from operatg actvtes Net come Morty terest Deprecato ad amortzato Othe (9) (37) (22) (16) (15) (35) (31) (32) (16) (20) (20) Chages workg captal 1 12 (13) 2 4 (7) (7) (6) (3) (4) (4) Net cash provded by operatg actvtes Cash flows from vestg actvtes CapEx (3) (6) (6) (4) (6) (10) (25) (30) (32) (35) (39) Other (3) (47) (7) (20) (32) (313) 0 0 (236) (269) (307) Net cash provded by vestg actvtes (6) (53) (13) (24) (38) (323) (25) (30) (269) (304) (345) Cash flows from facg actvtes Proceeds from borrowgs Repaymets of borrowgs (9) (7) (87) (60) (135) Other (31) 2 (20) Net cash provded by facal actvtes 6 19 (39) (135) Net chage of cash 21 1 (14) (9) Cash at the begg of perod Cash at the ed of perod Source: compay's data, Estmato: Veles Captal Dscout rate (WACC) of CTC Meda, % Cost of equty (k s ) Rsk-free rate year US Treasures yeld Russa rsk Stock market rsk Coeffcet β Sector β Leverage Corporate rsk Share of equty, % Cost of debt (k d ) Rsk-free rate Debt premum Tax rate Debt share captal structure WACC Estmato: Veles Captal Cash flows of CTC Meda, m USD (F) 2009 (F) 2010 (F) 2011 (F) 2012 (F) 2013 (F) Net come (corr.) Deprecato ad amortzato CapEx (6) (57) (14) (24) (6) (10) (25) (30) (32) (35) (39) Chages workg captal 1 12 (13) 2 4 (7) (7) (6) (3) (4) (4) Free cash flow Dscout rate, % Dcout coeffcet Dscouted cash flow Source: compay's data, Estmato: Veles Captal July 30, 2008 page 4

5 CTC Meda's stocks valuato TGR, % 3.0 Sum of cash flows, m USD 1,878 Termmal value, m USD 6,607 Dscouted termal value, m USD 2,986 Eterprse value, m USD 4,864 Net debt, m USD -163 Shareholer's equty (cl. morty terest), m USD 5,026 Morty terest, m USD 67 Shareholer's equty, m USD 4,959 Number of shares, m uts 152 Far value of stock at the year ed, USD Upsde (dowsde), % 53.1 Source: compay's data, Estmato: Veles Captal CTC Meda s far prce hstory /07/07 24/09/07 23/11/07 22/01/08 22/03/08 21/05/08 20/07/08 CTCM CTCM (Far prce) CTCM (vs RTS) July 30, 2008 page 5

6 Publc comparables Share Tker Curret prce, USD Target for year ed, USD Curret growth potetal, % Our recommedatos Recommedato Date of recommedato revso Tradtoal telephoy Volgatelecom, cs NNSI BUY 3/14/2008 Volgatelecom, ps NNSIP BUY 8/28/2007 Dalsvyaz, cs ESPK BUY 8/28/2007 Dalsvyaz, ps ESPKP BUY 8/28/2007 NWT, cs SPTL HOLD 6/18/2008 NWT, ps SPTLP ACCUMULATE 6/18/2008 Sbrtelecom, cs ENCO BUY 2/5/2008 Sbrtelecom, ps ENCOP BUY 8/28/2007 Uralsvyazform, cs URSI BUY 3/13/2008 Uralsvyazform, ps URSIP ACCUMULATE 8/28/2007 Cetrtelecom, cs ESMO BUY 7/7/2008 Cetrtelecom, ps ESMOP BUY 7/7/2008 STC, cs KUBN BUY 7/15/2008 STC, ps KUBNP BUY 7/15/2008 Ivestmet dea Hgh effectveess ad low debt make compay to a attractve subject for vestg Prospects of mprovg the effectveess of actvty due to the ew servces Compay's maagemet gets maxmum out of regulated servces, however CapEx lmts the growth prospects Hgh share of o-regulated servces allows compay to mprove ts facal results Hgh debt load lmts growth potetal The fall of quotes, spt of aggrasve vestmet program, makes compay's shares attractve. Sgfcat fall of quotes after year's start teds a growth potetal up to far prce Alteratve telephoy Comstar-UTS CMST BUY 4/24/2008 Growth potetal due to developmet of regoal markets Log-dstace commucato Rostelecom, cs RTKM SELL 7/21/2008 Rostelecom, ps RTKMP BUY 7/21/2008 A extremely hgh market prce, resulted from buyup of shares, yet usupported by fudametal factors Cellular commucato Vmpelcom VIMP BUY 6/6/2008 Chage of marketg polcy tedg growth of proftablty, possble trasformato to a uversal operator (carrer) MTS MTSS BUY 5/21/2008 Soud facal results, prospects of 3G techology use, fudametal uderestmato of shares Meda CTC Meda CTCM BUY 7/30/2008 Growth of ad market, prces ad spread busess, due to merger wth other compaes RBC RBCI BUY 10/2/2007 Separato of IT busess ad mprovemet of prmary busess' effectveess Other Strocs SITR SELL 5/6/2008 Compay demostrates record losses ad low effectveess, determg ts low fudametal value Data: Bloomberg; Estmato: Veles Captal July 30, 2008 page 6

7 Bref vestor s gude Methods, used for compay's share evaluato Icome approach Comparables approach Expeses approach DCF method EVA method Multplcatve method Net assets method Cocept of evaluatg the ufed object (EV) * FCFF dscoutg EVA dscoutg Shareholders' value drect calculato (SV) ** FCFE dscoutg EVA for shareholders dscoutg (Edwards-Bell-Ohlso method) * ** Debt cost s calculated separately ad the subtracted from the sum total cost of busess (target EV), formed cosderg the cash flows/ ecoomc profts of frm. Debt s accouted tegrated -va aual coverage. So the far cost of shareholders' value (target SV) s formed drectly - cosderg the cash flow / ecoomc profts for holders. Note: DCF methods dffer from the methods of ecoomc proft by the way of vestmets calculato. The methods of ufed object evaluato cocept dffer from thee methods of drect calculato of shareholders' value costs - by the way of accoutg cost ad mateace of debt labltes. Cost calculato wth the frames of come approach: DCF method (FCFF) DCF method (FCFE) EVA method EBO method Busess cost calculato ( EV ) wth the frames of uted object cost evaluato FCFF EV = + + NA =1 (1+ WACC ) (1+ WACC ) EVA EV = IC NA (1+ WACC ) (1+ WACC ) =1 SV = Shareholders' captal value calcculato ( SV ) SV = EV - D =1 SV = EV - D FCFE + (1+ k ) (1+ k s s 1 =1 SV = BV + SVA + (1+ k ) (1+ k ) s s ) + Cash + NA + Cash+ NA Sgs: EV SV Cagr BV, E EBIT EBITDA EBT EAT EPS NOPAT FCFF FCFE EVA SVA WACC k s D Cash NA IC ROIC ROE ROA - Eterprse Value - Shareholders Value - Termal Value - developmet rates wth the target perod - Balace Value, Equty - operatoal proft from sellg, proft before paymets of credt terest ad come tax - operatoal proft before paymet of credt terest, come tax ad amortzato - Eargs Before Tax - Eargs After Tax - Eargs Per Share - et operatoal proft, free from effects of debt facg NOPAT = EBIT * (1- come tax effectve rate) - Free Cash Flow to Frm FCFF = gross cash flow - gross vestmets Gross cash flow = NOPAT + amortzato - Free Cash Flow to Equty FCFE= gross shareholders' cash flow - gross vestmets Gross shareholders' cash flow = EAT of operatoal proft (cludg terest payoffs) -aual debt coverage + attracted borrowed assets + amortzato - Ecoomc Value Added EVA = ecoomc proft spread * IC = (ROIC - WACC) * IC - Shareholders Value Added SVA = spread * E = (ROE - k s ) * E - Weghted Average Cost of Captal - requred shareholders' yeld - far (market) cost of et debt - cash assets, alog wth market securtes o thee balace - o-operatoal assets - Ivested Captal - Retur o Ivested Captal ROIC = NOPAT / IC - Retur o Equty - Retur o Assets July 30, 2008 page 7

8 Iformato dsclosure The statemet of a aalyst ad cofrmato of the resposblty wthdrawal The gve report s prepared by the aalyst (-s) of the Ivestmet Compay Veles Captal. The gve estmatos the preset report reflect persoal opo of the aalyst (-s). The award of the aalysts does ot deped, ever depeded ad wll ot deped upo the specfc recommedatos or estmatos, provded the preset report. The award of the aalysts depeds upo the geeral effcecy of the busess of the Ivestmet Compay Veles Captal, determed by the vestmet beeft of the compay s clets ad also upo the comes from other types of actvty of the Ivestmet Compay Veles Captal. The gve report, prepared by the Research Departmet of the Ivestmet Compay Veles Captal, s basg o the publc formato. The preset revew was prepared depedetly from other Departmets of the Ivestmet Compay Veles Captal, ad ay recommedatos ad judgmets, preseted the gve report reflect oly the vew pot of the aalyst (-s), partcpated makg of the preset revew. Due to that cosderato, the Ivestmet Compay Veles Captal cosders beg ecessary to state that the aalysts ad the Compay are ot resposble for the cotet of the gve report. The aalysts of the Ivestmet Compay Veles Captal do ot take overall resposblty to regularly up-date the formato, cotaed the preset report, ad also to aouce about all chages, troduced to the preset revew. Provded aalytcal materal of the Ivestmet Compay Veles Captal could be used oly wth formato ams. The compay does ot guaratee the completeess ad precousess of provded formato the gve report ad ts relablty, ad also s ot resposble for drect ad drect losses from usg of the gve materals. Ths documet caot serve as a bass for purchase ad sellg ay securtes, ad caot also be cosdered as a offer from the part of the Ivestmet Compay Veles Captal. The Ivestmet Compay Veles Captal ad (or) ts subsdares alog wth the staff, drectors ad aalysts of the Ivestmet Compay Veles Captal have the rght to purchase ad sell ay securtes, metoed the gve revew. The Ivestmet Compay Veles Captal ad (or) ts subsdares ca serve as a market-maker or have the labltes for uderwrtg of compaes securtes, metoed the gve revew, ca purchase or sell them for clets, ad also make ay actos, whch do ot cotradct the Russa law. The Ivestmet Compay Veles Captal ad (or) ts subsdares ca also be terested the possblty of provdg the compaes, metoed the preset revew, wth the vestmets ad bak or ay other servces. All rghts for the gve bullet belog to the Ivestmet Compay Veles Captal. The reproducto ad/or dstrbuto of the aalytcal materals of the Ivestmet Compay Veles Captal are prohbted wthout the wrtte permsso of the Compay. Veles Captal The prcple of recommedato assgmet The vestmet recommedatos are gve based o the evaluato of the compay s share yeld. The bass for the calculato of the expected compay s cost s the evaluato by the dscouted cash flows method (DCF). I some estmatos the method of comparable coeffcets, ad also the mxed estmato (by DCF method ad by comparable coeffcets method) are appled. All recommedatos are assged based o the determed by us the far cost of the shares wth the earest 12 moths. At the preset momet the vestmet scale of the Ivestmet Compay Veles Captal s the followg: BUY correspods to the growth potetal of the shares wth the earest 12 moths by 15% or more. ACCUMULATE correspods to the growth potetal of the shares wth the earest 12 moths for 5-15%. HOLD correspods to the growth (reducto) potetal of the shares wth the earest 12 moths from -5% to 5%. REDUCE correspods to the reducto potetal of the shares wth the earest 12 moths from 15% to 5%. SELL correspods to the reducto potetal of the shares wth the earest 12 moths by 15% or more. I some cases the devatos from the evaluato scale gve above, based o whch the recommedatos are assged, are possble. That fact relates to the hgh volatlty of some securtes partcular, ad market the whole, ad also to the dvdual characterstcs of oe or aother ssuer. I order to get addtoal formato ad specfcatos please cotact the Research Departmet of the Ivestmet Compay Veles Captal. July 30, 2008 page 8

9 Research Departmet Mkhal Zak Head of Departmet Strategy Staslav Fomeko Metallurgy Iva Maaeko Fxed come market, Macroecoomcs Mara Irkly Trasport, machery Ilya Fedotov Telecommucatos Oleg Zotkov Eergy Dmtry Lyutyag Ol ad gas Oleg Salmaov Fxed come Shaw Gzatul Edtor/Iterpreter Sales ad Tradg Departmet Yury Pavlov Drector (VIP clets) Sergey Vetoshk Corporatve Clets Alexader Tara Tradg (Ukrae) Strategc Ivestmets Departmet Adrey Lee Head of departmet Assets Maagemet Beyshe Isaev Head of Departmet Vadm Labed Ivestor relatos Staslav Brodsky Ivestmet products Russa, Moscow, , Krasopreseskaya ab. 12, Etr. 7, floor 18 Tel.: 7 (495) , Fax: 7 (495) Ukrae, Kev, 04070, Naberezho-Kreschattskaya, 37/55 Tel.: 38 (044) Fax: 38 (044) July 30, 2008 page 9