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OJSC Live office (ОАО Живой офис) IPO – burning questions

Date: 02 Jul 2013 23:30

OJSC Live Office plans to do an IPO on MICEX on July 3, 2013 (

Live office is a B2B office products supplier in Russia - like Office Depo or Staples in the US.

One of IPO organizers is Finam known for Utinet IPO, though this time research report was written by EASTLAND Capital.

Company’s business model and financials raises several fundamental questions so I would not do a full-valuation and rather focus on these questions.

Overall investment story

It’s growth equity investment at a supposedly turnaround point.

Current trends looks scary:
- EBITDA declines for at least the 2nd year in a row (2011, 2012) and we have not seen reports before 2010!
- EBITDA margin achieved 0.2% in 2012

The company plans to get 129 RUB * 4m shares=516m RUB to invest in working capital and CAPEX. The company is sincere that in 2013 situation will deteriorate and EBIT will go to negative zone. But suddenly in 2014
- Revenue will almost double
- EBITDA margin will increase from 0.5% to 5.9%

Can this happen on a …
- B2B market (=slow switching)
- Very competitive and price-sensitive market
- Market growing a bit faster than inflation: 10% a year

? The answer is hardly.

EBITDA Margin is not expected above 9% with 2-6% as a realistic target

Historical EBITDA for 2010-2012 was never higher than 0.8%. The company forecasts sudden increase to 10.3% in 2014 and 13.2% in 2017. Is it realistic?

Live Office P&L history and forecast

Benchmarks given by EASTLAND Capital says no. Here is EBITDA Margin for all DM benchmarks and one EM benchmark (will discuss later why other from EM are not relevant benchmarks).

EBITDA Margin benchmarks - office suppliers

After 2008 crisis EBITDA Margin none of the benchmark companies went above 9%. It was in 2-9% corridor which suggests that a company like Live Office which is not a market leader should assume to achieve 5-6% maximum.

Looking at historical numbers 2%-6% can be considered as a good outcome of planned CAPEX and marketing investments.

EM benchmarks used are almost all not very relevant

Just looking at the core businesses of the proposed companies becomes clear that all except Officemate PLC could hardly be used as benchmarks due to different dynamics in their industries vs. office products supply industry.

Comparables suggested in the IPO research report

Shanghai Xinhua Media Co. – not very relevant

Shanghai Xinhua Media Co., Ltd. engages in the book publishing, newspaper operation, advertising agency, e-commerce, media investment, and logistics and distribution businesses in China. The company is also involved in the wholesale and retail of books, magazines, electric publics, and stationeries. In addition, it engages in the publishing, printing, and distribution of newspapers, journals, and magazines; wholesale, retail, and leasing of video and audio products; design, production, and issue of advertisements; trading business; property management business; and provision of economic trading consulting services, as well as warehousing and delivery services. The company operates 200 bookstores. Shanghai Xinhua Media Co., Ltd. was formerly known as Hualian Supermarket Holdings Co., Ltd. The company is headquartered in Shanghai, China.

Jarir Marketing Company (Jarir) – not very relevant

The company is offering a wide range of products including school & office stationeries/supplies, education aids & books, PCs & laptops, PCs & laptop accessories, digital electronics & video games and smart phones & PC tablet. According to the given information, the company has strong relationships with worldwide leading brands and companies particularly in PCs segment. Moreover, Jarir has a strong and well-diversified wholesale customer base, which includes oil companies, banks, government and health care.

Gestetner, Sri Lanka – not very relevant

Gestetner of Ceylon is the sole distributor of Gestetner brand B&W and colour photocopying machines in Sri Lanka. In addition the Company is the authorized distributor of the prestigious brand of Fujitsu Laptops and Daito stencil duplicators.

The Company is a leading provider of Total Document Solutions in Sri Lanka making available cutting edge IT based hardware and software solutions. The document life cycle combined with a range of business and professional services are also provided to our customers.

Office Equipment PLC – not very relevant

Office Equipment PLC engages in the import, distribution, and maintenance of office equipment in Sri Lanka. Its products include note counting machines, coin counting machines, time recorders, and currency sorting systems. The company is based in Colombo, Sri Lanka.

Officemate PLC - ok

Officemate Public Company Limited supplies office products through printed and online catalogues in Thailand. Its products comprise writing and correction, office stationery, glue, tape, packing, filing, storage, conference presentation, beverage, canteen, and cleaning products, as well as furniture, ink and toners, computer supplies, papers, books, envelopes, business machines, electronics, and factory products. The company is based in Bangkok, Thailand.

EV/Sales for Officemate PLC was too high for 2012 (4.0x) due to reverse merger and is not representative. So 2013 EV/Sales for EM would be 0.6x vs. 1.16x which will considerably decrease multiples valuation.

Leaving only Officemate PLC as an only comp will considerably decrease multiples valuation in 2012-13.

Investments in working capital didn’t work that efficiently in the past

In 2012 working capital grew 90.7m RUB while revenue grew 35% (203m RUB).

If the company invests ~350m RUB in working capital in 2013-15, would it help to grow the revenue on 3,857m RUB? Probably not, even not close to that.

To conclude, IPO research by EASTLAND Capital has several unjustified assumptions which are critical for valuation. If they are corrected, resulted valuation would probably hardly justify the proposed IPO price, not to mention required equity upside.

Tattelecom – Russian Value Trap with 80% upside

Date: 23 Mar 2013

Tattelecom (JCS Tattelecom, TTLK): fixed line telecom operator in Russia. Fundamentals are appealing:
  • Regional leader with > 50% market share
  • EV/EBITDA 2012E=2.1x
  • Stable dividend yield: 6.6% for 2012, 2.5%-18.7% for 2006-2011
  • 80% upside based on DCF
  • 130-180% upside based on comparables
What is this: strong BUY, ideal LBO candidate or a value trap? Let’s take a look at its fundamental value and how it could be realized.

1. Revenue forecast – below inflation growth from fixed line telephony and broadband internet

Tattelecom is a fixed line telecom provider in Tatarstan – one of Russia’s regions with 3.8m population and 75.9% urban citizens.

Tattelecom on 27 Apr 2012 expanded to mobile market: it became an MVNO using infrastructure of Smarts – mobile operator from Samara. As Tattelecom is just at the beginning of its way to mobile, it’s difficult to estimate mobile influence on revenue, margin and CAPEX. In this analysis

- it’s assumed that the mobile segment will generate average return on capital
- mobile revenue and related CAPEX are not modeled

1.1 Fixed line telephony market – slow ARPU growth with slow subscribers decline

Tattelecom was formed as a fixed line telephony operator and continues in this way: 54% of 2011 revenue came from fixed line telephony. Fixed line telephony is a declining market by number of subscribers. How fast will the decline happen and will it be compensated by ARPU growth?

To analyze that I looked at fixed line telephony data for the biggest telecom operators WW. They usually have dominating market shares in their respective countries and thus changes in their revenue, subscribers and ARPU approximate market behavior.

Fixed line telephony subscribers, APRU and revenue change for top operators WW

Source: Capital IQ

Note: the difference between the speeds of subscriber decline for Business and Residential segments are not very different for benchmarks: 1-2%, so the difference in the mix doesn’t cause material differences between companies.

The best and the only Russian benchmark for regional fixed line telecom services is Rostelecom. Its data shows accelerating decline speeds in number of subscribers.

Rostelecom fixed line telephony: subscribers and ARPU growth

Source: Rostelecom

Rostelecom – fast ARPU growth with fast subscribers decline strategy:
  • High APRU growth policy lead to sharp acceleration in decline speeds which reached 4.5%.
  • As a result Rostelecom made a correction in ARPU growth and decreased it to 3.6% as of Q3 2012
  • This strategy is close to BT in the last 3 years and Telecom Austria in the last 5 years
Tattelecom historically followed “slow ARPU growth with slow subscribers decline” strategy which is close to global benchmarks. I assume Tattelecom will continue using it going forward. More specifically:

  • Fixed line market declined 6% in 2009, 1.5% in 2010, 1.7% in 2011 (based on indirect data). Global benchmarks assume 6% decline
  • I would assume based on historical data that the market will not deteriorate so quickly and will achieve 5% CAGR decline speed in 2017
  • Global benchmarks assume 1% growth
  • In 2011 and 2012 Tattelecom showed 4.2% and 2.2% growth
  • I would assume 2% for 2012 and 2013 and then 1%

1.2 Fixed broadband internet market – Tatarstan is ~4.5 years behind developed European countries

Broadband internet is rapidly developing in Tatarstan – penetration is only 51%. The question is when this growth will stop.

Fixed broadband penetration in Tatarstan - estimation

To analyse this I looked at the history of key European markets.

Source: World Bank, Eurostat

Based on the above data, I assume that Tatarstan is 4.5 years behind developed European markets and forecast subscriber growth as an average for two relevant years from the benchmark. For example, 2012 growth rate is an average for 2007 and 2008 growth rates.

Fixed Broadband penetration in Tatarstan - forecast

The real rate may be slower: mobile broadband and Smartphone penetrations are higher now than they were in Europe 4.5 years ago which provides considerable competition for fixed broadband.

Additional data point can be found for other regions for residential broadband internet (source: AC&C):
- Russian market grew 15% in Q3 2012 vs. Q3 2011
- Moscow (a saturated one with good organic growth prospects) grew 4% in Q3 2012 vs. Q3 2011

Russia residential broadband subscribers growth

Source: AC&C

Tattelecom fixed broadband ARPU forecasted as a slow 2% decline in 2012-2014 and stabilization to 0% since 2016 as it happened in Moscow.

1.3 Revenue forecast – from 3.7% growth in 2012 to 0.1% in 2017

For both segments I assume based on historical data that Tattelecom’s market share will remain constant.

Tattelecom revenue forecast

2. EBITDA Margin – stable, no reasons to believe in improvements

Tattelecom EBITDA margin (37.6% in 2011) is above average among WW fixed line telecom providers, but is almost the lowest among cable operators in Europe and US. I believe there is a clear potential to grow EBITDA margin:

- Ziggo while run by PE owners achieved 56%
- Rostelecom showed 38.4% in 2010, 39.5% in 2011

At the same time, there are no signs from Tattelecom management that they have abilities, desire and plans to do that.

Tattelecom EBITDA margin is forecasted at the same level as in 2011: 37.6%

Source: Capital IQ

EBITDA Margin of top worldwide cable operators

Source: HSBS, Ziggo, 1 May 2012

3. CAPEX – assumed at 20-22% of revenue

Average CAPEX as % of Revenue was at 23% for 2008-2012 while average data for WW comparable companies suggests 16%. 2012 showed 22% based on RAS accounting.

High CAPEX were probably attributed to the historical fast growth in broadband internet which required a lot of upfront investments. As it was assumed before, active growth in broadband penetration will continue for 2013 and 2014. I forecast CAPEX/Revenue at 22% for 2013 and 2014 (in line with 22% in 2012) and then 20%.

4. DCF Valuation: 80% upside

DCF valuation is done for 01.01.2013.

Tattelecom DCF valuation

Tattelecom DCF valuation sensitivity

Potential upsides for DCF:
+ Slower decline of fixed line telecom subscribers
+ Broadband internet growth faster than expected
- Deterioration in EBITDA margin due to wages inflation and not enough optimization

5. Russian and Global comparables: 130-180% upside

The most relevant comps for Tattelecom are Russian telecom companies as Russian stock market overall has a big “country risk” discount.

By any of the 3 multiples Tattelecom has 130% growth potential, or more than two times cheaper.

For comparison below is a list of global benchmarks (except one outlier with 56x). The median is 5.9x which means that Tattelecom has 180% growth potential.

6. Value realization scenarios: probability is unclear

How could this huge value upside be realized? Realistically, only through change of control in the following scenarios:
  • Acquisition of Rostelecom
  • LBO
  • Privatization on an open auction
But, how is it viable? Owner of Tattelecom Svyazinvestneftehim sold nothing to external companies since 2005. Their strategy is “hold forever” so they probably would not sell in the future and would not care about delivering value for minority shareholders. This raises a question: why is Tattelecom public at all?

7. Conclusion: it’s a convertible bond

In a nutshell we have:

+ DCF upside is 80%. Comps assume 130-180%
? Unclear prospects for value realization

This makes this stock look like a convertible bond: there are no reasons for value decline and there is a small probability for big upside in case of change of control event.

Abrau Durso – 48% upside with "Champagne"

Date: 08 Jun 2012

Abrau Durso (JSC Abrau Durso, MICEX:ABRD) started to trade at MICEX-RTS on 11 April 2012 to "test" investor interest. So, let's test our interest.

The intrigue of the stock is that it's very cheap comparable to multiples from other emerging markets… except Russia.

EV/2011E EBITDA = 5.9x

What about DCF valuation?

My target price is 8,167 RUB which is 48% to 08.06.2012 close price at 5,501 RUB.

1. Russian Vine Market and Revenue

We will use the following model: Revenue = Volume * Price

Assumed macro context: slowdown of Russian GDP growth from ~7% in 2001-2007 to ~4% in 2011-2016

1.1 Russian sparkling vine market

In April 2012 presentation the company makes the claim that wine market in Russia will grow fast to catch up with European penetration. I don't support this.

Is there potential fast growth in vine consumption in Russia? No, but there is potential upside

The claims that it would grow with GDP to catch up with developed European countries is questionable:
  • In the last 5 years (since 2006) it grew 6.5% p.a.
  • US has even lower consumption: 8.8 vs. 9.3 in Russia

A lot of researchers assume an upside which is a good upside to have for a stock. This is one of the best papers on the topic:

Is there potential fast growth in penetration of sparkling vines to vine market? No

1) Russia already has the 2nd highest penetration among ~50 top countries.
2) Penetration of sparkling vines to wines showed no particular trend since 2006

So, expected growth of Russian sparkling wine market is well defined by its history: 2.2%

1.2 Abrau Durso Market share

Abrau Durso was aggressively gaining market share in 2008, 2010, 2011. Loss of market share in 2009 is well explained with 31% price increase vs. 17% CAGR in 2006-2008 and 14% CAGR in 2009-2011

The company didn't do any acquisition in 2009-2010 of production assets: the only acquisition was the following: "On 22 May 2009 the Group acquired 100% of the trading company LLC Atrium with the aim to create the distribution network within the Group."

I believe that the company will continue market share growth at 13% rate (CAGR 2006-2011): with 2011 market share of 4.9% there is enough space to grow.

1.3 Abrau Durso Price increase

Price increase was the biggest driver of revenue in Abrau Durso business model: prices grew at 18.6% CAGR in 2006-2011.

Part of this price increase was driven by growing penetration of the more expensive Classical champaign: it contributed 2.5% to price CAGR in 2009-2011. This contribution is forecasted to decrease to 1.3% in 2011-2014.

Note: there is an inconsistency in share of classical champaign at page 15 of the presentation and operational report (

Price CAGR decreased from 17% before 2008 crisis to 14% after (-3% change). It's defined by several effects: inflation, duties, currency rates and share of imported vs. local wines. The last one is hard to take into account due to lack of data.

I would expect price growth to experience the same slowdown in the coming years due to increased competition.

Price CAGR forecast 2011-2016: 10% (11% rate before taking into account effect of slower growth of Classical champaign or 10% after)

1.4 Revenue forecast

Volume growth: 2% + 13% = 15%
Price growth: 10%
Revenue growth: 25%

Company's forecast: 34m bottles in 2015, which is 21% CAGR


In 2010 Gross Margin showed improvement, but SG&A increased due to G&A expenses growth. In 2011 EBITDA margin increased on 5.3% which is quite big and is potentially caused by preparation to IPO. Unfortunately there is no explanation for this change. Also, 2011 EBITDA margin is already on high levels – 32.6%.

To base projections on 2009-2010 data where all costs splits are provided, it's assumed:
  • 2012 EBITDA at average between 2010 and 2011
  • 2013-2016 EBITDA decreases on 1% p.a.

3. FCF

3.1 Working capital (WC)

The company showed good progress in 2010 vs. 2011 in improving its working capital components. Remy Cointreau shows that turnover of Receivables and Payables can achieve much more attractive levels.

WC projections assume 1% p.a. decrease in Inventories + Receivables turnover as % of revenue and 1% p.a. increase in Trade and other payables turnover as % of COGS.


2010 CAPEX as % of next year revenue change is 22%. For CAPEX forecast 30% is used.

4. DCF Valuation

IFRS report is available only for 2010, and debt and cash are given at the end for 2010. So all valuation will be done for the end of 2011, including FCFF for 2011 at 0% discount rate.

4.1 Acquisition of CJSC Abrau-Durso

One of the biggest complications of DCF valuation is acquisition of 41.2% of CJSC Abrau Durso on 22.07.2011 (

"As a result of this transaction the Group’s share in CJSC "Abrau-Durso", JSC "Wine atelier Abrau-Durso", Fund for the revival of traditions of winemaking "Heritage of Abrau-Durso", "Service Abrau-Durso Limited", LLC "Abrau-Durso territory", Vine Yards Abrau-Durso Limited, LLC Abrau-Durso Public Utilities, CJSC Vino ER EF, LLC Center of Wine Tourism Abrau-Durso increased to 100%."

According to the prospect dated 18.11.2011, the company owns 99.999%-100% in all dependent companies. As no major M&A transactions happened since that time non-controlling interest is effectively 0 as of now. How to value this non-controlling interest at the end of 2010? To answer this question let's see how that deal was financed:
  1. According to rumors 41.2% were purchased at 500m RUB (
  2. They were financed by 412m RUB loan which appeared in 2011 and can be seen in JSC 2011 report based on Russian accounting standards. It indirectly confirms acquisition price.
It's hard to track the whole deal and the following approach was used: market value of minority interest is 500 m RUB.

4.2 DCF Valuation

5. Conclusion

At current assumptions upside is 48%. Together with comparables valuation (EV/EBITDA 2011E at 5.3x vs. 8.4x in developed and 14.1x in developing markets) this makes the stock very attractive.

  • Faster growth of sparkling wine market, market share or prices
  • No decline in EBITDA
  • Improvements in WC turnover
  • (tactical) Release of more information before IPO in 2012/2013 will make the analyzed attractiveness of the stock more clear and will increase investor demand
  • Tightened legislation, including increased excise taxes
  • Decrease in WC turnover
  • Growth of COGS
It's worth pointing out that 2% faster revenue growth in 2012-2016 (I assumed 15% volume CAGR while the company assumed 21%) and no 1% annual decline in EBITDA means 105% upside.

Attractiveness of emerging markets by P/E and implied return on capital

Date: 22 Jan 2012 22:33

The goal of this article is to analyze attractiveness of BRIC and Vietnam stock markets using multiples.

Country attractiveness based on P/E ratio

The multiple which is often used an indicator of investment attractiveness of individual stocks or countries is P/E. Below are its values for a key index in each country plus S&P for comparison.

P/E for key emerging markets indices and S&P

  • China was the most expensive county by P/E since 1996 to 2011 except 2007 when Vietnam took the leadership
  • Vietnam was the most expensive country by P/E in 2007, but lost its leadership to China during 2008 crisis and have never recovered since
  • Russia had always the lowest P/E among BRICs and Vietnam
Questions about the past performance:
  • Can we say based on this data that Russia generated the biggest investment return and China the lowest in the observed timeframe?

P/E for key emerging markets indices and S&P

Questions about the future:
  • Can we say based on this data that Russia and Vietnam are the most attractive for investments for 3-5 years ahead?
  • Can we say that India is the least attractive?

Implied return on equity

Thinking about the questions above, everybody understands that direct comparison of P/E multiples for different stocks or countries is often incorrect as different earnings growth rates are implied. For example, expected growth for Russia in 2012 is about 3.6% while expected growth for China is 8.5%. The multiple which tries to fix this problem is PEG:


where g is taken as g*100 (for example, g=10% is used as 10). PEG multiple is even worse as it doesn't have any financial interpretation.

As P/E is widely calculated and published it's worth using it but with the correct inclusion of g in the formula:


This formula tells that if you want to compare attractiveness of stocks or countries, you should look at the implied return on equity r:

r= 1/(P/E)+g

Then the question which investors should ask is whether the implied return on equity is justified, too high or too low. Below is the implied return on equity for the analyzed indices:

Implied return on equity (re) for key emerging markets indices and S&P

Implied return on equity (re) for key emerging markets indices and S&P

This leads to interesting implications:
  • Before 2008
    • Investors assumed huge cost of equity in Russia
    • China, India and Brazil had similar r since 2001
  • Since 2008 crisis the order of countries changed:
    • Vietnam has the highest implied return on equity since 2009, Russia has the second since 2010
    • Russia stopped being attractive since 2008, and then became attractive for a short period of time at the end of 2008 - beginning of 2009
    • China and Brazil have the lowest implied return on equity
    • India is in the middle and decoupled from China and Brazil
    • Any of the BRICs + Vietnam have at least twice bigger implied return than S&P
Vietnam and Russia are the most attractive countries for investment in public stocks among BRIC + Vietnam.


In calculating implied return on equity the following assumptions were used:
  • g in the formula should be long term expected growth in earnings. It's hard to measure it retrospectively. Instead, g which happened/expected in the next 365 days was used.
  • Also, it's hard to get exactly earnings growth, so GDP growth was used.
  • This approach is theoretically not ideal, but does the job. The main goal of this exercise to broadly incorporate growth expectations in P/E analysis. For example, in 2010 Russia with g=4.0%+11.4%=15.4% is very different from India with g=9.7%+9.6%=19.3% and P/E ratios of these countries cannot be compared directly
  • g = real GDP growth + GDP deflator
  • Period for the above data: g is measured for the 365 days ahead of the time of P/E. For example, for 30 March 2011 real GDP growth =~ ¼ * real GDP growth 2011 + ¾ * real GDP growth 2012
  • When the growth was not available or the period is in the future, short term forecasts were used
  • For GDP deflator forecasts (2011-2013) CPI forecast was used


Below is P/E ratio and implied return on equity for S&P separately as the historical data is available for longer periods than for BRICs and Vietnam: P/E for S&P 1954-2012

Implied return on equity (re) for S&P

Platforma IPO. 110x EV/EBITDA, 157x P/E – Finam's valuation tricks

Date: 20 Jul 2011 19:57

Finam IPO range IPO Price Author
Equity, b RUB 8.57-9.19 2.90-3.90 3.9 1.25
Share price, RUB 429-460 145-195 195 62

Key valuation assumption: revenue growth projections from Finam are correct. If they are decreased, valuation will be much lower.

Today (20.07.2011) Finam did an IPO of JCS Platforma This is a good event from several dimensions:
  • Gives public investors more chances to invest in small cap Russian companies and in the growth of Russian internet
  • Creates exit market which will stimulate VC and PE investments in small and medium Russian companies
  • Brings more attention to Russian internet sector which is unfairly under covered
IPO was at 137x EV/EBITDA 2010 and 48x EV/EBITDA 2011.

Investor Presentation, 2009&2010 IFRS reports and Finam research report are here:

This research report is awesome. Just take a look at the chart below.

Utinet IPO Finam recommends investing in with a valuation in mind of 110x EV/EBITDA and 157x P/E:
  • Finam's estimation of fair value: 8.57-9.19b RUR or 429-460 RUR/share
  • IPO price range: 145-195 RUR/share
How did Finam come to so bullish views? Their report contains several big issues which explain it:
  • Several unjustified assumptions (which is in many cases fine as soon as they are explicitly described)
  • Violation or incompetent application of corporate finance rules (which is not professional)
If they are fixed, then
  • DCF would give fair value at $1.2b RUR or 62 RUR /share
  • Comparables valuation would be hard to apply due to negative EBITDA in 2011 and 2012
Let's go through the key issues in Finam report and try to understand what should be a more balanced and professional valuation.

1. EBITDA forecast

Revenue grows at 70% CAGR in 2011-2015. It's too questionable, but let's assumes that this is a good enough forecast. The company goes from -5% EBITDA margin in 2009 to 10% in 2015. Why?

General comment: the company cut many expenses in 2010 to get a high EBITDA in 2010 (pre-IPO year), so I almost don't take 2010 numbers into account as this level of costs is obviously pre-IPO manipulation and is not sustainable.

Utinet IPO

1.1 Gross Margin

If we adjust for high Gross Margin for "Platforma" business (assuming 30% in 2010 and taking 57% in 2015 from Finam report), we will get that Gross margin for own trading business grows from 7%, 5% and 10% in 2008-2010 to 13% in 2015. The growth of discounts from laptop distributors should explain this growth. But there are three counter arguments:
  • What defines discounts from distributors is market share and it will not grow that dramatically to justify additional 3-6%.
  • Intensifying competition in retail will lead to drops in retail margins
  • Between 2011 and 2015 there should be one-two "bad years" due to bad economy or other external conditions and margins should decrease in these years
My adjustments:
  • Gross Margin from trading business: 8.8% in 2011 (Finam), growing at 0.5% per year
  • Which gives Gross Margin from total business: 10.8% in 2015

1.2 Marketing Expenses

Benchmarks: Marketing Expences as a % of revenue are declining from 6.0% in 2009 to 0.3% in 2015. This is unsustainable and in the long term will lead to market share loss. Below is the comparable data for all the companies WW in Internet Retail Industry with data for Advertising Expense available. Average: 9.8% of revenue. Amazon has 2.4%. Utinet IPO Source: Capital IQ

Company plans: "Согласно инвестиционной программе «Ютинета», до 70% привлеченного в результате IPO капитала пойдет на продвижение бренда «Ютинет»." (

How is this ambitions brand promotion plan consistent with decrease in Marketing Expenses as a % of revenue?

My adjustment: keep Marketing Expense at 2009 level of 6%


These two adjustments lead to drastic decrease in EBITDA Forecast.

My adjustment:

Overall conclusion: watch out for their marketing spending as % of revenue:
  • If they cut them in 2011, the company may show positive EBITDA, but then
    • Revenue growth for the coming years will be much slower than projected
    • Market share will drop which will lead to loss of Utinet's market leadership in laptop online retail with long term consequences for margins and growth prospects
  • If they don't cut them, then EBITDA will be negative in 2011 and 2012

2. Comparables Valuation

"Отметим, что аналоги из развивающихся стран обладают большим потенциалом роста продаж по сравнению с аналогами из развитых стран (ежегодные темпы роста продаж аналогов развивающихся стран в долларовом выражении в 2011-2015 гг. составляют 35-40%, в развитых странах – 24-28% по сравнению с 89%-м ростом продаж Ютинет.Ру), и оценки на основе их мультипликаторов не отражают перспектив роста, которые мы прогнозируем для Ютинет.Ру."

I assume these 24-28% growth forecasts for 2011-15 are average forecasts from many banks while 89% from Finam is an extremely optimistic forecast from one bullish bank motivated to sell shares on the IPO. For many on the discussed companies in emerging markets you can find local "Finam's" who can forecast 89% growth for them.

"Мы считаем, что данные Компании за 2011 г. не являются репрезентативными по сравнению с ожиданиями доходов на 2012 г. и далее с учетом экспансии в регионы, выхода в новые товарные категории, поэтому далее оцениваем стоимость Ютинет.Ру по средним прогнозным показателям 2011-2013 EV/EBITDA и P/E."

This phrase in bold can be applied to any of the comparables used as they are all fast growing companies.

My adjustment: If comparables' multiples are calculated based on 2011F numbers, then Utinet's equity should also be calculated based on 2011F EBITDA and Net Income.

New valuation range at Finam's EBITDA forecast: 1.3-2.3b RUR

At the same time, if EBITDA forecast from 1. is used, it will be almost impossible to use comparables as EBITDA<0 in 2011 and 2012.

3. DCF

There is one key principle of DCF method which is often misused by starting corporate finance professionals and which Finam clearly ignores in its report: DCF method requires use of market values for:
  • cost of debt
  • cost of equity
  • debt
  • equity

3.1 WACC – cost of debt

Finam assumed 13% for cost of debt. Can borrow on the open market at 13%? Obviously not and we have facts supporting that. Based on 2010 report Utinet has two external loans from AlfaBank, each at 25% rate and each with a "Related-party collateral and guarantee" which for the question discussed is an external (to the company) guaranty. That means a loan taken on the open market will have even higher rate, if any bank agrees to give it to

With EBITDA growth borrowing rate will drop, but I don't believe it will drop below 15-20% even in 2015 as the company will still operate in a very competitive and fast-changing environment.

My adjustments: cost of debt is 30% in 2011 and decreases to 15% in 2015

3.2 WACC – cost of equity

Investment in is between investment in a venture (expected return on equity 50%) and a small cap public stock (15%).

My adjustment: cost of equity is 30%

CAPM could also be applied, though Finam's application of CAPM has two big mistakes:
  • Small cap company requires 3- or 4- factor models (Fama and French and the Pastor-Stambaugh Model) that takes into account premiums for small cap, low liquidity and high book-to-market ratios.
  • Beta as a very important parameter requires clear justification

3.3 WACC

Finam used book values for Debt and Equity in their calculation of the share of debt capital.

This allowed then to increase share of debt capital which is cheaper in their model and significantly decrease WACC.

Real calculation of WACC is circular as E required for WACC and WACC required for E. That's why I would calculate here only approximate WACC, In the assumption that the company costs 1b RUR now, so share of Debt in 2011 is 0.25/1=25% and let's assume that the company will maintain this level of debt.

My adjustments:

3.4 Working Capital

Positive change in WC is the biggest source of cash in 2011 and the second biggest in 2012. It mostly comes from growth in Accounts Payables as suppliers give 10 days credit to Utinet.

By looking at turnover, the first question is why it's jumping from 20 days in 2010 to 43 in 2011? The other question is how does this 10 days reconcile to 40 days? I don’t know well enough numbers for payment terms between electronic distributors and retailers, but would like to notice that this is very questionable and manipulative assumption to generate big positive cash flow in 2011 and 2012. One reason to explain that may be that to increase gross margin in 2010 the company agreed with suppliers to get bigger discounts and decrease financing from their terms. I would adjust this number close to 2010.

My adjustments: Accounts Payable turnover is 25 days in 2011-2015

3.5 Updated DCF

Below is the model DCF built with all discussed adjustments. fair value is $1.2b RUB or 62 RUB /share.

4. Summary

Finam did so aggressive valuation for a purpose. Are real numbers so unattractive that it was the only way to attract investors for the IPO? It's hard to know the real story behind but my estimation of negative EBITDA in 2011 and 2012 tells me that doesn't look attractive to most of public stocks investors.

5. Other facts

5.1 IPO Russian Sea Group (Русское Море)

In April 2010 Finam did IPO of Russian Sea Group ( The collapse of Russian Sea stock gives insight about potential behavior of stock if IPO happens at the announced price range.

5.2 What it takes to achieve high growth

Finally here is a post from a blog showing how high growth is often achieved:

Исайкин Денис Сергеевич 13.10.2009 08:36 Ответить

Серёга привет, меня зовут Ден, живу в Южно-Сахалинске, ты такой умный, может подскажешь что делать? Заказал в интернет магазине (ООО ГлавИнформСистема) ноутбук. Прислали модель ту которую заказывал, НО конфигурацию урезанную, которая стоит гораздо дешевле. Переговоры по телефону, а так же переписка по мылу ничего не дали. В ОЗПП сказали написать официальную претензию. Написал на директора Уколова. Вернулось письмо с пометкой, что такой организации по такому адресу не существует. Что делать? Вообще, существует ли справедливость?:( Редиски, обманывают народ и это постоянно сходит им с рук:(

Russia had the fastest nominal GDP growth in USD in 2000-2009 with China only second

Date: 05 Jan 2011

Many investors focus on real GDP growth while thinking about perceptiveness of investments to a particular country. And this is really strange approach as real GDP growth is
  • real
  • measured in local currency while what investors care about is
  • nominal returns
  • measured in USD
The average expected equity returns over many years are normally expressed by the formula:

Expected equity return = Expected real GDP growth + Expected inflation + Expected dividends yield

If you want to measure it in $, you should add change of exchange rates.

The good explanation and data for this you can find in many articles in the internet. Here I will just quote Warren Buffet made to Fortune Magazine back in November 1999 right before dot com bust:

“Let's say that GDP grows at an average 5% a year--3% real growth, which is pretty darn good, plus 2% inflation. If GDP grows at 5%, and you don't have some help from interest rates, the aggregate value of equities is not going to grow a whole lot more. Yes, you can add on a bit of return from dividends. But with stocks selling where they are today, the importance of dividends to total return is way down from what it used to be.”

The key component in this equation like Buffet mentioned is nominal GDP growth while dividends returns nowadays are small and cannot cause big differentiation. If we take a look at Nominal GDP growth in USD for 20 biggest countries (by GDP in 2009) for the period of 2000-2009, surprisingly we will find that Russia was the first one, with China only the second and India the forth. This analysis also gives insight about the country which will be on radar of EM investors soon: Indonesia. I have already seen BRIIC abbreviation.

Real vs. Nominal GDP growth for 20 biggest countries

In many GDP growth discussions Russia was not even mentioned in the last five years. Some want to exclude it from BRIC. Why were investors so inconsistent using real GDP growth which was not even close for their ultimate goal – nominal $ returns?

Let’s also see what the reasons were behind so drastic differences between real and nominal GDP growth.

Growth structure of nominal GDP in $ for top-20 countries, 2000-09

In many cases this was high inflation that secured leadership in nominal GDP growth like for Russia and Indonesia. In case of China and Euro zone countries it’s also devaluation of local currencies. It’s worth to mention that Russia was the only country out of this top-20 with negative population growth which ate 0.3% GDP growth annually.

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