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On June 30th Gazprom published his IAS report for full financial year 2007.
S The sales of the concern rose up +11.1% in 2007 to 2.390 trn RUR, whereas we have forecasted this value to form 2.309 trn RUR. This value rose thanks to sound results of 4Q, related to positive conditions of European export throughout the while quarter, on par with decent results of all 2007 on shipments to domestic market.

Net income of Gazprom under International Accounting Standards in 2007 had increased +7.3% versus 2006 to 658.038 bn RUR, says the report of the company. In USD value the growth was far more significant due to the reinforcement of ruble and formed 13.5%, net income achieved 25.653 bn USD. We must note that income appeared higher than market’s expected at average of +5.2%, we have forecasted net income at 626.715 bn RUR.

However, the primary surprise of the published report was EBITDA level, and the nature of expanded net income. Report indicates that EBITDA of the concern, instead of our forecasted fall of -2.5% to 931.757 bn RUR, due to a rather unfruitful start of 2007 on western export direction, have demonstrated a fall of -7.4% and formed 885,355 bn RUR. The operating income dropped even lower, losing -11% down to 701.778 bn RUR. The primary reason of such fall is outrunning growth of company’s costs. Whilst net income of 2007 had been raised raised only thanks to several “paper income” entries of report, forming a total of 146.283 bn RUR.

The background of accelerated costs growth, the effectiveness of other operations by the concern has been dropped. EBITDA margin decreased -7.4 p.p. and formed 37%, EBIT margin lost -10.4 p.p. to 28.1%, net income margin dropped down by -0.5 p.p. (29.1%), even considering single time positive entries within the report.

S We have corrected Gazprom’s model, introducing new corrections. For example – we have modified our forecast of oil price and condensed gas price by subsidiaries of the monopoly upwards, at average of +44.2%. We have also reviewed sale price of natural gas by Gazprom at external markets, at average of +31% throughout the forecasted period.

Our model now also reflects the influence from delay of launch of equal profitability principle for domestic and external shipments of gas for years 2014-2015, as this influences the business of gas concern as well.

The model also holds a modified volume of capital investments by Gazprom, using the investment plan of the company, estimated in 8-10 trn RUR by the company for years 2009-2020 bn RUR.Е

The resulting corrections of Gazprom’s financial model, regarding the expanded price of sold commodities, excluding issued report of 2007, made us upgrade the fundamental estimation of concern. New fair price on Gazprom’s stock rose from 16.25 USD to 20.20 mn USD or +24.3%. According to the closing price of July 10th at 13.40 USD, the growth potential now equals 50.75%, which obviously corresponds to “BUY” recommendation

Gazprom: What is the nature of monopoly’s income growth? - July 11, 2008 (PDF)

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