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RMG - LSR Group: Strong Performance, 3-D Business, Jan 22, 2013.

Investment Summary

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LSR reported strong results in 2012 that look sustainable in 2013. The Group also has reassuring a3-Da diversity in terms of geography, real estate segments, and business divisions, and is our top pick among developers.

LSR Group reported 46% y-o-y growth in total value of new contracts for apartments to R37b ($1.2b) in 2012 from a high base in 2011, driven by growth of square meters (31% y-o-y) and of prices. The improvement was visible on all main markets (Moscow, St. Petersburg and Ekaterinburg), with fastest growth in Moscow.

St. Petersburg (LSR's home market) accounted for over two thirds of sales. The St.P luxury segment grew by 42% to R10.2b, while mass market sales in the city reached R16.4b. LSR's mix of elite and mass market projects in St.P offers a good hedge against downturns in either segment. Value of sales in Moscow shot up by nearly three times to R5.5b and there was 37% growth in Ekaterinburg to R5b, thus equalizing volumes on two different markets.

4Q sales of mass-market projects in St.P were decisive for performance in the whole of 2012. St.P mass-market sales grew by 85% y-o-y in 4Q, compensating a dramatic 63% y-o-y contraction in 3Q caused by delayed launch of Aurora-2 and Yuzhnaya Aquatoria. 4Q sales in the two projects accounted for 86% of total square meters sold by LSR on the St.P mass-market in FY2012.

LSR Group is selling some of its commercial estate assets - the Apollo and Orlov business centers. Each of them accounted for 1% of FY2011 total portfolio and we believe that the company can make good use of the cash by investing in promising residential projects. We expect more commercial estate to be disposed by LSR.

Construction materials segment also performed well in 2012. The Slantsy cement plant reached full capacity in 2Q and LSR launched a brick plant in Moscow Region in July. Demand for crushed granite (+18%) and ready-mix concrete (+5%) was driven by large infrastructure projects as well as residential construction.

The LSR share price traditionally rallies in 1Q, ahead of full-year operationals and IFRS financials (published in late March or early April) and dividend cut-off. We forecast modest dividend yield of 3%, judging by last year's payments ($0.13 per GDR).

Most Russian developers showed healthy results through 2012 as strong demand swallowed apartments in new projects. We find levels of demand sustainable in 2013 (assuming that oil prices hold up), and look to further strong support from the mortgage market.

LSR is our favored stock among developers. Its diverse business model (in terms of geography and real estate segments, with the additional hedge of construction materials production) largely offsets the common perception that developers are a bad bet in uncertain times. We find 52% upside and recommend to BUY company stock with target price of $7.3 per GDR.


Rye, Man & Gor Securities

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Publication:Russian Banks and Brokers Reports
Date:Jan 23, 2013
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