By Ilya Fedotov (Veles Capital)

On Monday Rostelecom summed up the results of 1H 2009 by IAS. According to the report, the sales within the half year year grew by 4.4% versus 1H 2008 and formed 32.8 bn RUR. Net profit dropped from 9.8 bn RUR to 1.5 bn RUR. OIBDA margin reduced by 7.6 p.p. to the level of 17.6%.

By now all the main public companies within the branch have also summed up their half year results and versus them it is evident that Rostelecom showed ones of the weakest results from both: financial and operating activity view points.

In particular Rostelecom showed rather significant slipping on the national and international traffic (-5% and -8% respectively versus the 1H 2008). The main reasons were likely the following: crisis, competition with alternative operators (cellular ones first of all), and also transfer of the clients to cheaper means of long-term communication. And though Rostelecom is expending new directions for it, none of them might seriously be called a growth driver for the company’s business in the coming prospect.

From the financial point of view, the results of Rostelecom look weak also. In 1H 2009 the company consolidated the results of RTComm.RU, the profitability of which leaves us hoping for the best. Besides, Rostelecom showed significant upping of expenses of employees, which affects the cost of company negatively under conditions of crisis.

We revised out model of Rostelecom considering the half year results. New evaluations on the common and preferred shares of the company form 2.96 USD and 2.22 USD respectively. The former estimates totaled 3.44 USD and 2.58 USD on the common and preferred shares respectively. Considering the common shares being seriously overbought, we confirm the recommendation SELL for the shares of the company. As for the preferred shares, considering their cost growth within the recent year, we lower the recommendation on them from BUY to HOLD.