Donetskgirmash Profitability In 2005 Exceeds Expectations.

Last year the company net revenues fell 8% to USD 52.3 mln due to the decrease in demand for its core product – conveyors for coal mines. At the same time, the company’s profitability increased: EBITDA grew by 34% to USD 3.6 mln, while net income increased by 13% to USD 1.7 mln. When we adjusted for non-core exports, roughly 23% of Donetskgirmash (DGRM: BUY) sales, the company’s overall sales USD 40.2 mln, are in line with our expectations. The company’s profitability margins (6% EBITDA, 3% Net) are significantly above our projections, but less than those of its closest peer in Ukraine, Svitlo Shakhtarya (33% EBITDA, 23% Net). Thus, we believe, DGRM is still involved in transfer pricing jointly with Ukrvuglemash, which participates in tenders on its behalf. However, DGRM’s growing margins reflect increased transparency; the company’s interim results for 1Q06 also support this idea, as the company posted 12% EBITDA margin, and 7% net margin, compared to negative EBITDA and net income in 1Q05.