Galnaftogaz AGM: Bigger Plans, Restructuring On The Way.

At its AGM yesterday, Galnaftogaz’s (GLNG: BUY) management announced plans to have 229 filling stations by the year-end, including 189 with the company’s OKKO brand. This is the second time since our last report (Oct 2005), the company has increased its plans for 2006. In June the GLNG increased its plan for the number of stations from 175 to 180 (which is in line with the strategic plan to launch minimum 60 OKKO in 2006). As of yesterday, Galnaftogaz had 144 OKKO filling stations (196 in total). The management also announced that in 2005 the company had increased its market share to 5.2%, from 4.7% in 2004. GLNG plans to become the 3rd largest fuel retail network in Ukraine by the end of the year, with a market share of 7.3%. No dividends were announced. The company’s shareholders also decided to integrate five subsidiaries into the parent company. According to the management, at the moment all these subsidiaries are 100% owned by Galnaftogaz and most of them will be transformed into regional branches. The company is going to enlarge its branch network in line with the expansion of its chain of filling stations. Vladimir Nesterenko: We will take into account Galnaftogaz’s updated plans in our report (to be released shortly), though we do not intend to considerably change our forecast for 2006 (218 total stations, 175 OKKO). The new plan looks overly ambitious to us: it implies GLNG opening 45 OKKO stations in 4 ½ months, though it has opened only 29 since the beginning of the year. The decision not to pay dividends is no surprise: GLNG is a typical growth company. Moreover, GLNG’s loan agreements specifically ban dividend payout until 2011 without the lender’s consent. As for restructuring, we agree with the management that the company would benefit from associated cost saving and higher operating efficiency.