Motor Sich reports its 1H08 financials

Motor Sich (MSICH: BUY) reported its 1H08 financial results:  sales grew 20.1% yoy to USD 167.4 mln; EBITDA was down 57.4% yoy to USD 16.9 mln; net income dropped from USD 24.1 mln in 1H07 to USD 1.1 mln in 1H08. Inna Perepelytsya: We ascribe decline in the company’s EBITDA to increased steel prices and higher labor costs, which Motor Sich did not transfer to its customers in the reporting period, as there is usually a several months’ lag between increase in input costs and adjustment of prices for final products in this industry. In addition, in management’s words, Motor Sich’s net income was affected by higher than usual tax expense in 1H08 resulting from taxation of financial income the company realized after selling its treasury stock back in 2007 (we estimate the extra tax expense at USD 4 mln). That said, we believe the company will be able to meet our full year sales forecast of USD 378.7 mln (+9.3% yoy) and EBITDA projection of USD 88.1 mln (+11.5% yoy), as we expect Moror Sich to raise prices for its engines in 2H08 so that to offset cost growth. Motor Sich’s clients are well positioned to pass engine costs increase to their customers, as Airbus did: in addition to traditional 2.7% annual increase in airplane prices, the company raised the prices by additional 1.2%-3.4% in April 2008 to make up for higher production costs.