SVGZ 2005 Results Better than We Expected, Interim - Declining, Awaiting for UZ order.

Stakhanov Wagon Works posted increase in sales by 24% in 2005 to USD 50.3 mln (10% more than we expected), with EBITDA and net income turning from negative in 2004 to USD 2.9 mln (61% higher than our projections) and USD 0.5mln (on our negative NI projections) respectively. Preliminary results for 1Q2006 reveal mixed trends in profitability (EBITDA almost doubled yoy to USD 0.4, while net income decreased to USD -1 mln mainly due to increases in interest expenses). We consider the decrease in sales by 52% yoy to USD 11.0 mln in 1Q06, the result of a lack of Ukrzaliznytsya’s orders. Adoption of financial plan for UZ for 2006 was postponed to May 2006, which will cause shift in flows of orders for all the producers of railway equipment from the first quarter to the subsequent ones. UZ has already decided to order 2.5ths of freight carriages from Kryukivsky Wagon Works, while SVGZ management plans to take the order for the last 1th. We expect improvement in performance of Stakhanov Wagon Works during the subsequent quarters to be in line with our previous projections for 2006 (Net Revenues of USD 97.9 mln, EBITDA 8.8 mln and Net Income of USD 4.0 mln).