OREANDA-NEWS. November 17, 2009. We are initiating coverage of the Russian internet ad segment, which we see as an exceptional investment opportunity to enter Russia’s fastest growth sector (we forecast a 48% CAGR over the next five years). There are two investment options in our universe, RBC and Rambler Media.

Our 12-month Target Price for RBC of USD 2.6 implies 51% upside potential and we are rating it a Buy. Despite our belief that Rambler Media is fundamentally fairly valued, we assign no rating to the stock given the high probability of its potential delisting by its controlling shareholder Profmedia and related risks.

Russian internet ad growth, on the back of broadband roll-out, is the ultimate value driver. First and foremost, Russian internet ad market remains small, at RUB 18bn (USD 710mn) in 2008, covering just 6.4% of total ad spending. However, in 2003-08 it emerged as the fastest growing segment with a CAGR of 100%. Furthermore, we see it expanding six-fold over the next five years on the back of an explosion in Russian broadband penetration, surging from the current 20% to over 60% by 2014.

RBC is uniquely positioned to capture Russian internet and TV growth. Its competitive business model stems from i) its primary focus on the two highest growing Russian media segments – internet and TV; ii) its exposure to a premium high-income audience; iii) and its business news segment being the backbone of the company’s core operating areas.

Our RBC’s DCF valuation uses a WACC of 14.2% and a terminal growth rate of 4.4% (equal to the nominal long-term GDP growth projected by our macro team). Key downside risks for our RBC’s valuation stem from weaker-than-expected demand brought on by a slower economic recovery, greater competition and higher cost inflation.

Lacking a competitive edge, Rambler Media’s growth might be constrained. The company might find it difficult to defend its current market positions due to the ongoing reshuffling of management and the lack of a i) competitive search platform in context and ii) distinguishing internet product in banner.