OREANDA-NEWS. December 16, 2009. Top pick in the primed-for-growth auto industry. We initiate coverage of Sollers with a BUY recommendation. Our 12-month Target Price of USD 20.4 implies 43% upside potential from current levels. Sollers trades at relatively high 2010F and 2011F EV/EBITDA multiples of 13.1x and 9.8x, but they are still affected by the ongoing market downturn (which has proven to be much deeper in Russia than on many other markets) and do not capture the growth potential. We view Sollers as the best undiluted exposure to the huge untapped potential of the Russian auto market.

Market to grow at double-digit rates. Once the dust from the current crisis has settled, we expect the Russian automotive market to resume its accelerated growth on the back of Russia’s economic catch-up with more developed nations. We forecast Russia’s car and LCV sales to grow at a CAGR of 12% over 2009-19F.

Sollers is well-positioned to capture the growth. Given its efficient management, proven track record of implementing value accretive projects, diversified model range and focus on commercial vehicles (which face lower competition and offer higher margins), Sollers is well-positioned to take advantage of the future growth. We conservatively estimate that its vehicle sales will grow at a CAGR of 13% over 2009-19, although the actual rate could be much higher, as our forecasts do not include potential launches of new models.

Growth backed by profitability. Sollers has always been the most efficient company in the Russian auto industry. We believe that the on-going cost optimisation along with such value-added initiatives as the company’s own dealer network and leasing could help the company restore its EBITDA margin and maintain it at about 11% from 2013 on the back of a 16% revenue CAGR over 2009-2019F.

The economy represents the key risk. Any prolonged economic downturn would hurt the market growth and Sollers’ prospects.