OREANDA-NEWS. September 14, 2010. GAZ Group launched its own corporate ‘cash for clunkers’ programs for passenger and commercial vehicles for individuals and companies. Its programs extend discounts to customers who do not meet the criteria of the state’s ‘cash for clunkers’ program. One program is designed for buyers of specific commercial vehicles (Gazelle and Sable), while the second is for buyers of Volga Siber cars. GAZ Group's corporate discounts for each of its programs will be RUB50-70,000, with additional funding for the second program available from the government's recycling program, reported the press-centre of OTKRITIE Financial Corporation.

View: We see this news as positive for GAZ Group, as the introduction of these programs should boost sales. According to the AEB report for 8M10, the sales of GAZ Group significantly lagged behind the performance of peers. For example, in 8M10 GAZ's sales rose 16% YoY, while AvtoVAZ’s sales increased by 32%, and Sollers’ by 37%. The main issue is the source of these programs. Despite the fact that GAZ Group restructured its debt, its operating cash flow is modest (1H10 operating profit of head company was only USD7.5m) while its debt service is rather substantial (USD28.9m in interest expenses in 1H10). Because the company is unable to finance such programs on its own, we assume the necessary funds are being provided by shareholders.

Valuation: GAZ Group trades on a 2011 EV/EBITDA of 6.0x, which implies an 8% discount to global peers, a figure that we feel is more than justified.