Red Boiler: turning power into profit

Red Boiler - or Krasny Kotelshick - is one of Russia's largest manufacturers of power plant boilers. The company built 60pc of the country's existing thermal boiler equipment and 90pc of heat exchange apparatus.

Amid the on-going restructuring of Russia's newly-privatised generating infrastructure, and an escalating demand for power, we expect a sharply increased need for equipment to modernise and expand the country's overall generating capacity. While still a "second-tier" stock, Red Boiler is well-placed to benefit from these trends.

Red Boiler's turnover grew 10pc in 2007, reaching $110m. While sales growth was relatively modest last year, the net margin increased from 3pc to 11pc, indicating rising profitability.

We expect there is a great deal more sales growth to come from Red Boiler - given the huge $200bn investment programme to be implemented across Russia's utility sector between now and 2015.

Over the next seven years, around 31GW of new coal-fired power generation capacity will be installed - 50pc more than today. Red Boiler is likely to account for a large share of that extra capacity.

We believe the company could expand its physical output three-fold by 2010. In recent months - as the break-up of UES, the previously state-owned power monolith, has been completed - sales of Red Boiler's products have soared, rising some 200pc during the first quarter of 2008. And, along with boilers and heat-exchange equipment, the company is also heavily involved in water treatment and both nuclear and metallurgy plants - not only in Russia, but across the CIS and other fast-growing emerging markets such as India.

Around 75pc of Red Boiler's shares are owned by EMAlliance - a privately-owned Russian consortium.

But there is a sizeable free-float.

On a current market capitalisation of around $500m, Red Boiler is trading at an imputed 2010 price-earnings ratio of around 5 - which some analysts would suggest represents good value.

And this is despite the fact that the company's share price rose 48pc during the first half of this year - indicating investors' growing interest in Russia's burgeoning power sector.

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