Delta Report MSICH

DELTA Team

Research D. Ushakou, I. Gavrysh, L. Murzaieva, M. Oliinyk, Z. Podilchuk

December 28, 2012

JSC Motor Sich

Ticker: MSICH

Current Price: UAH 2 150

Recommendation: BUY

12-month target price: UAH 5 317

Highlights

We initiate the coverage of Motor Sich with BUY recommendation and a 12- month

target price of UAH 5 317 per share, implying 147% upside to the current stock price. The

estimation is based on the combination of the DCF approach and relative valuation with

equal weights 50% and 50%

Company profile. Motor Sich is a monopolist producer of aircraft engines on Ukrainian

market. The Company supplies engines for helicopters, jets, military and civil cargo planes

and civil aviation planes. Approximately 25% of turboprop planes existing in the world are

equipped with engines produced by Motor Sich which corresponds to 10% share of world

rotorcraft engine market. Four big plants, numerous subdivisions and developed service

network ensure the Companys strong competitive position in the world. In fact, export

deliveries account for more than 90% in total sales; they go to more than 120 countries

worldwide.

Solid track record. Over the last five years Motor Sich demonstrated considerable revenue

growth and it is expected to follow the same trend in the future. Maintaining sound liquid

and solvent position, the Company also has been increasing its profitability. It is expected

that future investment strategy will be heavily financed through reinvestments rather than

loan attraction due to strong self-financing potential.

Positive outlook. Strong demand growth in the helicopter engine segment in Russia together

with expansion in the lightweight segment will provide Motor Sich a dominant position in

the helicopter production. High rates of economic growth in large developing countries, like

China and India, will open new horizons for the future expansion. There are already

considerable orders for Motor Sich engines from China and Pakistan. Growing demand for

turboprop engines together with Motor Sich second largest share in this market will even

further support the Companys growth. Also the need for modernization of the fleet in CIS

will stimulate Motor Sich development.

Risks of Russian market decline with the parallel Motor Sich expansion into developing

markets. Since 2005, Russia has been trying to substitute Motor Sich engines, who currently

produces the majority of engines for helicopters produced in the country. The latest attempt

is the construction of the new plant in Russia with a full capacity of production of 450

engines per year by the end of 2013. This will cause 25% loss of Russian market.

Nevertheless, Motor Sich actively expands into new markets to hedge the risk. Moreover,

due to uniqueness of productions most engines can not be easily substituted in the short-

term.

Market profile

52 Week Price Range UAH 1887-2150

30 Day Average Vol. UAH 770 276.8

Beta 0.87

Shares Outstanding 1 980 394

Market Capitalization UAH 4 257 mln

Free-float 20%

Key Financial Data, 2012

Earnings per Share UAH 357.75

Dividends per Share $0.00

Net Debt to Equity 0.003x

Return on Equity 36%

Return on Assets 22%

EV/EBITDA 4x

EV/Sales 1.3x

DELTA-Team D. Ushakou, I. Gavrysh, L. Murzaieva, M. Oliinyk, Z. Podilchuk

Figure 1. Shareholders structure

Source: Motor Sich, Delta calculations

Figure 2. Breakdown by Product

Segments in 2011

Note: Revenue Break-down

Source: Motor Sich

Figure 3. Helicopter Engine Market

Breakdown, 2011

Source: Turbomeca, GE data

Business Overview

Monopolist producer of aircraft engines on Ukrainian market. The product line of

the Company is unique not only for Ukraine as much as 80-90% of all helicopters

made in Russia are using engines of Companys production. Moreover, Motor Sich is

also one of few Ukrainian firms whose owners aim to make their business transparent

and coherent for investors and shareholders. Besides effective management

Companys success and prosperity are insured by strong reputation and monopolistic

position.

Founded in 1907, incorporated in 1994, the majority of stocks (62%) is now

being held by the management of the Company. Officially, 15% of shares belong

to Companys CEO Vjacheslav Boguslaev, but many sources indicate a higher share

of Mr. Boguslaev of about 62%. Notably, Motor Sich free float (around 20%) is the

largest within the Ukrainian stock market.

More than 93% of Companys total revenue of about UAH 5.9 bln for year 2011

is generated from aircraft engineering. Particularly, 65% is generated from

production of aircraft engines. Motor Sich produces engines for helicopters (bestseller

TV3-117VM accounts for 63% of total helicopter engines production), jets (AI-222

family for Russian Yak-130 and Chinas L-15), military and civil cargo planes

(including An-124 Ruslan, one of the largest planes in the world), civil aviation

planes. Besides engines the Company manufactures industrial installations, mainly

gas turbines and power generating sets, and consumer goods. Companys full product

range in details is represented in Attachment A with examples in Attachment B .

Currently Companys full-cycle production process takes place at four plants

situated in Zaporizhzhia, Snizhne and Volochisk. Besides, Motor Sich runs its own

airplane Company Motor Sich Airlines, has three subsidiary companies, 14 structural

subdivisions in different regions of Ukraine and almost 200 service centers around the

world. Specializations of business units are shown in Attachment C .

Motor Sich occupies 80% share of engines for helicopters production on Russian

market which is equivalent to around 10% share of world rotorcraft engine

market. Approximately 25% of turboprop planes existing in the world are equipped

with engines produced by Motor Sich, while in general segment of engines for planes

the Company holds 4% share on the global market.

Export deliveries account for more than 90% in total sales. Main consumers are

aircraft manufacturers located in more than 120 countries all over the globe.

Particularly, Russian buyers generate 60-70% of Companys revenues. Recently,

Company started intensive expansion to India, China and Middle East. A new plant

for re-manufacturing of used engines was opened in OAE just a month ago.

The supplies of Motor Sich are delivered by about 300 suppliers with a total of

51.1 thousand components. These mainly include producers of metal products,

carbonic composites and aviation electronic aggregates. (Attachment D). Around 50%

of materials come from Russia, including special types of metal alloys not available

in Ukraine.

65.6%

16.0%

12.1% 4.4% 1.9%

Aircraft engines

Engine service

Other aircraft equipment

Industrial installations

Consumer goods

UAH 5.9 bn

62.0%

9.4%

4.7%

1.3% 22.6%

V. Boguslaev

Mckenzie Financial

Treasury Shares

Global Depositary Receipts

Others (free float, management)

38.0%

16.0% 14.0%

13.0%

11.0% 8.0%

Turbomeca Pratt&Whitney

Rolls-Royce Motor Sich

General Electric Other


Figure 4. Helicopter Production in

Russia

Source: Oboronprom

Figure 5. Turboprop planes

distribution by producers, 2011

Source: Motor Sich

Figure 6. 30-70 seats planes engines

Source: Motor Sich, Delta calculations

Industry Overview and Competitive Positioning

Strong double-digit demand growth is likely to proceed in the helicopter engine

segment. The production of helicopters in Russia will continue to grow with the same

high rate of about 20%, mostly due to the rising demand of military orders in the

country and orders from different governmental ministries (of civil defense,

emergencies, health, etc.) .

Expansion in light helicopters category. Development of new MS-500V engine and

the contract with Kazan KMPO will provide an annual production of 20 helicopters

for the period up to 2016, increasing the share in the lightweight segment to 40%.

Expansion in this category can provide a foundation for future growth, with Motor

Sich becoming a dominant player in one more category of helicopters.

Prospects for growth in the segment for plane engines are also positive. Orders

from Chinese Military Forces for 250 engines for L-15 combat trainer will help to

sustain the growth. Some other modern machines, which are only starting to be

popular, are using engines of Motor Sich: Yak-130 in Russia, K8-J in Pakistan and

China. The demand for these planes in the developing countries will be only

increasing in the nearest years.

Production of engines for An-148 (158) will be increasing, but still wont capture

a large share in the business. The demand for these planes will be increasing, but

Ukrainian/Russian joint production An-148 (158) planes didnt appear as superstars

in their segment and enjoy only a small part of the market. A slight increase in the

segment is still feasible.

Turboprop engines share in the segment of 30-70 seats planes is going to

increase. The number of planes with turboprop engines is going to increase in the

future in this segment, while the share of jets is likely to go down. Since Motor Sich is

the second producer in the tubroprop segment, the market structure change is likely to

positively influence Companys growth.

The demand for modernization will be high. About half of helicopters in Russia

should be replaced by 2020, resulting in high demand for both helicopter

service/repair and for orders of new engines. Thus, the share in the CIS market for

engine repair is not likely to fall below the current 20%.

High rates of economic growth in large developing countries (India and China)

and the growing availability of helicopters will enlarge consumer base in these

countries, which are the core markets for Russian helicopters. Due to the increasing

production of L-15, K-8J and Yak-130 the position of the Company on the Asian

market would be strengthened, opening new horizon for future expansion.

The level of competition on international market of aircraft engines is extremely

high. There is strong rivalry between four main players: Snecma/Turbomeca (France),

BMW Rolls-Royce (Germany/England), General Electric and Pratt & Whitney

(USA). The competitive advantage of Motor Sich amid fierce competition is that the

Company is unique producer of engines for Mi- and Ka-type helicopters and An-type

airplanes. Moreover, every owner of the aircraft fitted with Motor Sich engine is

largely dependent on Companys service since there is no other firm that provides a

full specter of maintenance and repair services for engines produced in Ukraine.

85 93 108

120

169 183

214

262

0

50

100

150

200

250

300

23.0%

77.0%

Motor Sich Pratt&Whitney

2010 2028 forecast

0

1000

2000

3000

4000

Turboprop Jet


Figure 7. Chinese helicopter market

forecasts, units

Source: AVIC (Aviation Industry

Corporation of China)

Figure 8. Chinese plane market,

units

Source: Boeing Co.

Figure 9. EBITDA and Net Revenue

dynamics (2007-2011)

Persistent development of new products as well as search for new distribution

channels and expansion possibilities. For instance, Motor Sich plans to produce

engines for the new model of helicopter MSB-2MO that will be adopted for domestic

military fleet in 2015. Another example is Companys intension to sale licenses and

license agreements to other firms in various countries of Central Asia and the Middle

East.

Russia has some intentions to diversify, but it wont be possible in the short and

medium-run. Over the last decade Russian consumers which bring more than half of

Motor Sich revenues indicated their intention to substitute services of maintenance

and repair which Motor Sich provides with equivalent services provided by native

companies. This intention became even more evident when Russian corporation

Russian Helicopters in 2010 substituted Motor Sich-designed engine with engine

produced by the US company Pratt & Whitney. Yet, long development cycle of new

products will not make the substitution possible in the nearest future.

The diversification of the Company is vital in the long-run. In late 2013, a new

Russian helicopter engine plant is planned for launch. If the construction will succeed,

the full production capacity of 450 engines per year will be reached in 2014. This is

likely to result in a dramatic drop of 25% in the Russian market, making search for

new markets and partners a vital task for the Company.

As a hole, the prospects of the industry are positive. The demand for engines will

be only increasing in the nearest future mainly due to growth of developing countries,

mainly China and India, and the increasing need of world fleet modernization. Motor

Sich is currently expanding on these markets, trying to diversify its production from

Russia and trying to seize a part of these new markets. And overall the world situation

on world markets has a positive influence on Companys sales.

Financial Analysis

Income statement. Over the last 5 years the revenues of Motor Sich demonstrated

rapid growth with CAGR of 23% y-o-y (an increase from UAH1750bln in FY2007 to

UAH 5792bln in FY2011). Profitability followed the same trend with net income

CAGR of 60% y-o-y, which implies that the Company is constantly improving

profitability without significant expense increase.

Company generates enough revenue to cover all interest on long-term and short term

loans. As of FY 2012 interest coverage constituted 49 signifying solvent financial

position of Motor Sich. Successful performance of the Company in FY2010 resulted

in ROE of 49% that slightly decreased to 36% in FY 2011(mostly due to equity

enlargement). In the future we expect the Company to maintain the same level of

profitability.(see Attachment E for details)

Balance Sheet. Accompanying income growth the assets of Motor Sich followed the

upward trend over the last 5 years and reached UAH 8182 bln. in FY2011.

Historically, the Company preferred equity asset financing with the leverage of 60%.

In the debt structure, short-term loans stand for around 80% of total debt. Besides, the

absolute amount of attracted loans is constantly decreasing with CAGR -18% y-o-y. It

can signify that the Company plans to reinvest significantly in the future in order to

enlarge production.

206

706

1250

1700

2010 2016 2021 2026

1750 5260

27000

28740

2011 2031

Civil Other

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

1000

2000

3000

4000

5000

6000

7000

2007 2008 2009 2010 2011

ths. UAH

EBITDA Net revenue

EBITDA margin, %


Figure 10. CAPEX, EBITDA and

FCF dynamics, 2007-2011

Motor Sich enjoys sound liquid position. Particularly, current ratio has been steadily

increasing and reached 2,29 in FY2011. Most liquid assets can cover almost 90% of

short-term liabilities ( quick ratio is 88%). In FY2011 inventories accounted for about

60% of current assets, which together with increasing property and equipment

investments is necessary to fulfill the growing demand for Motor Sich production.

Cash Flow Statement. Company closed 2011 financial year with Operational Cash

Flow of UAH 867,7 mln. Investment Cash Flow decreased compared to the previous

year and constituted UAH -540,5 mln. This significant negative amount implies that

Company actively invests into business enlargement. For the last three years Financial

Cash Flow was negative mostly due to intensive debt and dividend repayment. Free

Cash Flow has been improving considerably.

Valuation

Motor Sich is valuated using both DCF Model and Multiple Analysis approaches.

DCF Modeling

FCFF approach is used to determine fair enterprise value. Assumptions made in the

process of modeling are listed below.

Revenues. We expect continuing growth in revenue from sales of new engines in next

years. We base our estimation on two main drivers of growth: firstly, increasing

demand for products from existing consumers (mainly Russian aircraft producers)

amid pressing need in replacement of obsolete aircraft fleet; secondly, Companys

policy of expansion in China, the Middle East and North Africa aimed at further

geographic diversification, especially in the sector of plane engines. Substantial rise in

net working capital, observed in 2012 (+35% during first 9 months), confirms the

suggestion about formed order book for the next year. Constantly increasing capital

expenditures that have reached 13% of net sales in 2011, the highest over last five

years, indicate intension not to slow down in the coming decade.

Combining Companys production plans and demand estimates with the assumption

of relatively constant share of revenues from aircraft engineering in total sales (around

90%) we expect net revenue of Motor Sich to reach UAH 12.4 bn till 2016. Estimates

for 2012 are heavily based on actual results for three quarters of 2012 in line with

historical performance during last quarter relative to the rest of the year.

Starting from 2014 we reduce growth rate in revenues substantially in order to

account for possible reduction in demand from Russian helicopter producers, major

sales drivers in recent years. Yet we question the ability of Russian producers of

rotorcrafts to replace Ukrainian engines with engines of own production completely in

the mid-term. We base our suggestion on the fact that despite numerous claims

Russian engine producers did not managed to replicate Motor Sichs full production

cycle during last decade. Nevertheless, such scenario that is very likely to occur in the

long-run is taken into account through growth rate of cash flows in perpetuity. We

impose the rate of 2% considering it as fairly conservative for a local monopolist in

the industry with inexhaustible demand and extremely high barriers to entry.

(se Attachment G1 for details)

-1,000

-500

0

500

1,000

1,500

2,000

2,500 UAH ths

CAPEX EBITDA FCF


Expenses. We rely on gross profit margins in COGS forecasting. We expect that

gross margins will be maintained at average historical level of 43% in 2012-2013 with

further gradual decrease to 40% in 2016. Making this forecast we assume that Motor

Sich will not be able to transfer increasing metal prices in engines prices completely

in the light of planned expansion on markets outside CIS where tuff competition from

world producers is present.

Similarly, other operating expenses are forecasted using historical average ratio of

such expenses to net revenue that had been proved not very significantly from period

to period.

Financial expenses are modeled in view of Companys financing strategy. During last

7 quarters Motor Sich has reduced its interest bearing debt by UAH 190 mln (or

35%). As a result Companys D/E ratio (in book value terms) declined from 14% to

5%. We relate this reduction to discussed earlier special tax regime that came into

force exactly in 2011. Receiving access to additional funds (i.e. income tax payments

redirected back into the firm) the Company has less need in borrowed funds. Taking

into account 10-year duration of special tax regime we assume that Motor Sich will

follow similar financing strategy keeping debt burden at the same low level resulting

in low (relatively negligible) interest expenses.

Tax expenses are calculated using marginal tax rates imposed by the Tax

Code of Ukraine. These expenses are accrued on the income statement but ignored in

FCFF calculation since they should not be paid due to special tax regime.

Capital Expenditures. We believe that recent boost in capex related mainly to

renovation of existing production lines and investment in new equipment will be

followed by slight decrease in capital expenditures during next few years. In the light

of planned increase in design and production of plane engines, however, we do not

expect capital expenditures to be below their historical average levels (relative to sales

volume) that ensure fixed assets maintenance and new models of engine development.

Net Working Capital. Making forecast for NWC changes we assume that average

turnover ratios for accounts receivables, inventories and accounts payables observed

in the past, will be maintained during upcoming years.

We came to UAH 4909 price per share in our DCF valuation.

Discounted Cash Flow Model

2012F 2013E 2014E 2015E 2016E

EBIT 2 109 2 489 2 760 2 923 3 092

Plus D&A 309 364 419 461 507

Less CapEx 588 694 798 878 965

Less Change in NWC 1 589 664 653 500 550

Free Cash Flow 241 1 496 1 728 2 006 2 083

WACC, % 18.4% 18.4% 18.4% 18.4% 18.4%

Discounted FCF 204 1 067 1 040 1 019 894

Sum of DCFs 4 223 Growth in perpetuity 2%

Terminal value 12 922 Terminal WACC 18.4%

Present value of TV 5 543 TV share 57%

Firm value 9 767

Less net debt 46

Implied equity value 9 721 Value per share, UAH 4 909

Shares outstanding, mln 1 .98


Source: Delta calculations

Target Price

Source: Delta estimation

Relative Valuation

Motor Sich peers are grouped based on the products/services produced and markets

occupied into three categories: jet engine producers, Russian jet engine producers

and commercial aerospace industry. Since it almost impossible to find companies

with the same business structure the selection is based on companies specialization.

Russian jet engine producers were separated into distinct category since Russian

companies are similar to Motor Sich. Almost all of them were founded in USSR and

have product lines similar to Motor Sich lines. Also every company from Russian

jet engine producers category is ruled by managers that were appointed by Party

during Soviet Union times which is also true for Motor Sich.

Motor Sich trades with 74 % discount on EV/EBITDA and 74% discount on P/E in

comparison with Russian jet engine producers. Moreover Motor Sich trades with a

slight discount of 0.12 % on EV/S when comparing with Russian engine producers.

Comparing Motor Sich multiples with multiples of other two groups (Jet engine

producers and Commercial aerospace industry), it is easily seen that they do not

differ a lot, yielding aprox. 68% discount on EV/EBITDA multiple and 74-75%

discount on P/E multiple. However discounts on EV/S multiple differ a lot between

these categories. (16% disc. in comparison with Jet engine producers and just 0.09%

discount comparing with Commercial aerospace industry) ( see Attachment K).

According to the relative valuation approach the target price is 5 724 UAH per

share.

Investment Summary

We initiate the coverage of Motor Sich with a BUY recommendation and a target

price of UAH 5 317 with 147% upside. The price is a weighted average of the

prices, estimated by DCF approach (50%) and relative valuation method (50%).

Motor Sich is the monopolist on the market of aircraft engines in Ukraine and one of

the biggest producers in the world.

We believe that the Company is worth investing because of the following reasons.

Strong demand and positive future growth prospects. Motor Sich is one of few

Ukrainian firms whose owners aim to make their business transparent and coherent

for investors and shareholders. The Company produces wide range of products,

among which the largest share belongs to aircraft engines. Motor Sich covers 80%

of Russian helicopter engine demand and supplies engines for the worlds largest

cargo airplanes. The Company intensively realizes the strategy of expansion into the

developing countries. In the future we expect demand for the Motor Sich products to

grow as considerable modernization of Russian fleet is planed, increasing demand

from Chinese military forces is observed and the number of planes with turboprop

engine is likely to increase in the future.

Weight Price

DCF 50% UAH4909

Relative 50% UAH5724

Target Price UAH5317

Upside 147%

Relative valuation results

EV/EBITDA P/E EV/S

Motor Sich 2.27 3.00 0.86

Jet engine producers

Weighted avg.

median 7.28 13.60 1.03

Premium, % -68.79 -77.95 -16.58

Max 15.83 14.48 2.91

Min 6.16 12.21 0.95

Russian jet engine producers

Weighted avg.

median 8.74 11.70

0.98

Premium, % -74.00 -74.38 -0.12

Max 16.60 35.80 1.48

Min 6.08 -5.16 0.42

Commercial aerospace industry

Weighted avg.

median 7.12 14.09

0.94

Premium, % -68.08 -78.72 -0.09

Max 11.68 20.73 5.37

Min 3.44 5.83 0.31


Strong financial performance. Increasing revenues together with constantly

growing EBITDA margin signify companys successful performance. High profits

and large reinvestments allow reducing debt significantly and switching to self-

financing in the future. Also, profitability of the company is reflected in ROE of

36%.

Motor Sich stocks drive the index up. The stocks of Motor Sich are traded on the

UX stock exchange. Share of the company are among the most liquid on the

exchange and drive the index up. Stocks of Motor Sich hold the largest share (16%)

in the index.

Source: UX, Delta calculations

No substantial risks to the Companys growth are predicted. More than 90% of

production is currently exported abroad. Therefore, depreciation of local currency is

likely to benefit Motor Sich with cheaper labor force and domestic material.

Moreover, the Company has a political lobbying since its owner is a member of

major party. On the global market, the threat of decreasing demand from Russia is

displaced by consumer base enlargement in China, India, Pakistan and other

developing countries.

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23.04.2009 19.10.2009 13.04.2010 06.10.2010 29.03.2011 22.09.2011 15.03.2012 10.09.2012

Motor Sich and relative UX Index stock prices

MSICH Price UX Relative Price


Downside Risks

Russian push for own helicopter engine production. Since 2005, Russia had

several attempts to substitute Motor Sich engines, who currently produces the

majority of engines for helicopters produced in the country. None of this attempts

was successful up to date, both because of reliability of Motor Sich engines and

financing problems in Russian substitution program. Next attempt is the

construction of the new plant in Russia with a full capacity of production of 450

engines per year. Planned to be completed in late-2013, the full production capacity

should be reached in 2014. If the plan succeeds, the positions of Motor Sich in

Russian market could be hurt, with a loss of about 25% in Russia in the segment of

helicopter engines. Thus, the company is now actively searching for the possible

substitutions of Russian market, trying to expand into Chinese and markets of other

Asian countries with both new contracts for previous products and new products

development.

Strong competitive environment. While the competition on the markets, where

Motor Sich operates, is very strong and divers, the Company has the advantages that

allow it to prosper on the markets of operation. Affordable price and high reliability

of Motor Sich products results in a strong market position and good reputation.

Growth of developing countries will still provide a stable increase of companys

sales in the nearest future.

Chinese plans to substitute the engine for L-15. While Chinese producer of L-15

planes already announced plans for substituting engines with a local production,

previous attempts of Chinese companies to substitute Motor Sich engines were not

successful at all. In particular, a previous attempt to make engines for K-8J was

unsuccessful, with local engines being not as reliable or durable. Moreover, the

current contract provides a secure market for the few upcoming years.

Hryvnia depreciation will result in a competitive advantage for Motor Sich.

Since more than 90% of production is currently exported abroad, depreciation of

local currency is likely to benefit Motor Sich with cheaper labor force, domestic

material, etc. Since about 42% of revenues the company receives from operational

activities is in Russian rubles, we should also assume the stability of this currency,

to have a large benefit from local currency drop.

Political risks are currently low. Mr. Boguslaev, the chairman of Motor Sich, is a

deputy of currently ruling Partiya Regioniv. His strong lobbying has provided a 10

years tax-free operation for aviation industry in Ukraine, providing a strong

competitive advantage for the company. There are no major reason for a change in

this law before 2015, when new elections are to be held.

Attachments

Attachment A. The Motor Sich JSC full product range

1. Products

1.1. Aircraft engines (More than 60 types and modifications for more than 80 types of aircraft and helicopters for various purposes)

Turboprop TVZ-117VMA-SBM1, AI-20, AI-24, VK-1500

Turbofan Engine

AI-25 series 2E, AI-25TL, 25TLK AI-, AI-25TLSh, AI-22, AI-222, D-436-148; D-436T1/T2, D-18, D-36 Series 1, 2A, 3A, D-36 Series 4A, D-436TP MS400, MS400P

Turbopropfan engines D-27

Turboshaft engines

MS-500-TV3-117VMA SBM1V; 117VMA-TV3, TV3-117VM, VK-2500, VK-1500VM, VK-1500VK; D-136/D-136 Series 1, AI-450

Auxiliary engines

Gas turbine engines AI-8, AI-9, AI-9V; AI9-BZ Onboard power plant AI-24UBE Turbine auxiliary engine AI-450-MS

1.2. Industrial plants

1.2.1. Gas turbine drives D-336 6.3 MW; AI-336-1/-2-10, AI-336 8 MW

1.2.2. Gas turbine power plant "Motor Sich EG-1000"; PAES-2500 and EG-2500T capacity of 2.5 MW, "Motor Sich EH-6000, EH-8000"

1.2.3. Gas compressor unit GPA-K / 5,5-GTP / 6,3 SC

1.2.4. Wind power VES-5-500/5-96

1.3. Industrial products and consumer goods

Internal combustion engines, components Engines "Motor Sich MS-10," "Motor Sich D-250", "Motor Sich D-70D", KM-17

Agrotechnics

Tillers "Motor Sich MB-4, 05," "Motor Sich MB-8", "Motor Sich MB-8E", a walk-behind tractor attachments, tiller "Motor Sich MC-5C"; "Motor Sich CD-1" and "Motor Sich-2 CD"

Boats, boats, power plants Column Swing-out "Motor Sich PAC-60", M Otori boat outboard "Motor Sich PLA-40E" (MC-40E), "Motor Sich MC-40", for outboard motors "Whirlwind"

Saws gasoline and electromotive

Saws gasoline "Motor Sich - 270", "Motor Sich - 370", n silt hand electromotive chain "Motor Sich EP-2000-1" Saw, with tanks sharpening chain saw "Motor Sich SW-150", " Motor Sich SW-150-1 "H abortion tools for sharpening and repair of saw chains

Separators Separator cream separator manual "Motor Sich STSMR 80", with separator "Motor Sich cms 80", "Motor Sich - 500"

Equipment for Public Utilities Lawnmowers "Motor Sich SC-500-2" and "Motor Sich GK-500-3" ,"Motor Sich GK-500-4"

Technique for motorists Socket wrench for motorist NC-3 to the Special assembly spanner CCM-1, H keys for abortion motorist NK-1

Homeware Meat grinder, juicer, Blow lamps, and home heating NSA-1C; of infrared home "Motor Sich OIB-2C", n Remus tourist "Motor Sich PT-2", with Anky baby

Industrial equipment

ADB - 1C; Power cutters "Motor Sich ILL-300 '; vibrator WB-1 in " Motor Sich VP-18P "and" Motor Sich VP-30-01 "d omkrat hydraulic" Motor Sich DT-20 "; steam-to-door P-0 ,5-0, 8

Construction - renovation Tool (key "Motor Sich 7813-0001") Medical products Implants, and Instrument Shops 12 stores and sections Service centers chainsaws and separators 4 centers Service

2. Services

2.1. Service of aircraft engines Technical publications (documentation), training, spare parts, and special offers; centers Inform. Support 2.2. Modernization and repair of CNC (computer numerical control)

2.3. Transport and communications 2.3. Other services Sports; medicine; hotel

TV3-117VM-x Engines Family Helicopters Equipped

Attachment B. Examples of products

AI-222-25F Engine L-15 jet

AI-222 Engine Yak-130

An-225 ( Mrija) D-18T Engine

An-124 Ruslan

Attachment C. The Motor Sich JSC business units

Attachment D. Major suppliers of the Motor Sich JSC

Major suppliers Materials and components

VSMPO-AVISMA (Russia) Titanium and alloys thereof titanium

ZAP JSC (Russia) Aviation bearing

FED Corp. CJSK (Ukraine) Aerospace aggregates

Uglekompozit JSC (Ukraine) Carbonic composites

EMSZ Lepse JSC (Russia) Aviation aggregates

Electropribor (Russia) Aviation and special production

2007 2008 2009 2010 2011 9M2011 9M2012

Net sales, UAH mln 1 750 2 047 3 740 5 002 5 793 3 936 5 031 Change, % YoY 41% 17% 83% 34% 16% 22% 28%

EBITDA, UAH mln 399 365 1 223 1 745 2 284 1 491 2 163

EBITDA margin, % 23% 18% 33% 35% 39% 38% 43% Net income, UAH mln 207 4 741 1 248 1 344 871 1 422

Net margin, % 12% 0.2% 20% 25% 23% 22% 28%

EPS, UAH 111 2 374 630 679 440 718 Total assets, UAH mln 2 915 3 539 4 211 6 154 8 182 7 527 10 317

Change, % YoY 28% 21% 19% 46% 33% 40% 37%

Debt share, % 39% 49% 40% 38% 38% 38% 35%

FCFF, UAH mln -56 5 258 589 n/a n/a n/a CROIC, % -3% 0.3% 10% 15% n/a n/a n/a

Attachment E. Key Financials

Attachment F. SWOT analysis

Strengths

Well-diversified line of products unique for

Ukrainian and Russian markets

Full-cycle production

Long and sustainable relations with suppliers

and consumers

Effective management which able to influence

government policy in aerospace industry

Weaknesses

Lack of internal demand

High dependence on Russian customers

Uncertainty about companys strategy after

Boguslaevs retirement

Opportunities

High level of deterioration of the aircraft fleet

in CIS countries

Increasing demand for airplanes worldwide

New products development

Threats

Implementation of Russian program on

replacement of helicopters engineers

imported from Ukraine by home production

Volatility of prices on imported parts and

components

High level of competition on global markets

Attachment G1. DCF valuation. Weighted Average Cost of Capital

2012 2013 2014 2015 2016

Risk-free rate (government bond yield) 10.0% 10.0% 10.0% 10.0% 10.0%

Equity risk premium 10.0% 10.0% 10.0% 10.0% 10.0%

Beta 0.87 0.87 0.87 0.87 0.87

Cost of equity 18.7% 18.7% 18.7% 18.7% 18.7%

Cost of debt (after tax) 14.2% 14.6% 15.1% 15.1% 15.1%

Target D/E ratio 8% 8% 8% 8% 8%

WACC 18.4% 18.4% 18.4% 18.4% 18.4%

WACC in perpetuity 18.4%

Perpetuity growth 2%

FCF Perpetual Growth

1% 1,5% 2% 2,5% 3%

WA

CC

in

ter

min

al p

erio

d

17.4% 5020.7 5126.2 5238.4 5358.2 5486.3

17.9% 4866.5 4964.1 5067.7 5178.1 5295.9

18.4% 4722.2 4812.7 4908.6 5010.5 5119.0

18.9% 4587.1 4671.0 4760.0 4854.3 4954.5

19.4% 4460.3 4538.4 4620.9 4708.3 4801.1

Attachment G2. DCF valuation. Sensitivity analysis

Attachment K. Relative Valuation

Market Cap. $ M

EV/EBITDA P/E EV/S

2012 2013E 2012 2013E 2012 2013E

Motor Sich Ukraine 560 2.22 2.35 2.93 3.1 0.8658 0.846

Russian jet

engine

producers

Irkut Russia 391.30 9.2 8.7 7.7 7.5 1.0 0.8

Kazan

Helicopter

Plant Russia 148.50 8.5 9.1 13.5 9.0 1.2 1.0

Ufimskiye

Motors-Cls Russia 212.90 7.9 9.9 14.0 12.1 1.6 1.3

Kazanskoe

Motorost Brd Russia 44.50 6.2 5.9 37.0 34.0 0.5 0.3

Saturn

Research &

Prod Russia 79.70 20.4 10.9 -3.6 -7.5 1.1 0.7

Mean 10.4 8.9 13.7 11.0 1.1 0.8

Median 8.5 9.1 13.5 9.0 1.1 0.8

Jet engine

producers

General

Electric United States 207,604 16.5 14.8 12.8 11.4 3.0 2.8

United

Technologies United States 73,845 8.4 7.1 14.5 12.2 1.3 1.2

Rolls-Royes Britan 25,211 7.7 6.7 14.5 13.2 1.1 0.9

Safran France 15,776 6.5 5.7 14.5 12.2 1.0 0.9

MTU Aero

Engines Germany 4,391 7.2 6.4 15.3 13.3 1.1 1.0

Mean 9.3 8.1 14.3 12.4 1.5 1.4

Median 7.7 6.7 14.5 12.2 1.1 1.0

Commercial

aerospace

industry

Boeing United States 57,669 7.6 6.1 16.6 13.4 0.8 0.6

EADS Netherlands 32,907 4.1 3.3 16.6 12.2 0.3 0.3

Bombardier Canada 7,405 5.5 4.5 9.0 7.3 0.4 0.4

Embraer Brazil 6,387 7.4 6.4 15.4 13.9 1.0 0.9

Textron United States 7,512 6.9 5.6 13.0 10.9 0.8 0.7

Goodrich United States 15,790 9.4 8.2 17.7 16.1 1.9 1.6

Rockwell

Collin United States 8,068 7.7 7.1 13.4 11.5 1.8 1.6

Transdigm United States 6,353 12.5 10.5 19.8 16.5 5.8 4.8

BE Aerospace United States 4,923 9.6 7.8 17.0 13.8 1.9 1.6

Zodiac France 6,274 9.9 8.6 15.6 13.4 1.7 1.5

Spirit United States 3,864 7.3 6.1 12.3 10.2 1.0 0.8

Triumph United States 3,082 7.7 6.7 12.6 11.0 1.3 1.1

Finmeccanica Italy 2,480 3.6 3.2 6.4 5.0 0.3 0.3

Heico United States 1,869 10.2 8.7 22.1 18.7 2.1 1.9

Heroux-

Devtek Canada 267 5.2 4.5 10.5 9.9 0.9 0.8

Mean 7.6 6.5 14.5 12.2 1.5 1.3

Median 7.6 6.4 15.4 12.2 1.0 0.9

Documents

Delta Report MSICH