OREANDA-NEWS. January 21, 2010. We are downgrading our recommendation for Inter RAO from BUY to HOLD on stock performance. Since our initiation of the stock in mid September 2009, Inter RAO has grown 103%, significantly outperforming the RTS Index, which has increased 28% during the same period. As a result we downgraded our recommendation for the stock from BUY to HOLD leaving TP and financial forecasts unchanged, reported the press-centre of VTB Capital.

Current assets are fairly priced in our view, but additional upside is possible. We think that Inter RAO’s current assets are fairly priced by the market.

Nevertheless, additional upside could materialise as a result of an intensive acquisition plan by Inter RAO, and that is why we are retaining a HOLD rating for the stock. To recap, OGK 1 and TGK 11 Inter RAO are likely to acquire state-owned stakes in generating companies and Otkrytie fund’s assets. (see the table on the next page).

Merger between Inter RAO and RusHydro could create a new utility giant worldwide. Finally, we note that merger plans for RusHydro and Inter RAO might materialise in the future. Consequently, that would create one of the largest utility companies worldwide, in our view.

Recently, Inter RAO’s previous management team headed by former CEO, Evgeny Dod moved to RusHydro to focus on key construction projects such as BEMO and the Sayano-Shushanskaya’s restoration. Now, Inter RAO is headed by former Rosatom manager, Yuri Kovalchuk. So, management reshuffling might bring some new colour to both companies’ strategic outlooks.

Valuation-wise, Inter RAO is priced at 10.4x on a 2010F EV/EBITDA (existing assets only) though not a bargain, in our view. However, financials could improve significantly, if the company’s acquisition strategy becomes value adding. That is the key reason for our HOLD recommendation for the stock.