FAS opens case against Dalsvyaz [BUY; TP:$4.31] over internet pricing

Event: FAS has opened a case against Svyazinvest regional subsidiary Dalsvyaz, Vedomosti reported on Tuesday. The principal issues are the high price of its broadband internet services and unequal pricing among the regions of the Far East. FAS is slated to review the case on 5 April. 

View: We believe that internet prices in the Far East, which can exceed those in Moscow by as much as 50 times, will inevitably fall, either as a result of government action or increased competition (or both). Fines could be levied at 1-1.5% of revenue earned from providing internet service, which would amount to approximately $1.2m-$1.9m, equal to 1.5-2.5% of 2009 net income. FAS has also indicated that it will be examining internet service pricing for Svyazinvest's other regional subsidiaries. 

Valuation: Dalsvyaz trades on a 2010 EV/EBITDA of 2.8x. The other regional incumbents trade in a range of 3.4x-4.6x. 

Action: We maintain a BUY rating for Dalsvyaz and target price of $4.31 for common shares, and would ordinarily recommend buying into weakness on this news. We believe, however, that the value held by minority shareholders will be diluted in the impending reorganization of Svyazinvest subsidiaries.