Market Report Baltic Post Q3 Update January 3, 2008

Focus on sentiment, macro figures

Analysts: Erki Kert, Sten Pisang, Henri Adams Contact: [email protected]

Forward P/E

30.0 28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07

Estonia Latvia Lithuania Baltics

 The second half of 2007 was rather weak on all three Baltic markets. As a result, Vilnius was the only one to end the year on positive side (+4.4%), while the annual performance of Riga and Tallinn was -9.2% and -13.3%, respectively. Going forward, we expect the volatile trading in both directions to continue and we would not be surprised to see even lower levels in the coming months. Both, the uncertainty regarding the macro future of Baltic states as well as turmoil on global credit markets constitute to the rough trading environment.

 The macro environment is clearly cooling – the most in Estonia and the least in Lithuania. Retail sales growth and real estate prices are coming down in all three Baltic states and although the GDP growth is still hanging on in Lithuania (and also in Latvia), we expect them to soon follow the path of Estonia (GDP growth has dropped from 11.4% in Q1/06 to 6.4% in Q3/07). In spite of that, we are generally expecting a “soft landing” scenario in 2008 with GDP growth of 4.7% and inflation of 8.6% in Estonia.

 Our top picks from the Baltic markets are definitely the telecoms – Eesti Telekom (Accumulate) and TEO LT (Accumulate). Both companies are trading at a significant discount to the European peers, which we argue is unjustified in the long term, because telecoms should not suffer very much even if the hard landing scenario was to play out. Moreover, the decrease in share price has pushed the expected 2007 dividend yield up to 8.4% for both companies, which is just too much to miss. In addition to telecoms, we also like Norma (Accumulate). The company is trading at reasonable levels, while at the same time holding a significant amount of cash, which brings about many interesting future scenarios.

Please see disclaimer at the end of this report 1

Market Report Baltic Post Q3 Update January 3, 2008

Table of contents

Performance ...... 3 Valuation ...... 4 Macro overview ...... 5 Deviation...... 8 Recommendation performance...... 9 Recommendation: Accumulate ...... 10 Eesti Telekom (Accumulate) – Low risk, decend dividends...... 10 Norma (Accumulate) – Cash ready for action...... 10 Tallinna Kaubamaja (Accumulate) – profitability still strong, but rough year ahead ...... 11 (Accumulate) – Stable future ahead...... 12 TEO (Accumulate) – Attractive valuation, nice dividends ...... 13 Recommendation: Neutral ...... 14 Apranga (Neutral) – negative macro trends have left their mark...... 14 Arco Vara (Neutral) – difficult to forecast, but trend seems to be clear ...... 14 City Service (Neutral) – Growth expected to slow to normal levels...... 15 Ekspress Group (Neutral) – not expensive, but sentiment could be better...... 15 Eesti Ehitus (Neutral) – all eyes on Civil engineering segment...... 15 Grindeks (Neutral) – cheap but a bit too risky ...... 16 (Neutral) – business as usual...... 16 Pieno Zvaigzdes (Neutral) – more milk needed, worldwide...... 17 Rokiskio Suris (Neutral) – strong sales, booming profitability ...... 17 SAF Tehnika (Neutral) – Can they stay in profit? ...... 17 Saku (Neutral) – Downgrade to Neutral due to alcohol sales restrictions ...... 18 Tallink (Neutral) – hard times are over?...... 18 Recommendation: Sell ...... 20 Baltika (Sell) – sales growth losing steam...... 20 (Sell) – real estate party is coming to an end...... 20 Olympic Entertainment Group (Sell) – struggling with falling margins...... 21

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Market Report Baltic Post Q3 Update January 3, 2008

Performance

The second half of 2007 was tough for all three Baltic markets. Tallinn took the most serious hit and the index ended the year with a negative performance of 13.3%. Riga and Vilnius also came down from the peaks done in mid October and Vilnius was the only market to end the year on positive territory compared to the beginning of the year.

Uncertainty regarding the Baltic macro situation coupled with the turmoil on world credit markets had its impact on the sentiment and index performance. Since neither of these problems has disappeared yet, we believe that the markets could see even lower levels than at the moment. At the same time, we do not forecast a crash scenario for the stock exchanges and expect the sentiment to improve again in the second half of 2008 (maybe even sooner).

Baltic markets performance (ytd)

25% 20% 15% 10% 5%

0% -5% -10%

-15% -20% Jan/07 Mar/07 May/07 Jul/07 Sep/07 Nov/07

Tallinn Riga Vilnius

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Market Report Baltic Post Q3 Update January 3, 2008

Valuation

Although we had to make some downward adjustments to our 2008 estimates after the Q3 reports, the valuation levels have still significantly decreased. This is due to the fact that the share prices have dropped even more than our estimates. As a result, the Baltic average 2008e P/E is now 14.5x, which can be considered relatively fair taking into account the risks and cooling macro picture. Among Baltics, Latvia is the cheapest with 2008e P/E of 11.8x. However, given that our sample of Latvian companies is quite small, the figure is not very informative. Estonia is trading at 12.9x P/E for 2008, while Lithuania is still close to 19x level. Estonia’s figure can be considered even quite attractive, while Lithuania has some more room for decline.

Forward P/E

30 28 26 24 22 20 18 16 14 12 Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07

Estonia Latvia Lithuania Baltics

Overall, although the P/E ratios suggest that there may be some interesting picks from the markets (especially in Estonia), the sentiment tells another story. As long as the Baltic macro future remains uncertain, we prefer to remain cautious and mostly suggest defensive picks like telecoms and Norma.

Forecasted annual EPS growth

60%

50%

40%

30%

20%

10%

0%

-10% Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07

Estonia Latvia Lithuania Baltics

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Market Report Baltic Post Q3 Update January 3, 2008

Macro overview

The macro picture of the Baltic economies in third quarter of 2007 can be summarized in 3 phrases: (1) cooling GDP growth, (2) slowing retail sales, and (3) increasing inflationary pressure. All of those point to the fact that the consumer-driven economic growth in the Baltics is cooling, which also translates into slower top and bottom line growth for most companies listed on the three Baltic exchanges. Although there are a lot of bears out there, who forecast a crash scenario for all three Baltic states, we prefer to remain a bit more bullish and favor the so-called “soft landing” scenario”. For this reason, we still expect moderate growth rates for the companies next year and remain more or less neutral regarding the overall market.

The GDP growth saw a drop in Estonia (to 6.4% in Q3 from 7.6% in Q2), while Latvian growth was more or less flat (to 10.9% from 11.0%) and Lithuanian one even accelerated (to 10.8% from 8.0%). These figures confirm that Estonia’s macro cycle is a bit ahead of Latvia’s and Lithuania’s, and hence, we expect Estonia’s southern neighbors to soon follow the path of slowing growth. In 2008, we expect Estonia’s GDP to grow 4.7% at constant prices.

GDP growth (constant prices, yoy)

14% 12% 10% 8% 6% 4% 2% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2005 2006 2007

Estonia Latvia Lithuania

Retail sales growth, which has boomed during the last couple of years, also slowed down significantly. The Q3 three months average growth again saw the fastest drop in Estonia. While the average growth from April to June amounted to 17.5% yoy, the increase in July to September was only 13.5%. Although it is still relatively high compared to Western countries, the trend is clearly down and we expect to see even lower levels in the coming months (the growth had dropped to 9.4% yoy in October). In Latvia, the average growth came down to 20.2% from 23.8% and in Lithuania, the pace decelerated to 16.6% from 20.3%. Given that the best performing companies in the past years have mainly been consumer oriented, the times are clearly getting tougher for them. For this reason, we also took a more bearish view on them in the end of Q2 and now confirm our stance.

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Market Report Baltic Post Q3 Update January 3, 2008

Retail sales growth (constant prices, yoy)

35% 30% 25% 20% 15% 10% 5% 0% I I II II X V X V III III XI XI IV VI XI XI IV VI XII VII XII VII VIII VIII 2006 2007

Estonia Latvia Lithuania

The increase in registration of new passenger cars, which also points to the health of Baltic consumers, has also slowed during the last quarters. The figure, which conquered levels close to 25% yoy in the beginning of 2007, is now below 15% in all three states. Again, we do not expect the trend to reverse soon and hence, remain cautious regarding the purchasing power of Baltic consumers.

Retail sales growth (constant prices, yoy)

35% 30% 25% 20% 15% 10% 5% 0% I I II II V X V X III III IV VI XI XI IV VI XI XI VII XII VII XII VIII VIII 2006 2007

Estonia Latvia Lithuania

And last but not the least – inflation. The pressure on consumer prices has been getting tougher month after month and is now close to or above the 8% level in all Baltic states. Latvia leads the way with an annual inflation of 13.7% recorded in November. Estonia, not far behind, saw prices increasing by 9.1% and Lithuania trails with 7.8% price growth. Although the countries also witness a sharp wage increase, the inflationary pressure most certainly still affects the purchasing power. The growth in consumer prices is not expected to significantly ease before H2/08 and we cannot do anything else but agree. Our 2008 inflation forecast for Estonia stands at 8.6%. Inflation is expected to exceed the figure in the first half of 2008, but calm down in the second half.

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Market Report Baltic Post Q3 Update January 3, 2008

Inflation (yoy)

16% 14% 12% 10% 8% 6% 4% 2% 0% I I II II X V X V III III IX XI IV VI IX XI IV VI XII VII XII VII VIII VIII 2006 2007

Estonia Latvia Lithuania

To sum up, almost all the macro indicators are heading lower at the moment (except for inflation), which means that the business environment for Baltic companies could get worse before any improvements. Although the deceleration in growth is welcomed by most market participants, it is important to turn the trend around at some point. At the moment, we believe it will happen before we reach the levels that would really start hurting the companies and our estimates for 2008 are also done with this idea in mind. We expect the situation to improve in H2/08, so the economies could continue the growth at more sustainable levels.

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Market Report Baltic Post Q3 Update January 3, 2008

Deviation

Given that the macro environment was cooling faster than expected, we cut the estimates for Q3 and Q4 for a lot of companies after the Q2 results. Given that in terms of sales, 9 companies out of 17 reported Q3 in line with our estimates, we can say that the cut in forecasts was justified (5 companies delivered Q3 sales above our expectations, while 3 companies missed them). But in terms of profitability (Pre-tax profit), we were a bit too bearish. 8 reports exceeded our forecast, five were in-line and another five came below. We also remain cautious after the Q3 results and expect growth ratios to decrease in Q4 and the following quarters.

Q3 deviation

In-line

Below

Above

0 2 4 6 8 10

Sales Pre-tax

Q3/07 Report Summary Table Deviation Deviation Q3 sales Q3 Pre-tax Company Country Industry Q3 sales Q3 Pre-tax Apranga Lithuania Apparel Retail -0.6% 14.1% In-line Above Arco Vara Estonia Real Estate Management & Development na na na na Baltika Estonia Apparel, Accessories & Luxury Goods -0.4% -24.4% In-line Below City Service Lithuania Environmental & Facilities Services na na na na Eesti Ehitus Estonia Construction & Engineering 8.6% 5.1% Above In-line Eesti Telekom Estonia Integrated Telecommunication Services -0.2% 4.6% In-line In-line Ekspress Estonia Media 0.1% -13.1% In-line Below Grindeks Latvia Pharmaceuticals 0.2% -18.3% In-line Below Harju Elekter Estonia Electrical Components & Equipment -10.4% 27.3% Below Above LASCO Latvia Oil & Gas Storage & Transportation -0.3% 38.5% In-line Above Merko Estonia Construction & Engineering -9.9% -1.4% Below In-line Norma Estonia Auto Parts & Equipment 23.8% 0.3% Above In-line Olympic Estonia Casinos & Gaming 0.4% -34.4% In-line Below Pieno Zvaigzdes Lithuania Dairy 6.4% 87.7% Above Above Rokiskio Suris Lithuania Dairy 15.1% 227.7% Above Above SAF Tehnika Latvia Communications Equipment na na na na Saku Estonia Beverages -19.8% -20.2% Below Below Snaige Lithuania Household Appliances na na na na Tallink Estonia Marine -4.3% 36.2% In-line Above Tallinna Kaubamaja Estonia Department Stores na 16.4% na Above Tallinna Vesi Estonia Water Utilities -4.7% 0.9% In-line In-line TEO Lithuania Integrated Telecommunication Services 7.9% 21.9% Above Above Source: LHV

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Market Report Baltic Post Q3 Update January 3, 2008

Recommendation performance

Our coverage universe has seen several downgrades lately. Although the hindsight says that we should have been even more aggressive with the downgrades already in the end of the summer (we expressed some concerns regarding the markets future in our post Q2 report on Sept 25), the downgrades that we have done so far have still proven right (most of the shares have kept on falling).

Our top picks are definitely the telecoms at the moment. Both Eesti Telekom and TEO LT trade at a significant discount compared to their peers, while at the same time offer an attractive 8-9% dividend yield. Both companies are kind of a “safe haven” during tough times, which we are witnessing at the moment. Hence, for investors who are looking for ca +10% annual return at lower risk, the telecoms are a nice play.

Also, we recently upgraded Norma from Neutral to Accumulate. We argue that there are a number of possible triggers for upside movements, while at the same time downside is limited. In that sense, Norma is more a play on anticipated positive news (extra dividends, takeover, etc?) and less on improving financials.

The most important change in recommendations took place in the beginning of October, when we downgraded our top pick Tallinna Kaubamaja from Buy to Accumulate. We suggested locking some profits (the share was up 10.3% since upgrade in the end of March) and those who did can be thankful, because the price has dropped ca 10% since. Although the company still looks attractive to us and we do not exclude the possibility that we could upgrade the share back to Buy again in the future, the sentiment on Eastern European markets is clearly shaky at the moment end hence, we keep a bit more conservative line at the moment.

We are also cautious about the Baltic clothing retail sector as a whole. For this reason, we downgraded Baltika and Apranga to Sell and Neutral, respectively. Given that the shares are down 47% and 20%, respectively, since the downgrade, we can undoubtedly admit that the negative stance has justified itself. Before the downgrade, Baltika had a Neutral recommendation and Apranga was rated as Accumulate (Apranga yielded a decent 86% in less than 2 years while Accumulate).

The end of real estate rally has pressured the construction and development companies – Merko and Eesti Ehitus. Both companies also saw a downgrade in the end of September (Merko from Neutral to Sell, Eesti Ehitus from Accumulate to Neutral), after which the shares are down 39% and 12%, respectively.

Saku was downgraded to Neutral due to lacklustre Q3 results. The sale of alcohol was limited in Harju County from the beginning of August, which had a significant impact on the company’s sales and margins.

Olympic EG, our latest downgrade, also missed our profit forecast and hence, it seems that the aggressive expansion has left a visible mark to the profitability. Given that the sales growth in the Baltics could also be under pressure due to slowing economy, we do not expect the problems on income statement to vanish in the near term. Hence, we argue that today’s price is a bit too high for such a slow growth in the bottom line, and rate the share with Sell.

Our detailed ratings actions and performances can be found below.

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Market Report Baltic Post Q3 Update January 3, 2008

Recommendation: Accumulate

Eesti Telekom (Accumulate) – Low risk, decend dividends

Eesti Telekom reported Q3/07 in line. Sales increased 10.4% yoy to EUR 103.1m, which was according to our expectations. The results were positively impacted by lower than forecast sales & administrative and research & development expenses, which came in 10.7% or EUR 1.7m lower than expected. As a result, the bottom line came in at EUR 32.4, or 4.6% above expectations. Looking at sales by business segments, broadband services offered a positive surprise, whereas we were expecting more from mobile telecommunications. The sales coming from the firstly mentioned grew 13.9% yoy (growth was near 8.7% in first six months), while mobile telecommunications demonstrated a growth of 9.8% (growth was near 13.0% in first six months). Behind the strength was overall good growth of all the services offered, ranging from interconnection and call services to telecommunications and IT merchandise retailing. Elion`s triple package (telephone, internet and DigiTV) is proving to be continuously popular, which is also reflected in the increase of revenue coming from the monthly fees (66% increase compared to Q3 2006). Eesti Telekom is trading at 2008E PE of 10.6x with an expected dividend yield of 8.6% 2007E. We think that the company is an attractive dividend play and reiterate Accumulate.

50.0% Initiation of coverage with Buy 1 Price: 7.80 EUR (Jan 9, 2006) 40.0% Dividends 30.0% 2 EUR 0.58 per share 3 (June 2, 2006) 20.0% Downgrade from Buy to Accumulate 10.0% 3 Price: 9.16 EUR 4 (Feb 8, 2007) 1 2 0.0% Dividends 4 EUR 0.61 per share -10.0% (June 8, 2007)

-20.0% Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07

OMX Baltic Benchmark Eesti Telekom

Performance under Buy (Jan 9, 2006 - Feb 8, 2007): 24.9% same period benchmark: 34.9%

Performance under Accumulate: -10.0% same period benchmark: -20.1%

Last price: 7.63

Norma (Accumulate) – Cash ready for action

The Estonian automotive sub-supplier Norma reported somewhat disappointing Q3 results. Revenue came in at EUR 19.2m or 23.8% above our estimates (deliveries of airbags and electronic control units to AVTOVAZ was the main factor behind the strong growth). Still, the related costs were significantly higher as well, which resulted in the gross profit of just 3.3% better than expected. Adding that marketing and administrative expenses were also higher than forecast, the net profit came in exactly as we expected. Still, Norma has EUR 31.9m worth of liquid assets (EUR 2.4 per share), which in our view hold a significant value for an investor. Not only has the company enough resources to finance its own operations but these funds could also be used for: 1) takeover (would add growth) 2) paying extra dividend (attractive for shareholders) 3) share buyback (similar to dividends). Also, Norma looks like an attractive company to acquire. Autoliv, owning already 51% stake, might decide to increase it’s share. In November, the Swedish auto safety systems maker announced a plan to offer

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Market Report Baltic Post Q3 Update January 3, 2008

USD 400m worth of guaranteed senior notes. Proceeds would be used to repay existing debt and for other general corporate purposes, the company said. At the same time, Autoliv also launched a full scale strategic review and intends to increase its M&A activity. According to chairman, Lars Westerberg, the company is already in the process of taking full control over its joint ventures (recently acquired remaining 50% in Autoliv India and 41% in Changchun Maw Hung Vehicle Safety Systems in China). Autoliv’s strategic review will take place during the fourth quarter and the first quarter of 2008, with the first possible deal taking place about half a year after this point. The cash & cash equivalents that Norma has, would make the acquisition even cheaper, as only half of the price would be actually paid for the company [EUR 4.9 (current share price) – EUR 2.4 (cash & cash equivalents per share) = EUR 2.5 per share (2008E PE of 5.5x)] – seems rather appealing. The current valuation of Norma seemed interesting for many reasons, of which the most important ones are: (1) expected dividend yield of 6.5% for 2007E, (2) the company is holding considerable amount of cash & cash equivalents, and (3) the company looks like a good take-over candidate. Thus, we upgraded the share from Neutral to Accumulate in December.

Tallinna Kaubamaja (Accumulate) – profitability still strong, but rough year ahead

We downgraded Tallinna Kaubamaja from Buy to Accumulate on Oct 11, due to weaker than expected Q3 sales figures (sales increased 30% yoy to EEK 1.6b in Q3, whereas we had previously expected an increase of 47%). Slowdown in the macro environment has been more serious than anticipated and we have also cut our target price from EEK 157 (EUR 10) to EEK 141 (EUR 9). On the positive side, the profitability has remained strong with costs increase slower than anticipated resulting in a net profit of EEK 110.9m (16.5% higher than forecast). Since the third quarter was strong, we have raised our estimates a bit for the current year. The slowing economic growth has not affected the results just yet. For the next year, however, we are estimating the economic slowdown to hit the results (slower sales growth and rising costs). High inflation and increase in excise tax (in Estonia), combined with higher interest rates (great deal of growth so far has been fueled by cheap money ) will have a negative affect on the purchasing power. We are expecting signs of improvement already in 2009, though. Looking forward, Selvers expansion to Latvia (goal is to open at least 15 stores by 2009) and opening of the beauty stores chain in the Baltics look promising. It will help to diversify sales geographically as well as increase profitability as the margins are expected to be higher in the beauty store segment. We think that Kaubamaja is in a good position to withstand the stricter economic conditions and see upside potential from current price levels. Trading at 2008E PE of 12.7x we reiterate Accumulate, with a target price of EEK 141 (EUR 9). For new investors, we advise to acquire a stake in different parts - the situation on the world markets is still shaky, which may offer an entry on different price levels.

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Market Report Baltic Post Q3 Update January 3, 2008

20.0% Upgrade from Neutral to Buy 1 Price: 7.80 EUR 15.0% (Mar 28, 2007) 10.0% Dividends 5.0% 2 EUR 0.06 per share (May 30, 2007) 0.0% -5.0% Downgrade from Buy to Accumulate 3 3 Price: 8.54 EUR -10.0% 2 (Oct 11, 2007) 1 -15.0% -20.0% -25.0% -30.0% Jan/07 Mar/07 May/07 Jul/07 Sep/07 Nov/07

OMX Baltic Benchmark Tallinna Kaubamaja

Performance under Buy (Mar 28, 2007 - Oct 11, 2007): 10.3% same period benchmark: 3.0%

Performance under Accumulate (Oct 11, 2007 - today): -10.4% same period benchmark: -14.8%

Last price: EUR 7.65

Tallinna Vesi (Accumulate) – Stable future ahead

Tallinna Vesi reported solid Q3 results. The sales grew 13.1% to EUR 10.8m, which was quite in-line with our estimate of EUR 10.5m. While revenue from water supply services and wastewater disposal services was slightly below our forecast, the higher than expected income from other operating activities fully compensated. The sales increase has been somewhat lower this year than the tariff increase. Still, in longer term we expect a growth premium of 0-1% compared to the tariffs. There were no surprises concerning costs with profitability remaining as strong as in the previous year. Bottom line came in at EUR 4.9m, very much in-line with our estimate. Looking forward, Tallinna Vesi and the City of Tallinn are going to extend the water company’s Services Agreement up to year 2020, which is definitely positive. In addition, the k factor (used in calculating the tariffs) would be fixed at 0% from 2011 until 2020. Thus there would be no real tariff increase during the abovementioned years, as the water price would be adjusted only by consumer price index (shareholders would, ofcourse, find an above 0% k factor more attractive). The company looks attractive as a long term investment, for its respectable dividend yield (2007E 5.2%) and stable cash flow (tariff agreement with the city, which benefits directly from the rising inflation). Trading at expected 2008E PE of 14.0x, we rate the share Accumulate.

50.0% Initiation of coverage with Buy 1 Price: 14.50 EUR (Jan 9, 2007) 40.0% Dividends 3 30.0% 2 EUR 0.50 per share (June 6, 2006) 4 20.0% Downgrade to from Buy to Neutral 10.0% 3 Price: 17.40 EUR 5 (Jan 12, 2007) 1 0.0% Upgrade from Neutral to Accumulate 2 4 Price: 16.18 EUR -10.0% (Mar 28, 2007)

-20.0% Dividends Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07 5 EUR 0.63 per share (May 30, 2007) OMX Baltic Benchmark Tallinna Vesi

Performance under Buy (Jan 9, 2006 - jan 12, 2007): 23.4% same period benchmark: 23.5%

Performance under Accumulate (Mar 28, 2007 - today): -12.7% same period benchmark: -12.2%

Last price: EUR 13.50

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Market Report Baltic Post Q3 Update January 3, 2008

TEO (Accumulate) – Attractive valuation, nice dividends

TEO posted strong Q3/07 results. Revenue grew faster than forecast with margins coming in equal to or better than expected. Sales increased 10.7% yoy to LTL 204.2m, which exceeded our expectations by 7.9%. Looking at sales by business segments, our forecast was surpassed in every sector. In addition to the positive surprise from the revenue, depreciation and amortization costs were a bit a lower than expected (have come down from near 50% of sales in 2003 to near 20% in 2007) and financial income came in better than we had hoped for as rising interest rates translate into higher return on investments. All this resulted in 25.3% higher than expected net profit of LTL 45.5m. We think that trading at 2008E PE of 11.2x with an expected dividend yield of 8.5% 2007E, TEO is an attractive dividend case and reiterate Accumulate.

50.0% Upgrade from Neutral to Accumulate 1 Price: 2.75 LTL 40.0% (Jan 9, 2006)

30.0% Dividends 2 LTL 0.16 per share 20.0% (Apr 13, 2006)

10.0% Dividends 3 LTL 0.26 per share 1 0.0% (Apr 26, 2007) 2 3 -10.0%

-20.0%

-30.0% Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07

OMX Baltic Benchmark TEO LT

Performance under Accumulate (Jan 9, 2006 - today): 1.5% same period benchmark: 7.9%

Last price: LTL 2.37

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Market Report Baltic Post Q3 Update January 3, 2008

Recommendation: Neutral

Apranga (Neutral) – negative macro trends have left their mark

Apranga Q3 sales came in at LTL 103.8m, equal to a growth of 47.6% yoy. Although the growth may look quite strong in absolute terms, first signs of deceleration can actually be seen. Monthly sales growth in October (+34.6%) and November (+33.4%) was the lowest in recent years. Given that the total sales growth of Baltic retail trade enterprises has also slowed down significantly, the deceleration in Aprangas top line growth is not a surprise. Also there seems to be some pressure on Cost of Goods Sold, which was 7% above our forecast and as a result, gross profit of LTL 43.9m was 9.3% below our forecast. In terms of profitability below Gross profit level, we were pleasantly surprised. For instance, operating profit increased by 35% yoy and amounted to LTL 10.08m, beating our forecast by 14.3%. Operating profit margin of 9.9% was also slightly better than the 8.0% in Q1 and 7.2% in Q2. Net profit amounted to LTL 8.45m, corresponding to a net margin of 8.1%. Although the overall picture looked pretty nice at that time, we still downgraded the share from Accumulate to Neutral mainly due to cooling macro-environment (slowing retail growth, peaking inflation). Apranga trades at an estimated 2007 and 2008 PE of 19.5x and 16x, respectively.

120.0% Upgrade from Neutral to Accumulate 1 Price: 9.69 LTL 100.0% (Jan 9, 2006)

80.0% Dividends 3 4 2 LTL 0.06 per share 60.0% (Apr 28, 2006)

40.0% Dividends 3 LTL 0.11 per share 20.0% (Apr 27, 2007)

1 0.0% Downgrade from Accumulate to Neutral 4 Price: 17.90 LTL 2 -20.0% (Nov 2, 2007)

-40.0% Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07

OMX Baltic Benchmark Apranga

Performance under Accumulate (Jan 9, 2006 - Nov 2, 2007): 86.5% same period benchmark: 20.2%

Last price: EUR 14.32

Arco Vara (Neutral) – difficult to forecast, but trend seems to be clear

Arco Vara reported solid Q3 results. Revenue grew 19.9% yoy to EEK 180.1m with net profit more than doubling to EEK 33.9m. The results were somewhat surprising on the back of a dismal real estate market. Still, one has to take into account that 17.4m of the profit came from revaluation of investments, also sale of subsidiaries and financial income (not main lines of business) contributed. The situation on the Baltic real estate markets is not showing any signs on improvement, rather the opposite actually with number of transactions falling together with prices. We do not see the trend braking any time soon, as usually movements in the real estate sector take years. Taking the previously mentioned into account, it is becoming increasingly important for Arco to grow their project portfolio outside of the Baltics. Looking at the company’s major projects (published in Q3 report), accounting for 96.3% of investment properties, Arco had only two projects outside of the Baltics (both in Bulgaria). Also, a question of revaluing the investments remains, as until now the net revaluations have added positive flow to the profit, but may we expect a turnaround, considering the situation on the market? Trading at an estimated 2008E PE of 38.7x, we reiterate Neutral.

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Market Report Baltic Post Q3 Update January 3, 2008

City Service (Neutral) – Growth expected to slow to normal levels

City Service reported Q3 slightly below expectations. The sales came in at LTL 54.3m demonstrating an increase of 170.7% yoy (in line with our estimates). The costs (mainly general and administrative expenses), however, have increased a bit faster than expected. The facility space maintained by the Group has grown to 9.6 million square meters in total, during the first nine months of 2007. By the end of the year we expect City Service to serve 10.5 million square meters of facilities. In terms of sales composition, in 2006 buildings administration and heating infrastructure renovation both gave about 50% of sales, whereas for 2007 we are estimating buildings administration to give 63.1% and heating infrastructure renovation 36.9% with the importance of the aforementioned to keep growing. In 2008 we expect the growth to slow down since this year the company has sowed robust expansion, but the revenue should still demonstrate 20%+ increase yoy. City Service is trading at expected 2008E PE of 22.5x, which shows that investors are expecting strong results and there is little room for disappointment. We argue that the company is fairly valued and reiterate Neutral.

Ekspress Group (Neutral) – not expensive, but sentiment could be better

The Estonian media company, , posted moderate Q3 results. The sales increased 19.2% yoy to EUR 16.5m, which was below our forecast. In the third quarter, the company earned net profit of EUR 1.2m (EUR 0.2m below our estimates). It is important to point out that our estimates did not include Delfi (recently acquired web based news and entertainment provider), whereas 1 month revenue from Delfi was actually consolidated into Q3 results (makes Q3 look even weaker). We have included Delfi into our estimates from Q4 and are waiting for a positive impact on the results (Delfi is operating at a considerably higher profitability). In October, As Printall (100% subsidiary) launched a new magazine printing press, which allows to increase production capacity by a third. The investment is definitely positive, as the production was utilized at full capacity and an increase was needed. In November, a business information line called TeleTell was launched in Romania. The company is expecting a turnover of almost a million euros for 2008 and is planning to end the year in profit, in Romania. Ekspress Group is trading at an estimated 2008E PE of 12.0x, with an expected dividend yield of 1.5% 2007E. We think that the company is quite interestingly valued, but given the present unfavorable macroeconomic situation we reiterate Neutral.

Eesti Ehitus (Neutral) – all eyes on Civil engineering segment

The Q3 figures of Eesti Ehitus were more or less in line with our forecast and confirmed our thesis behind the recent downgrade from Accumulate to Neutral. The sales in Q3 amounted to EEK 1.14b, equal to an increase of 36% yoy. Although the sales came in 8.6% above our forecast, the growth pace is clearly losing steam. For instance, in the first two quarters of the year, sales growth was above 63% and hence, a 36% growth in Q3 can be considered a significant fall. Besides that, Q3 sales included an EEK 498m income from Port construction. A year ago, the corresponding figure amounted to only EEK 49m. In general, we strongly applaud to Civil engineering segment of Eesti Ehitus because it helps to buffer a deceleration/decrease of sales in Residential segment when the situation on real estate market gets worse. Although the situation is actually getting worse every day, we still expect the Q4 to be relatively strong due to the finishing of some major projects. Also, strong backlog of EEK 3.2b should add confidence concerning the sales in the coming quarters. Q3 expenses were slightly higher than we expected – total operating expenses amounted to EEK 48m, beating our forecast by 17% and personnel expenses grew by 74% (9 months), while the number of staff grew only by 27%. Pressure on the margins is getting tougher every quarter. Operating profit amounted to EEK 85m, equal to an operating margin of 7.4% which is slightly lower than a year ago. Bottom line of EEK 72.4m was in-line

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Market Report Baltic Post Q3 Update January 3, 2008 with our 72m forecast. Net margin amounted to 6.4%, slightly below the 7.1% recorded last year. Eesti Ehitus trades at an estimated 2007 and 2008 PE of 8.8x and 11.5x, respectively. At a glance, it might look fairly cheap, but when adding the real estate and macro-risks, we do not see any reasons for the stock to go up significantly in the next 6-12 months. In the coming quarters we recommend to keep an eye on Civil engineering segment to see whether it is able to support overall revenue and profit level or not.

40.0% Upgrade from Neutral to Accumulate 1 Price: 5.93 EUR (Mar 9, 2007) 30.0% 2 Dividends 2 EUR 0.19 per share 20.0% (May 28, 2007)

Downgrade from Accumulate to Neutral 1 10.0% 3 Price: 5.40 EUR 3 (Sept 25, 2007) 0.0%

-10.0%

-20.0% Jan/07 Mar/07 May/07 Jul/07 Sep/07 Nov/07

OMX Baltic Benchmark Eesti Ehitus

Performance under Accumulate (Mar 9, 2007 - Sept 25, 2007): -5.7% same period benchmark: 7.4%

Last price: EUR 4.63

Grindeks (Neutral) – cheap but a bit too risky

The Q3 revenue of LVL 12.1m was in line with our forecast (equal to yoy growth of 20.7%). We saw strong growth on the two main markets – Russia and CIS. On one hand, it is positive that the company is able to gain extra market share on its main markets. But on the other hand, it also further increases Russia’s exposure, which is unpleasantly high already (46% now). Given that the patent protection of Grindeks’ main product, cardiovascular prescription drug Mildronate, ended in the beginning of 2007, we might see some generic drug manufacturers coming to the market which could lead Grindeks to even lower margins. Although, we have not seen anybody being interested in manufacturing the drug so far, the risk remains. On the positive side, we could see a positive kick in sales from China or Turkey. In September, Grindeks signed a contract on five medical products registration in Turkey, and in May they signed a contract for registration Mildronate in China. It is definitely good that Grindeks is seeking for new markets and geographical diversification. In terms of profitability, we see slight pressure on the margins. Pre-tax profit amounted to LVL 1.75m, equal to a 4% increase yoy. Pre-tax margin amounted to 14.5%, slightly below 16.8% in Q3/06. Pressure on the margins can be explained with investments into expansion and promotion. Net profit amounted to LVL 1.4m, corresponding to a net margin of 11.7% which is also indicating a slight downtrend. All in all, the company has been quite cheaply valued for some time already, but the risks are also quite high. Given that the Baltic economies are cooling, while at the same time Grindeks is increasingly focusing on foreign markets, it is definatelty a company to keep on the radar screens. At the present, Grindeks trades at an estimated 2007 and 2008 PE of 8x and 6.6x, respectively. This is cheap, but due to risks, we reiterate Neutral.

Harju Elekter (Neutral) – business as usual

Harju Elekter posted solid Q3 results. The sales increased 22.0% yoy to EUR 12.5m, which was 10% less than we had expected. However, we have to admit that our expectations regarding the top line may have been a bit too optimistic and hence, the results can be considered decent. All the margins came in stronger than expected, which resulted in the bottom line of EUR 1.2m (we expected EUR 0.9m). Harju Elekter still holds a

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Market Report Baltic Post Q3 Update January 3, 2008

8.9% stake in PKC Group (ca 1.6m shares), which means that additional funding for future investments is not a problem [1.6m shares * EUR 9.0 per share (current market value) = EUR 14.4m)]. However we do not see a way, other than dividends received from PKC, how investors could actually benefit from the investment, at the moment. We argue that a more meaningful use, related with main business activities, should be found for the funds. Given that Harju Elekter is trading at expected 2007E and 2008E PE of 8.9x and 14.5x, respectively, we think that there are better options for investment and reiterate Neutral.

Pieno Zvaigzdes (Neutral) – more milk needed, worldwide

The Lithuanian dairy company, Pieno Zvaigzdes, reported strong Q3 results. Sales increased 33.2% yoy to LTL 191.9m, which was 11.6% more than our forecast of LTL 180.3m. Cost of goods sold, at the same time, were lower than expected resulting in gross profit of LTL 47.3m (37.9% more than expected). Operating profit came in twice as high as expected and the bottom line surpassed our forecast by 88.5% (more than doubling yoy). Given that the other Lithuanian dairy Rokiskio Suris also posted notably strong results, it is clear that the worldwide rise in milk product prices has favored the dairies recently. In December, the company updated it’s guidance for 2008 and is expecting sales of approximately LTL 750m (in line with our forecast). We expect the positive trend on the dairy market to continue, as demand is expected to exceed supply in the longer run. The main driver behind this will be strong economic growth in the developing countries – China, Brazil, India. Yet, in the short term we expect some price adjustments, as the increase in dairy sector product prices has been really strong this year. While talking about Pieno, it is also important to point out that the company is highly geared. Still, we expect the amount of debt to start decreasing in coming years, as the company will ease a bit on investments. The company is trading at an expected 2008E PE of 10.5x and we reiterate Neutral.

Rokiskio Suris (Neutral) – strong sales, booming profitability

The Lithuanian dairy company, Rokiskio Suris, posted really strong Q3 results. Sales came in at LTL 200.0m or 15.1% above our expectations. Also, the costs were considerably lower than forecast and export’s share in sales is still increasing significantly - both pushed up the margins. As a result, the bottom line came in at LTL 16.8m, which was 141.7% better than expected. By now, Rokiskio has also released sales figures for October and November, demonstrating a growth of 28.4% and 21.8% yoy, respectively. Given that the other Lithuanian dairy Pieno Zvaigzdes also posted notably strong results, it is clear that the worldwide rise of milk product prices has favored the dairies recently. We expect the positive trend on the dairy market to continue, as demand is expected to exceed supply in the longer run. The main driver behind this will be strong economic growth in the developing countries – China, Brazil, India. Yet, in the short term we expect some price adjustments, as the increase in dairy sector product prices has been really strong this year. On 19th of October it was decided on an Extraordinary Shareholders' Meeting to change the nominal value of the ordinary registered shares from LTL 10 to LTL 1 (the stock underwent a split of 10 for 1). The company is trading at an expected 2008E PE of 8.7x and we reiterate Neutral.

SAF Tehnika (Neutral) – Can they stay in profit?

SAF Tehnika’s FQ1 sales amounted to LVL 3.16m, increasing by 34% from last quarter’s levels but sill trailing last year’s corresponding result by 21.8%. In the last fiscal year, SAF Tehnika struggled with delays in a large- scale Indian project. According to the management, FQ1 sales included revenues from the Indian project, which turned out to be significantly smaller than expected. Therefore we can say that the results were rather moderate. Management also confirms this and adds that the activity in its largest regions (Asia and Europe) is

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Market Report Baltic Post Q3 Update January 3, 2008 weaker than before. For instance, Pakistan projects have been completed and no new deals are anticipated; China is performing below last year’s levels. On the positive side, SAF Tehnika was back in black. The company was in loss or barely made any profit in the past two quarters, but in the operating profit amounted to LVL 164 thousand in again FQ1, demonstrating an operating margin of 5.2%. Net profit amounted to LVL 112 thousand, corresponding to a net margin of 3.5%. If there was an award for the worst performing stock on the Baltic markets, SAF Tehnika would definitely be the winner in 2007 – the share lost ca 90% last year. Given the business is still not going well, we would not touch the company at the moment, but suggest keeping eye on it. SAF Tehnika trades at an estimated 2007 and 2008 PE of 11.6x and 4.8x, respectively, and we reiterate Neutral. Keep in mind that the 2008 figure is rather optimistic and hence, there is a lot of downside risk at this point.

Saku (Neutral) – Downgrade to Neutral due to alcohol sales restrictions

Both the top and the bottom line came in lower than expected and hence, it seems like the restrictions on alcohol sale in Tallinn region are eating the results faster than expected. We also had to cut the forecast and downgrade the share from Accumulate to Neutral. The Q3 sales increased 5% yoy to EEK 256.6m, which is significantly lower than the Q1 and Q2 growth rates of 45% and 26%, respectively. EBITDA even decreased 3.9% from year ago to EEK 75.7m. The main reasons for lackluster results were the following: (1) alcohol sale restrictions in Tallinn area, which were effective for 2 months in Q3, (2) decrease in the consumption of mainstream and premium brands (Saku’s focus) and better sale of strong drinks, which was most probably caused by the aforementioned restrictions, (3) raw materials (malt, hops and sugar syrup) price rise on global market due to increasing demand in Asia, and (4) cooling macro environment. In addition, the government will implement an exceptional 30% rise in excise duty in 2008 which will render the excise duty on Estonian beer one of the highest in Europe. Therefore we cut the 2007 sales and Pre-tax profit target by 12% and 15% to EEK 890m and 163m, respectively. There is some upside to our forecasts, in case the government will apply the same alcohol sale restrictions to the whole country and hence, somewhat ease the tough rules active in Tallinn. Although Saku is slightly cheaper than its peer group (2007 and 2008 expected PE of 14.5x and 14.1x, respectively), the risks are also higher.

90.0% Upgrade from Neutral to Accumulate 1 Price: 9.85 EUR 80.0% (Jan 9, 2006) 70.0% 3 Dividends 60.0% 2 EUR 0.64 per share 50.0% (Apr 20, 2006) 40.0% Dividends 4 30.0% 3 EUR 1.60 per share 20.0% (Apr 19, 2007) 10.0% Downgrade from Accumulate to Neutral 1 2 0.0% 4 Price: 13.05 EUR -10.0% (Nov 28, 2007) -20.0% Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07

OMX Baltic Benchmark Saku

Performance under Accumulate (Jan 9, 2006 - Nov 28, 2007): 55.2% same period benchmark: 6.1%

Last price: EUR 12.40

Tallink (Neutral) – hard times are over?

The FQ4 sales of Tallink amounted to EEK 3.552b, corresponding to a yoy growth of 8.2% (4.3% below our forecast). Note that the results of Silja were consolidated for full 3 months this year, while they were there for only 2 months last year. The number of passengers has been falling for three months already and therefore we

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Market Report Baltic Post Q3 Update January 3, 2008 do not expect fast growth in the future either. On the other hand, the company has managed to increase on- board sales per passenger, which could still somewhat support the sales figures. For instance, in the first three fiscal quarters, the sales growth per passenger amounted to 42%, 39% and 28%, respectively. We saw some positive surprises in profitability. Operating profit came in at EEK 1.087b, beating our forecast by 32%. Excluding the non-recurring integration costs in the amount of EEK 75m, and the income from the sale of ships, the operating profit was 20% better than we expected. Net profit came in at EEK 1.008m, and got a kick from positive tax gain of EEK 86m (but this was still 27% below the management guidance). Excluding all the one- offs, the bottom line was 21.5% better than we expected. Although the passenger figures are continuously declining, we expect some improvements in terms of profitability since the synergies with Silja should realize soon. Besides that, hopefully we will see no more integration costs. In addition, Tallink decided to buy back a maximum of 5.8m own shares or up to the total aggregate consideration of EUR 7m. The period lasts till January 17, 2008 and the buyback program might support the share price for some time. Tallink trades at an estimated 2007 and 2008 PE of 15.3x and 9.9x, respectively.

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Market Report Baltic Post Q3 Update January 3, 2008

Recommendation: Sell

Baltika (Sell) – sales growth losing steam

The Q3 sales of EUR 19.8m (EEK 310m) were already announced on monthly basis. Sales growth amounted to 35.6%, which can be considered relatively strong. Moreover, when taking into account that Baltika aims to reduce the share of wholesale from overall revenues to as low as 10% in order to reduce Russia’s exposure, the top line is clearly solid. In Q3/07, wholesales accounted for 15% of the total sales, which is significantly lower compared to 23% a year ago. Therefore, a growth of 44% yoy in retail sales and a 13% decrease in the wholesale in Q3 confirms the management’s strategy. But, although the retail sales growth figures were still outstanding, we stick to our thesis (see the figures of new cars registered in Baltika’s Q3 earnings preview) that we could see a significant deceleration quite soon. Total operating expenditures amounted to EUR 9.5m, or 9.1% higher than we expected. Operating profit of EUR 900k, which was 10% weaker than we forecasted, included a EUR 400k one-off income from revaluation of a property. This is already the second quarter this year when Baltika boosts earnings with one-off income from real estate sale or revaluation. Excluding the one-off item, the net profit for the period amounts only to EUR 267k, corresponding to a net margin of 1.4%. This is by 80% less than a year ago (excl. one-off), and we suggest to take the drop in profit seriously. The management still cites to longer than expected opening period for stores in Russia and to higher starting costs than in the Baltic States. On the positive side, Baltika has slowed down the expansion, which in turn should help to improve the margins during the next quarters. But in spite of that, we do not suggest buying the share for a quarter or two. We expect some improvement in H2/08, but reiterate Sell at the moment.

140.0% Upgrade from Neutral to Buy 1 Price: 4.40 EUR 120.0% (Jan 9, 2006)

100.0% 6 Downgrade from Buy to Neutral 7 2 Price: 4.74 EUR 8 80.0% 9 (Feb 22, 2006) 60.0% Dividends 40.0% 3 EUR 0.13 per share (May 18, 2006) 2 5 20.0% 3 Upgrade from Neutral to Buy 1 4 0.0% 4 Price: 4.33 -20.0% (Jul 26, 2006)

-40.0% Downgrade from Buy to Neutral Jan/06 Apr/06 Jul/06 Oct/06 Jan/07 Apr/07 Jul/07 Oct/07 5 Price: 5.27 EUR (Sept 26, 2006) OMX Baltic Benchmark Baltika Upgrade from Neutral to Accumualte 6 Price: 8.25 EUR Performance under Buy (Jan 9, 2006 - Feb 22, 2006): 7.7% (Mar 28, 2007) same period benchmark: -5.8% Downgrade from Accumulate to Neutral Performance under Buy (Jul 26, 2006 - Sept 26, 2006): 21.7% 7 Price: 7.83 EUR same period benchmark: 8.6% (May 22, 2007)

Performance under Accumulate (Mar 28, 2007 - May 22, 2007): -5.1% Dividends same period benchmark: 2.1% 8 EUR 0.15 per share (June 3, 2007) Performance under Sell (July 25, 2007 - today): -46.5% same period benchmark: -21.3% Downgrade from Neutral to Sell 9 Price: 7.10 EUR Last price: EUR 3.80 (Jul 25, 2007)

Merko Ehitus (Sell) – real estate party is coming to an end

Merko’s Q3 sales came in 10% below our forecast, or at EUR 87.4m, equal to just 0.7% yoy increase. Slowdown on real estate market is clearly eating revenue and we might see negative sales growth figures during next quarters. Q2 indicated strong pressure on the margins, after which we had to cut yearly forecast

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Market Report Baltic Post Q3 Update January 3, 2008 and Q3 confirmed our decision. During the real estate boom, there was huge need for construction workers and the companies had to increase wages significantly. This lead us to a situation where the number of employees at Merko is up 26% yoy, but wage expenses have increased by 51% (and there goes the profitability). Operating profit amounted to EUR 7.7m, down by 34% from last year’s levels. We see significant pressure on the margins when we take a look at operating profit margin which has dropped from 13.4% in Q3/06 to 8.8% in Q3/07. Given that the margins have been quite fat during last quarters due to extremely high profitability in real estate development, we might see continuous decline in the coming quarters. Since the net cash flows were negative, the company had to finance its expenses with loan money and therefore interest expenses were remarkably higher than in previous quarters. Given that the demand on the real estate market is plummeting, we expect the trend to continue. More on the negative side – inventories have increased by 2 times to EUR 1b, which is clearly a sign of problems. We downgraded the share from Neutral to Sell. Merko trades at an estimated 2007 and 2008 PE of 8.3x and 9.3x, respectively.

40.0% Dividends 1 EUR 0.45 per share 30.0% (May 16, 2007)

20.0% Downgrade from Neutral to Sell 2 Price: 20.49 EUR 10.0% (Sept 25, 2007) 1 2 0.0%

-10.0%

-20.0%

-30.0%

-40.0% Jan/07 Mar/07 May/07 Jul/07 Sep/07 Nov/07

OMX Baltic Benchmark Merko

Performance under Sell (Sept 25, 2007 - today): -37.5% same period benchmark: -17.2%

Last price: EUR 12.80

Olympic Entertainment Group (Sell) – struggling with falling margins

Profitability is still under pressure and the management issued a profit warning. This confirms our view that problems are serious and it may take at least half a year before we will see any improvements. Q3 sales of EUR 42m were in line with our forecast of EUR 41.8m. Sales growth amounted to 50.6% yoy. At the same time, the number of casinos has increased from 73 to 115 (up 58%). Although the sales did not include venues of recently acquired Eldorado, we saw a strong 43% growth in Ukraine and a five-fold growth in Belarus. But our concern is what happened in Estonia where sales per casino decreased compared to Q2 (even though Kristiine Kasiino was already included in Q2)? Partly, this could be attributed to the renovation of Kristiine’s casinos, but cooling macro environment may also have its role to play. Given that Estonia’s macroeconomic cycle is a bit ahead of Latvia’s and Lithuania’s, the “sales per casino” figures could soon be also under pressure over there. Although the share of Baltics from total sales has fallen to 78% in Q3/07 from 95% in Q3/06, it is still considerably high and hence, the growth on other markets may not be fast enough to compensate the cooling sales in the Baltics. Personnel expenses have increased 94% yoy, which has significant pressure on the margins. Operating profit of EUR 6.5m (31% below our forecast) declined by 28% yoy, corresponding to an operating margin of 15.5%. The margin has been in strong downtrend since Q3/06, when it reached 32.4%. In the report, management also cut annual sales forecast from EUR 170.5m to EUR 147m and operating profit from EUR 38m to EUR 28.8m. Share plummeted almost 30% during the next five trading days. Olympic trades at an estimated 2007 and 2008 PE of 21.3x and 20x, respectively. Since we do

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Market Report Baltic Post Q3 Update January 3, 2008 not expect the troubles regarding the top and bottom line to be solved soon, we downgraded the stock from Neutral to Sell.

50.0% Dividends 1 EUR 0.06 per share 40.0% (May 30, 2007)

1 30.0% Downgrade from Neutral to Sell 2 Price: 3.85 EUR 20.0% (Dec 11, 2007)

10.0%

0.0%

-10.0% 2 -20.0%

-30.0% Jan/07 Mar/07 May/07 Jul/07 Sep/07 Nov/07

OMX Baltic Benchmark Olympic EG

Performance under Sell (Dec 11, 2007 - today): -6.5% same period benchmark: -1.2% Last price: EUR 3.60

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Market Report Baltic Post Q3 Update January 3, 2008

Disclaimer

LHV is a full service investment bank with focus on the Baltic region. LHV is a member of the Tallinn, Riga, and Vilnius stock exchanges, and is under the supervision of the Estonian Financial Supervisory Authority (Eesti Finantsinspektsioon; see also www.fi.ee). Readers of this report should be aware of that LHV and LHV affiliated companies (hereinafter LHV Group) is constantly seeking to do investment banking business with companies (hereinafter, Company) mentioned in research reports. LHV Group may be the arranger or one of the arrangers of an offering of securities of the Company. LHV Group may have been the arranger or one of the arrangers of an offering of securities of the Company preceding the publication of the Recommendation. LHV Group may have preceding the publication of the Recommendation made an arrangement with the objective of offering investment banking services to the Company and LHV Group may have received or may have been promised a one-time or a continual fee according to such an arrangement. LHV Group may act as a market maker, or act as principal or agent, buying or selling securities or derivatives of the companies mentioned in the report. All reports are produced by LHV Group research department which is separated from investment banking by a “Chinese Wall”. The research analysts receive remuneration based on among others, the overall group revenues of LHV, including investment banking revenues. However, no compensation is based on a specific investment banking transaction. The author or authors of this report certify that the opinions expressed in this report accurately reflect our personal opinions about the company. The analyst or analysts responsible for this report owns stocks in the following companies mentioned in this report: Eesti Telekom, TEO LT, Kaubamaja, Arco Vara. LHV Group or its directors, officers or employees may have financial interest in the companies mentioned in this report, including long or short positions in their securities, and/or options, futures, or other derivative instruments. Any company mentioned in this report may have a position in LHV Group. Investing in stocks involves risks. Investors should regard this report as only a single factor in their investment decision process. The shares in this report may not be suitable for all types of investors. No consideration has been taken for the individual investor’s specific needs with regard to financial circumstances and objectives. This report is not an offer to buy or sell any security, but provided for general information purposes only. Information in this report is taken from sources believed to be reliable. However, LHV Group cannot guarantee that the information contained in this report is accurate and complete. LHV Group assume no responsibility for any investment losses. Where possible, LHV has sent the report to the companies prior to publication. The main valuation method used is PE (price/earnings), and earnings growth. Our aim is to at least once a year, write a report on the companies included in this report. This document is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. In particular, neither this document nor any copy hereof may be taken or retransmitted in or into the United Sates or redistributed, directly or indirectly in or into the United States. Any failure to comply with this restriction may constitute a violation of US Securities laws. The distribution of this document in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restriction. Any failure to comply with these restrictions may constitute a violation of the laws of any such other jurisdiction. By the receipt of the Recommendation the user of this document agrees to be bound with all and any possible restrictions and circumstances as stated above.

Recommendation structure 1/Buy Expected return of more than 15% within 6-12 months (including dividends) 2/Accumulate Expected return between 5-15% within 6-12 months (including dividends) 3/Neutral Expected return 0% to <5% within 6-12 months (including dividends) 4/Sell Expected return less than 0% within 6-12 months (including dividends) Not rated No recommendation Under review Recommendation is under review due to specific event

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Market Report Baltic Post Q3 Update January 3, 2008

LHV LHV

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Phone: +372 6 800 400 Phone: +371 7 502 000

Fax: +372 6 800 402 Fax: +371 7 502 001

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Please see disclaimer at the end of this report 24