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Strategy

 Over the past few years through a combination of organic growth and acquisitions, Mostotrest has evolved from a niche contractor into the largest diversified infrastructure construction player in Russia. The Company has the requisite expertise and competences to build any type of transport infrastructure using both its own capacity and the involvement of qualified subcontractors.

The Company intends to further develop and improve its business in line with the needs of the Russian infrastructure construction market. In early 2014, Mostotrest’s Board of Directors reviewed the Company’s development strategy up to 2018 and decided on the following main development areas:

· Business expansion and market share growth

· Develop and strengthen positions in core and related business segments

· New acquisitions.

Business Expansion and Market Share Growth Independent analysts project an average annual growth rate of 2.5% [1] for the transport infrastructure market between 2014–2017. The bulk of financing will be used to upgrade federal highways, build toll roads (Moscow – Saint Petersburg and Moscow’s Central Ring Road), and modernise Moscow’s transport infrastructure and that of other cities hosting the Football World Cup.

The Company intends to respond effectively to growth in the transport infrastructure construction market and meet the high standards expected by major government customers, by focusing on improving the efficiency of its production and management processes, increasing productivity and making sensible use of its material and intellectual resources.

Mostotrest’s current backlog covers 2,5 years [2] of revenue, which enables the Company to be selective with regard to new projects. The Company’s strategic plan envisions steady market share expansion. At the same time, the growth in the volume of construction work performed by the Company using its own production capacity should not significantly exceed market growth rate, enabling the Company to minimize the risk of downtime.

Revenue growth will be driven by a balanced distribution of construction work between the Company’s own capacity and subcontractors.

Backlog growth will be driven by participation in large, complex projects (mainly in the road construction segment) that only a handful of construction companies are able to bid for.

The Company will seek to maintain dividends to shareholders at an attractive level.

Access to capital markets to finance projects will play an important role. Mostotrest is the only publicly listed company in the Russian transport infrastructure construction industry and has a reputation as a reliable borrower from the largest Russian banks, which provides the Company with certain competitive advantages in terms of access to capital.

New Acquisitions In addition to organic growth or cooperation with leading players in specific business segments, Mostotrest may in future consider acquiring stakes and participations in other companies, subject to efficiency criteria.

Mostotrest intends to strictly comply with its strategy for future acquisitions. Any potential acquisition will be assessed in terms of its cost-effectiveness compared with organic development, its strategic impact on existing operations, the possibility for operational control, as well as in terms of required return on investment.

The Company is considering increasing its stakes in its subsidiaries in order to consolidate the earnings of efficient and fast-growing businesses.

Platform for Successful Development A full set of competencies, a growing backlog, a strong engineering component to its business, highly skilled engineers and workers, and an effective combination of own production capacity with general contracting expertise certainly offer the Company additional opportunities for access to capital markets.

Its reputation as a reliable contractor that has been delivering projects on time and to the required quality for 85 years, as well as its partnerships with major foreign players give Mostotrest clear competitive advantages in bidding for infrastructure construction projects and PPP contracts.

The transport infrastructure construction market has very strong potential, while Mostotrest’s business platform enables the Company to respond flexibly to demand and offer transport infrastructure customers and users a full range of services, from project design to maintenance and operation, as well as to invest in developing Russia’s transport infrastructure, while adding strategically important PPP projects, including concessions, to its backlog.

Development and Strenghening Positions in Core and Related Business Segments

Services and participation in long-term investment contracts

Mostotrest has vast experience in construction of all types of transport infrastructure, including roads, bridges, railways, airports and ports. The Company is able to respond flexibly to market opportunities, while developing and strengthening its position in those segments that are expected to be a priority for the government.

Mostotrest expects to generate the bulk of its revenue from road and bridge building projects, considering current priority financing of the segment. However, should government investment be channeled to the development of other segments of the transport infrastructure construction market, the Company intends to diversify its revenue sources by participating in new projects.

Considering its market leadership and competitive advantages, Mostotrest will be selective in its choice of projects and will only participate in those with clearly defined risk profiles, attractive profitability and compatible geography.

Most major infrastructure construction projects in Russia are expected to be tendered off in the form of long-term investment contracts (concession / lifecycle / operation). Such tenders feature tighter requirements for bidders.

Additional competitive advantages include availability of design capability enabling construction companies to be involved in the development of project documentation, as well as own capacity for long-term project repair and maintenance post-completion.

Over the past three years, the Company has been actively developing its capabilities in the following areas:

Project design;

Sites preparation;

Road repair, maintenance and toll-based operation (Service Segment).

Mostotrest’s expertise in related business segments allows it to participate in complex, long-term projects not only in the construction phase, but also in the pre-production, operation and maintenance stages. It means that the Company can effectively assess risks associated with such projects at all stages of the life cycle, from bid submission through to the end of the project’s service life.

Mostotrest’s subsidiaries have all the requisite competences. They include, among others, the operator that has been implementing Russia’s first ever contract for toll-based operation of a highway section, and a company specializing in comprehensive maintenance and repair of transport infrastructure.

The availability of such expertise within the Group creates significant competitive advantages when bidding for lifecycle contracts and it allows the Company to control the long-term stage of operation of the facility, thus avoiding risks associated with subcontractors.

Over the next four years, Mostotrest intends to rapidly expand its business volumes in the Service Segment, which offers stable cash flows and attractive profitability levels.

The acquisition in 2012 of a stake in the concession business will allow the Company to diversify its cash flows and generate stable high-margin revenue at the operating stage of the concession.

Concession experience and partnership with a strong foreign player will be useful in the case of a rapid development of concession projects in Russia going forward.


¹KPMG Research (Russian Road Infrastructure Development Outlook, May 2015).
²Based on backlog and revenue as of and for the year ended 31 December 2016.