FOCUS: Among Russia’s big four MTS earns most in 2017, Tele2 gains clients

By Yekaterina Yezhova

MOSCOW, Mar 26 (PRIME) -- MTS again proved by its 2017 performance its leading position on the Russian market, although its competitors also boosted their revenues. Capex, which the leading carriers cut in 2017, will likely rebound in 2018, while a tariff rise seems the only option to stay afloat.

“The year of 2017 was not the industry’s best. Expansion of the subscriber base almost stopped, and hopes for sales of contracts for various devices did not materialize amid low tariffs for data transfer. In their turn, low tariffs depressed the operators’ margin,” Georgy Vashchenko, director of operations on the Russian stock market at investment company Freedom Finance, told PRIME.

The carriers were forced to cut capital expenditures on development and sometimes on payment of dividends.

“A further growth driver for all mobile operators is higher tariffs. I think it’s the only and unavoidable option: there are no other sources to raise margins and cash flows. All costs that could be cut have been already cut,” Vashchenko said.

Below is a breakdown of national market results of the leading operators for 2017:

	MTS, Bln rbl	MTS, Y-o-y change,%	MegaFon, Bln rbl	MegaFon, Y-o-y change,%	VimpelCom (Beeline), Bln rbl	VimpelCom (Beeline),Y-o-y change,%	T2 RTK Holding (Tele2), Bln rbl	T2 RTK Holding (Tele2), Y-o-y change,%
Revenue	412.3	+2.9	317.4	+1.9	275.9	+1.1	123.0	+16.2
Mobile	304.0	+3.1	260.0	+0.4	224.2	+2.7	n/a	n/a
Fixed-line	60.8	-0.6	28.7	+12.1	39.3	-11.6	n/a	n/a
Subscriber base, mln	78.3	-2.1	75.4	-0.2	58.2	-0.3	40.6	+4.1

Analysts agree that MTS was the best performer in 2017. The company’s revenue added 2.9% to 412.3 billion rubles, and adjusted operating income before depreciation and amortization (OIBDA) rose 5.7% to 171.8 billion rubles. The adjusted OIBDA margin climbed 1.1 percentage points to 41.7%, the highest result in the industry, Vashchenko said.

“It was attained thanks to lower capital expenditures, which will grow again in 2018. The operator taps new digital trends,” the analyst said.

Renaissance Capital analysts said MTS’ earnings before interest, taxes, depreciation, and amortization (EBITDA) grew faster than that of its main competitors with the highest overall average revenue per user (ARPU) and EBITDA margins.

“MTS is the best performing Russian telecom stock over three, six and 12 months. We believe the main reasons are consistent results, strong execution, a supportive dividend, and being the only ‘relevant’ stock to many investors by virtue of remaining part of relevant indices,” Renaissance Capital said in a research note.

The operator’s management said the company will pay the same dividends of 52 billion rubles in two installments like in the two previous years.

Aton said that a clear dividend policy differentiates MTS from its peers, and remains an important competitive advantage that investors appreciate.

MegaFon reported broadly neutral results for 2017, but discouraged investors by a decision to abstain from paying dividend in 2018.

“I believe that MegaFon’s shares remain attractive for long-term investment. Despite a small chance of seeing dividends in the next couple of years, a growth driver for shareholder value could be an increase in tariffs,” Vashchenko said.

“I expect a higher ARPU from data by at least 5% as of the end of 2018, and growth rates of this indicator could start accelerating already in the second quarter.”

The analyst thinks MTS and MegaFon develop in equal conditions and have almost similar financial and technological opportunities. “MegaFon’s strength is its strategic alliance with Internet giant Mail.Ru Group,” Vashchenko said.

VimpelCom’s revenue rose 1.1% to 275.9 billion rubles. Capital expenditures decreased 6.1% in 2017 to 38.9 billion rubles. EBITDA shrank 0.4% in 2017 to 104.3 billion rubles and plunged 4.9% on the year to 25.1 billion rubles in October–December 2017, when a split of retailer Euroset with MegaFon was completed.

“Revenue momentum in Russia slowed quarter-to-quarter as mobile ARPU accretion was lower in October–December, likely due to increased levels of competition. EBITDA momentum also continues to be negative due to ongoing Euroset rebranding costs,” Aton said in a research note.

T2 RTK Holding, which is by 45% owned by state-controlled telecom operator Rostelecom, partly disclosed its 2017 results after keeping its performance in secret since November 2016, explaining the conspiracy by a severe and concentrated reaction of competitors.

“As expected, it staged a recovery following hefty investment in its Moscow facilities in 2016. Revenues were up 16% to 123 billion rubles, while EBITDA grew 84% from a weak base to 30.5 billion rubles. The net loss narrowed to 5.5 billion rubles from 15.6 billion rubles in 2016. Tele2’s subscriber share remained at around 15.5%, or 40.6 million subscribers, while ARPU grew 11% to 252 rubles…The company has said it will focus on profitability rather than chase subscribers going forward,” Sberbank CIB said in a research note.

In terms of subscriber bases, it may seem that clients voted with the feet and joined T2 RTK Holding, which was the only to show an increase in this indicator among the big four operators, the theory that could be partially true.

“The growth of Tele2’s base results from a still-on-the-go active marketing with a focus on prices. In other cases, the subscriber base is mainly determined by the operators’ policy: there were cases when an operator counted 8 million users as inactive and deleted them from its base,” Finam analyst Leonid Delitsyn told PRIME.

“In such a way, any explanation seems doubtful, and we can assume that an operator with the biggest base and capable of paying dividends, could use this upside to cut its base. Nobody would pay much attention now, but the move will bring fruit in the future, when a base could be revised up.

“An operator with a modest base will tend to raise it so that investors would not conclude that a lag from a leader gets wider.”

(57.1072 rubles – U.S. $1)

End