FOCUS: After solid financials, Mail.ru hooks investors with Moscow listing plan

By Yekaterina Yezhova

MOSCOW, Mar 10 (PRIME) -- Mail.ru Group released robust 2019 results and a realistic 2020 guidance, while analysts liked the Internet company’s idea of entering the Moscow Exchange and possibly joining the MSCI Russia Index this year.

“Mail.ru Group’s results were in line with our expectations and the management’s outlook. Despite deconsolidation of certain fast-growing businesses, like Delivery Club, the company managed to raise revenue and EBITDA,” investment company Veles Capital analyst Artyom Mikhailin told PRIME.

Heavily dependent on advertising and games, the total group aggregate segment revenue increased by 22.4% in 2019 to 87.070 billion rubles. Online advertising revenue rose by 22.6% to 36.505 billion rubles, and massively multiplayer online (MMO) games revenue went up by 20.1% to 27.987 billion rubles. The group’s aggregate net profit rose by 3.8% to 15.649 billion rubles.

“The results showed a solid revenue rise and dynamic progress of new businesses,” investment company IC RUSS-INVEST analyst Dmitry Bedenkov said.

“The report can be praised, but we should note faster growth of operating costs compared to revenue.”

Total group aggregate operating expenses increased by 30.2% to 57.318 billion rubles. Personnel costs rose by 34.4% to 19.007 billion rubles. Agent/partner fees rose by 34.1% to 21.174 billion rubles.

Group aggregate segment EBITDA grew by 9.6% to 29.752 billion rubles. The EBITDA margin shrank by 3.9 percentage points to 34.2%.

“The margin was depressed by significant investment in new directions, like musical services, classifieds, and MRG Tech Lab, which is natural for IT holdings,” Mikhailin at Veles Capital said.

Sberbank CIB said in a research note, “Mail.ru benefits from the ongoing shift of online advertising budgets to the social platforms, and we expect its advertising revenues to grow ahead of the market. We think Mail.ru might potentially create more partnerships in the next 12 months, including in media and classifieds.”

The investment company sees the key concerns in “a mixed execution track record, potentially overpaying in related-party deals; and possible further short to medium-term pressure on earnings from investment in new projects.”

Guidance

Mail.ru Group said it will remain focused on advertising solutions and technologies as well as driving content consumption in 2020. The company expects its revenue to rise by 18–20% this year to 103–105 billion rubles.

“We think the 2020 outlook is realistic and the company has a good chance to reach the target like it did in 2019,” Mikhailin at Veles Capital said.

Quotes

Mail.ru Group’s global depositary receipts (GDRs) have fallen by 15.7% since the beginning of the year and closed at U.S. $18.80 on March 5 in London.

“In our opinion, the quotes sagged because of the general correction, currently impacting the global markets. Like before, we are positive about the potential of Mail.ru Group’s securities and see them much undervalued,” Mikhailin said.

Bedenkov at IC RUSS-INVEST expects the securities to follow the market’s general trends.

Moscow Exchange listing

The company said on March 2 that its board of directors approved a GDR listing on the Moscow Exchange, which is to begin by July. There will not be any secondary accompanying issuance.

“Listing on the Moscow Exchange is an important step from the point of view of a potential cash inflow of domestic investors into the stock. The receipts may be interesting to a wide number of both private and institutional investors,” Bedenkov told PRIME.

Mikhailin at Veles Capital believes the decision will benefit the company’s investment profile and will increase liquidity of securities and diversify the investor base. “The Moscow listing could enable Mail.ru Group to join new indices, including the MSCI Russia, which will ensure an extra inflow of investment in GDRs,” he said.

Ilya Pitersky, head of the investment strategy department at VTB Capital, said, “If after the listing, the daily volumes on the Moscow Exchange exceed $1.5 million per day in June and in the third quarter, and GDRs do not fall below $17.70, they can be included in the MSCI Russia Index after the next semi-annual revision in November.”

In this case, a passive flow of cash in Mail.ru Group’s GDRs may reach $193 million, with the current GDRs quotes, Pitersky said in a note.

(67.5175 rubles – U.S. $1)

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