FOCUS: Core telecom, digital services to push MTS’ financials higher in 2020

By Yekaterina Yezhova

MOSCOW, Jun 1 (PRIME) -- Lockdown-fueled demand for connectivity services and digital products helped major Russian mobile operator MTS to deliver robust January–March financials and will stay the main engine in the next quarter with steady high dividends to encourage investors, analysts said.

“January–March revenue exceeded our expectations. The telecom segment was the growth driver along with the fintech products and cloud services. OIBDA resisted a downward turn, and MTS leads the industry by the OIBDA margin of 43.1%,” Georgy Vashchenko, head of trading operations on the stock market at investment company Freedom Finance, told PRIME.

Revenue increased by 8.9% to 119.6 billion rubles thanks to the telecom services, which contributed 5 billion rubles with the rest coming mainly from fintech, which expanded by 2 billion rubles, and business-to-business digital and clouds, which contributed 2.5 billion rubles.

“I don’t expect revenue to fall much in April–June. On the contrary, lower retail sales will be offset by higher sales of traffic and cloud services. Due to the high uncertainty I expect revenue at 115 billion rubles,” Vashchenko said.

Adjusted OIBDA rose by 1.6% to 51.5 billion rubles in January–March. “In April–June, OIBDA could amount to 48 billion rubles. Telecom is one of the most stable industries during the lockdown. At that, relief steps will not entail a fall in demand for cloud services and mobile connection. On the contrary, some companies will keep remote work for at least several months, saving cash on rent,” the analyst said.

MTS’ net profit rose by 0.8% to 17.7 billion rubles in January–March on the back of adjusted OIBDA, excluding MTS Bank, and a significant net positive impact from foreign exchange effects and operations with derivatives amid the ruble’s devaluation, the operator said in the statement.

The net debt narrowed by 2.6% to 284.8 billion rubles in the reporting period, and cash capex increased by 21.6% to 20.2 billion rubles.

“The outlook for April–June is quite optimistic from the point of view of connection services, but indicators of the banking business may partially eat away the growth. Sales of credit products in the fintech business tumbled by 60% on the month in April, and the fall slowed down to 30% in May,” investment company IC RUSS-INVEST Dmitry Bedenkov told PRIME.

“The April data showed growth of traffic on fixed-line networks by 30% in comparison to March, while mobile traffic rose by 5–10%.”

Among the impacts from COVID-19, MTS mentioned temporary closure of a third of its stores in April–June and continued growth in online sales channels. The operator ran 5,510 stores, including franchise, as of the end of March in comparison to 5,679 as of the end of 2019.

Aton said, “Due to the COVID-19 outbreak, recent industry trends indicate a decrease in revenue from roaming services and retail sales. At the same time, connectivity and digital services that are experiencing greater demand are clearly becoming the current core drivers for the whole business.”

Vashchenko at Freedom Finance said retail was the hardest hit by the lockdown, but a 25% fall in handset sales in mid-May will recover by 75–80% in July–September unless there are no new shocks.

MTS reduced its 2020 revenue guidance to flat to a 3% growth and to a 2% fall to flat for adjusted OIBDA, while maintaining cash capex at about 90 billion rubles. Vashchenko does not rule out that the company would return in July–September to an expected revenue rise by 3–6% in 2020.

CEO Alexei Kornya said MTS will stick to its current dividend policy in 2020, which pays at least 28 rubles per ordinary share and 56 rubles per American depositary receipts every year in two tranches.

“The shareholders could be encouraged by the management board’s assurance of dividend payments, which may push the company’s stocks up to the level of the beginning of the year,” Bedenkov at IC RUSS-INVEST said.

MTS’ ordinary shares went up by 1.3% since the beginning of the year to 324.05 rubles on May 28 in Moscow, while its American depositary receipts lost 11.7% to U.S. $8.96 per receipt in New York.

Vashchenko at Freedom Finance sees the target for ordinary shares at 325 rubles for the end of the year.

MTS, which works in Russia, Armenia, and Belarus, had 86.4 million subscribers in total in January–March, up 1.4% on the year.

(70.7520 rubles – U.S. $1)

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