FOCUS: Data law, new roaming rules may threaten telecoms’ 2018 divs, revenue

By Yekaterina Yezhova

MOSCOW, Jan 9 (PRIME) -- The coming 2018 year will bring many a challenge to Russian connection operators as the data retention law may cloud their dividend prospects, while cancellation of internal roaming is a threat for their revenue. But analysts say the operators could succeed in juggling with the tasks while maintaining their capitalization.

“In 2018, the Russian operators could increase their financial results thanks to an expected economic growth and the FIFA World Cup (which the country hosts), which will help carriers to boost traffic and attract new clients. After a successful championship, mobile operators could offer new information products that will interest clients,” Zerich Capital Management senior analyst Viktor Markov told PRIME.

The central bank expects the country’s economy to rise 1.5% to 2% in 2018.

Georgy Vashchenko, director of operations on the Russian stock market at investment company Freedom Finance, sees the 2018 revenue of mobile operator MTS at 455 billion rubles compared with 326.1 billion rubles in January–September 2017.

Mobile operator MegaFon’s revenue could reach 357 billion rubles in 2018, as it was at 274.2 billion rubles in January–September 2017. Revenue of VEON, sole owner of local mobile operator VimpelCom, could reach U.S. $9.6 billion in 2018 as compared to $7.2 billion earned in January–September 2017.

State-controlled wireline operator Rostelecom could earn revenue of 311 billion rubles compared with 221.2 billion rubles in January–September 2017, Vashchenko said.

MTS was the growth leader among its peers on the stock market with local shares rising 6.6% and ADRs 11.2% in 2017. MegaFon’s local shares plunged 11.5% and GDRs lost 2.4%. ADRs of VimpelCom’s sole owner VEON grew 2.6% over the year. Common shares of Rostelecom nosedived 23.9%.

Investors view MTS as a solid sustainable dividend story, while the operator also surpassed the local competitors by revenue and the subscriber base volume as of the end of September 2017.

“We expect quotes of MTS, MegaFon, and VEON to keep some potential in 2018 for a restoring growth. Meanwhile, a lag from MOEX Russia will get wider because of high competition in the industry, which is killing margins,” Otkritie Broker analyst Timur Nigmatullin said. MOEX Russia descended 5.5% over 2017.

The main quantity indicators of the telecom market will be stable in 2018, Dmitry Bedenkov, head of the research department at investment company Russ-Invest, said. “Progress in development and promotion of digital products, options to offset losses from the abolition of intra-network roaming, tariff competitiveness, and foreign exchange rates will determine growth of financial results,” he said.

“An increase in expenses, including on the data retention law, is the biggest risk for financial health and the level of dividends paid by connection operators.”

Most debatable law

“The data retention law will exert a negative influence on investment attractiveness of mobile operators and restrain their development,” Markov at Zerich said.

In force from July, the law obliges connection operators and Internet companies to keep content of talks and correspondence of users, including photos, videos, and sound files, which can be handed over to special services upon their request for up to six months. The order is yet to be clarified by the government and is expected to be milder than the initial version after clamor about heavy costs and a possible increase in tariffs for users.

Vashchenko at Freedom Finance expects final requirements to data storage to appear by June.

MegaFon weighed its expenses on fulfilment of the data retention law at 35–40 billion rubles over five years with at least 7–8 billion rubles to be spent during the first year, and MTS sees expenses at tens of billions of rubles.

The figures seem acceptable and could have a limited negative impact on the telecom companies’ dividend yield, which is one of the highest on the local stock exchange, Bedenkov at Russ-Invest said. “Keeping in mind falling dynamics of quotes of Rostelecom and MegaFon this year, the 2017 annual dividend yield of the telecom companies, including MTS, exceeded 8%,” he said.

The operators justifiably say that storage of petabytes of data will require expenses from 7 billion to 8 billion rubles per year, or some 12–15% of capital expenditures, Finam analyst Leonid Delitsyn told PRIME.

“As these expenses account for from 15% to 50% of the profit of the operators, suppose the profit is at the current levels, dividends could be reduced, which pulls telecom quotes downward,” he said.

Nigmatullin at Otkritie Broker said, “Impact of the data retention law on the industry is obscure and unpredictable. Expenses on fulfillment of the law and development of 5G could force companies to renege fully or partially on dividend promises.”

MegaFon said in October 2017 that it may decide not to pay dividends since it contradicts strategic purposes of the company and its major shareholder USM.

Even if MegaFon pays no dividends, growth potential for its quotes following technical and fundamental factors prevails, Vashchenko at Freedom Finance, said. “MegaFon’s shares are appealing and trading currently at its lowest. I expect the local shares to return to a 600 ruble level,” he said.

“I see some potential in Rostelecom, which is traded now below its book value. The 2018 target is 65–80 rubles per share.”

In new realities

Delitsyn at Finam said that the abolition of intra-network and national roaming is also pulling telecom stocks down.

The Federal Antimonopoly Service wants MTS, MegaFon, VimpelCom (Beeline), and T2 RTK Holding (Tele2) to abolish intra-network roaming, when an operator applies various tariffs to different regions in its network, and national roaming, when an operator uses other networks in a region, in the first half of 2018.

“Even without data storage and abolition of roaming, a continued silent truce and an end to price wars seem unrealistic when the market has more than two players with own advantages and difficulties. Local telecoms are not large by global standards. Even the major one, MTS with capitalization of 520 billion rubles, is valued half or even three times less than the biggest Brazilian, Saudi Arabian telecoms, to say nothing of West European or U.S. operators,” Delitsyn told PRIME.

“Since the Russian market would hardly see any mergers soon, telecoms sign partnership agreements to develop. The first one is an agreement between MegaFon and Rostelecom on cooperation to develop 5G. The deal is aimed at cutting expenses on construction of the new generation network, and the companies underline a necessity of cooperation and do not rule out joint ventures,” he said.

(57.6002 rubles – U.S. $1)

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