FOCUS: Data retention laws, divs payout cap Russian telecom index growth by Oct

By Yekaterina Yezhova

MOSCOW, Oct 3 (PRIME) -- The telecom index, MICEX TLC, has been rising steadily since January through May on a strong ruble and robust performance of its pillar, Russia’s top telecom firm MTS, but the controversial data retention laws and the end of a dividend payout period undermined the growth by late September. Analysts said the indicator could recover until the end of 2016, if the government softens requirements to data storage.

“Investors seem to be discouraged by prospects of the country’s telecommunications sector, because they are not rushing to buy these assets. Uncertainty with the sector’s regulation raises investment risks, and market participants prefer to abstain from purchases,” Anna Bodrova, a senior analyst at Alpari, told PRIME.

The TLC index lost 3.5% since December 30, 2015, closing at 1,622.97 on September 29 with the capitalization of 355.8 billion rubles. The broader MICEX index soared 13.3% to 1,996.12 with the capitalization of 9.4 trillion rubles.

The telecom index comprised six securities as of September 29: common shares of mobile operators MTS (MTSS) and MegaFon (MFON); common and preferred stocks of state-controlled Rostelecom (RTKM, RTKMP); preferred shares of Moscow City Telephone Company (MGTSP), a fixed line unit of mobile operator MTS; and common shares of TransTeleCom (TTLK), a wireline operator owned by Russian Railways.

Below is the weight of stocks in the TLC index as of September 29:

Of the three heaviest stocks in the index, common shares of MTS, advanced in January–September by 9.5% to 230.05 rubles on September 29, while common shares of Rostelecom and MegaFon lost 12.5% to 79.2 rubles and 27.5% to 616 rubles respectively.

Promsvyazbank senior analyst Ilya Frolov said the data retention laws could threaten cellular operators with multi-billion investments in infrastructure. “This will mean that the companies’ free cash flow could shrink, which will inevitably cut dividend payments, while telecoms have been one of the most predictable and highly-yielding dividend ideas on the market,” the analyst said.

The laws oblige telecom operators and Internet companies to keep records of users’ activities and content of talks and correspondence. Companies must provide special services with access to data upon demand. Leading operators opposed the legal initiatives saying they would translate into soaring expenses and tariffs for subscribers.

In response to the loud criticism and to some relief of the market, President Vladimir Putin said in early September that the government could amend the laws to make life easier for the business. Communications Minister Nikolai Nikiforov said that the government is analyzing the laws and will understand by November whether amendments are needed or not.

Timur Nigmatullin, a financial analyst at Finam, also said that the telecom market was in a backlash against the data laws, whose drafts were approved by parliament in May–June, when the TLC index started to fall.

The situation with the telecom stocks was aggravated by the fact that the dividend period also falls on April–June. “The already paid dividends are not included into the stock dynamics, though dividend yield of telecom shares are twice as high as market average. As soon as dividends are distributed, we see a so-called dividend gap down,” Nigmatullin said.

Frolov at Promsvyazbank pointed to a slowdown in growth rates of revenue, which rises mostly thanks to retail, as well as a decrease in the OIBDA margin of MTS and MegaFon.

“At present, we can speak about a strong negative re-rating of the sector as investors don’t see a strong fundamental picture here. However, quotes of MTS and especially of MegaFon have already stepped down to quite attractive levels,” the analyst said.

“The government is thinking of ways to soften the data laws, and a final version could be not as much destructive for business. Against this background, quotes could recover until the end of 2016, and I think that the current levels are close to the bottom.”

(63.3960 rubles – U.S. $1)

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