FOCUS: Dividend-driven investors remain uninspired about telecoms in H1

By Yekaterina Yezhova

MOSCOW, Jul 5 (PRIME) -- The Moscow Exchange’s telecoms index’s growth lagged behind its broad peers in January–June as investors were still cautious about soaring and digitally-oriented Rostelecom, analysts said.

“As we see, the telecoms index was still far behind the ruble-denominated MOEX Russia Index and the U.S. dollar-denominated RTS Index at the end of June. This is also true for the ordinary shares of MTS and Rostelecom, because their total weight in the industry index exceeds 95%,” investment company Algo Capital senior risk manager Vitaly Manzhos told PRIME.

The telecoms index (MOEXTL) rose by 3.6% since the beginning of the year to 2,386.57 on June 30, while the MOEX Russia Index (IMOEX) added 16.8% to 3,841.85 and the RTS Index (RTSI) increased by 19.2% to 1,653.78.

“The industry index is very narrow with only four components. There are no clear-cut incentives for a robust rise of their price. Strictly speaking, this number of the elements is not enough to build an informative industry index. For comparison, the U.S. market counts more than 60 companies providing various telecommunications services,” Manzhos said.

MOEXTL’s weight is split between MTS’ ordinary shares with 71.1% as of June 30, Rostelecom’s ordinary shares with 24% and preferred shares with 3.3%, and preferred shares of MGTS, MTS’ unit, with 1.6%.

“The lack of a new technological wave slows down the sector the most. On the U.S. market, for example, one can invest in T-Mobile considered to be the leader by the speed of 5G introduction. Although development of the 5G service is still at the brain-storm stage, this standard is to drive the growth of the telecom industry this decade,” investment company Finam analyst Leonid Delitsyn told PRIME.

MTS

Delitsyn said that MTS’s future is unclear, although it can turn into one of Russia’s top digital ecosystems. “It certainly prompts us to think about the scope of connection operator’s restrictions in building its hypothetic ecosystem at a profit and why it chooses this or that vector of development,” Delitsyn said. “This is why we cannot reproach the market of being too harsh to company valuation.”

He said that MTS’ priority is high dividends, now carrying an 8.3% yield, which suits both the core shareholders and the market.

MTS paid 8.93 rubles per ordinary share, or 17.8 billion rubles in total, for January–June 2020. Its shareholders approved final 2020 dividends at 26.51 rubles per share, or 53 billion rubles in total.

Manzhos at Algo Capital said that MTS has been traditionally seen as a dividend stock, which is not supposed to rise strongly in value. “This is why demand for the stock can shrink when the price rises as the shares become less attractive from the point of view of the dividend yield,” he said.

MTS’ ordinary shares added 3.6% since the beginning of 2021 closing at 342.65 rubles on June 30.

“We’ll see a dividend gap in the stock on Wednesday that will pull it down by 25–30 rubles approximately. In such a way, they can again move to the middle of their 3-month range of 300–350 rubles. In other words, MTS’ shares have been bought for dividends from mid-April. This positive factor will fizzle out soon,” Manzhos said.

MTS will most likely fluctuate in a 300–350 ruble range in the coming months, Manzhos said. Delitsyn sees the end-year price at 350 rubles.

Rostelecom

After incorporation of mobile operator Tele2, Rostelecom is far ahead its peers by revenue. “Rostelecom’s strategy is growth. Getting a 700 billion ruble revenue in 2025 means a 5% rise, which is far above the typical indicator of the country’s telecom companies over recent years,” Delitsyn told PRIME.

“If the plans are fulfilled, no other Russian TMT company will be close to Rostelecom by revenue. At that, the firm does not plan to raise capital expenditures during the coming years.”

Rostelecom may achieve the goals thanks to active development of digital businesses. The company is the largest operator of data centers, and boosts its expertise and client base in big data processing, the Finam analyst said.

But the operator pays a moderate dividend of 5 rubles per share with a promise to raise it by 5% a year. “The stock market players who do not believe in the growth of telecoms can find more generous firms,” Delitsyn said.

Rostelecom’s shareholders approved a final 2020 dividend at 5 rubles per share, or 17.5 billion rubles in total.

Manzhos at Algo Capital said that Rostelecom’s ordinary shares are less attractive at the current price from the point of view of a 5% dividend yield. “We should keep in mind that the stock’s price has failed to rise for many years, which should be taken as a statistically important fact. Regardless of its potential, they can continue to deceive positive investor expectations,” he said.

The operator’s ordinary shares climbed by 5.5% in January–June to 102.07 rubles on June 30.

“Rostelecom will most likely stick to its mid-term range of 90–112 rubles. A probable rise to the upper end of the bracket may be unstable,” Manzhos said. Delitsyn set the end-year target at 115 rubles.

(73.6175 rubles – U.S. $1)

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