FOCUS: Driven by games, Mail.ru likely to show robust results further, MSCI in view

By Yekaterina Yezhova

MOSCOW, Nov 2 (PRIME) -- Games became the main growth driver of Mail.ru Group’s July–September financials as the segment’s revenue exceeded advertising, which is more dependent on the economic situation, analysts said, expecting the tech giant to gain even more in the rest of 2020 if added to the MSCI Russia Index.

“All the core indicators of the company topped the consensus and our outlook. Advertising income expectedly recovered, and the games division continued to demonstrate robust growth and margins,” Veles Capital analyst Artyom Mikhailin said in a research note.

Mail.ru Group’s aggregate segment revenue increased by 19.9% on the year to 26.372 billion rubles in July–September. Revenue from massively multiplayer online (MMO) games jumped by 33.8% to 9.615 billion rubles, and revenue from online advertising went up by 5% to 9.510 billion rubles.

“The games division was the main growth driver. At that, media are intriguing us with reports that Mail.ru intends to break up with this driver by spinning it into a successful public firm, which seems to be a risky step. The sector brought 9 billion rubles of revenue, while new directions, on which the company bets, mainly e-commerce, generated only 3 billion rubles, whose 64% rise recalls the golden age of the Russian Internet, but the volume is still modest,” Finam analyst Leonid Delitsyn told PRIME.

Mail.ru Group’s Managing Director and Chief Financial Officer Matthew Hammond said on October 26 the company does not plan an initial public offering of its games division MY.GAMES.

Easing of the coronavirus restrictions helped the July–September advertising revenue rise by 5% on the year after a 5% fall on the year in April–June and did not turn people from playing online games.

Mikhailin explained the rise in the games revenue by consolidation of studio Deus Craft, whose revenue was at 820 million rubles in the quarter and U.S. $5 million in September. “The share of mobile games in Mail.ru’s games revenue reached 75%, and the share of revenue from international markets amounted to 76%. The fall of the ruble against the U.S. dollar by some 15% on the year supported the division’s results seriously,” the Veles Capital analyst said.

Unlike the advertising market, games ignore the economic situation, and the lockdown could raise the number of players by 12.7% in 2020, Delitsyn at Finam said, adding that experts raised the assessment of the average growth rate of global revenue of the games sector to 7.4% from 1.4% earlier.

Games revenue could exceed advertising revenue in October–December. “The company sells games on the global market that is valued at $159.3 billion and advertisements on the local market weighing less than 500 billion rubles, which may fall if the economic climate worsens,” Delitsyn told PRIME.

Mail.ru Group also revised up its 2020 revenue guidance to 103 billion rubles from 100 billion rubles and said it expects the EBITDA margin guidance in the mid-twenties.

“We take the reported numbers and the guidance as positive and supportive for the stock. We also believe that Mail.ru’s business model positions the company well to withstand any potential pandemic-related headwinds, while the stock’s potential inclusion into the MSCI Russia in early November would serve as the next short-term trigger,”  VTB Capital analyst Vladimir Bespalov said in a note.

Mikhailin said that Mail.ru Group meets the main criteria for addition to the index in the November review, which will bring the company a sizeable flow of liquidity from passive funds and back its quotes up.

Delitsyn said that the managers who compile portfolios based on the index will buy the stock.

“With the other favorable conditions, the price of Mail.ru’s shares could rise by 4–5%,” he said.

Mail.ru Group’s global depositary receipts rocketed by 27.2% on the Moscow Exchange since the start of listing in early July to 2,119 rubles on October 29. Its receipts jumped by 19.5% on the London Stock Exchange since the beginning of the year to $26.65.

Finam’s 12-month fair price of Mail.ru Group stands at 3,121 rubles. “The outlook for the end of the year depends on many factors -- first, on the enthusiasm on the stock market and the view on high-tech. Second, the summer proved that high spirits are not for all. The growth concentrates in several market favorites, like Apple, Nvidia, Tesla, Zoom. As a rule, it takes the market to see that a company’s business wins from the pandemic before the stock grows,” Delitsyn said, adding that Mail.ru Group’s quotes may close the year at 2,650 rubles.

VTB Capital set the 12-month target at $35.

(79.3323 rubles – U.S. $1)

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