FOCUS: Future of Russian telecom stocks depends on data storage law application

By Yekaterina Yezhova

MOSCOW, Jul 11 (PRIME) -- The Russian stock index of telecom companies, TLC, grew almost in line with its “big brother” MICEX in January–June driven mostly by rally in MTS and MGTS shares offering hefty dividends, but analysts say the indicator’s further health is gloomy after the adoption of content storage bills, unless they are amended.

The TLC index added 5.6% since the end of 2015, closing at 1,776.04 on July 1, while MICEX rose 7.7% to 1,896.62 points.

“Domestic telecom companies looked quite promising in the first half of 2016 in view of the current market conditions. A positive impact came from measures taken by the companies to adapt business to economic realities, as well as from firming of the national currency,” Anna Ustinova, a leading analyst at KIT Finance Broker, told PRIME.

“Mobile operators earn most of their revenue on the local market, while investment in purchases of technologies are denominated in a foreign currency. A stronger ruble allows companies to reduce expenses on debt servicing. Another factor supporting shares of cellular companies are traditionally high dividends, like those paid by MTS and MegaFon.”

Below is a breakdown of companies’ weight in TLC as of July 1; common shares are meant unless indicated otherwise:

Common shares of mobile giant MTS and its fixed line unit, the Moscow City Telephone Company (MGTS), were growth leaders in January–June. MTS’ shares have added 16.7% since the end of 2015 to 245.05 rubles on July 1.

“MTS is the only company with positive dynamics of OIBDA in January–March. The company is undervalued by the market by the price/earnings ratio and traditionally pays high dividends,” Ustinova said.

MTS shareholders voted for paying 28 billion rubles in dividends for 2015, or 14.01 rubles per common share and 28.02 rubles per American depositary receipt.

MGTS’ common share quotes more than doubled to 1,004 rubles from 480 rubles as of December 30, 2015. Preferred shares rocketed to 984 rubles from 540 rubles. Shareholders of MGTS agreed earlier to boost dividends for 2015 to 21.1 billion rubles from 1.8 billion rubles paid on 2014 results.

MegaFon, whose common shares nosedived 19% in January–June, still has chances to reverse the trend in the second half of the year thanks to generous dividends, Ustinova said. The operator will pay 30 billion rubles in dividends for 2015, or 48.38 rubles per share, as compared to 10 billion rubles paid for 2014, or 16.13 rubles per share. MegaFon will also pay 5 billion rubles for January–March, or 8.06 rubles per share.

The immediate future of the telecom giants heavily depends on the situation with the new law, signed by President Vladimir Putin on July 7, though accompanied by a list of orders to the government to cushion the blow to the industry.

Putin ordered to prepare a report by September 1 on volumes of financial expenses required to organize production of domestic software and equipment to store voice information under the new law.

The law obliges operators to keep records of subscribers’ talks and correspondence for three years, starting from July 20, currently stored for about six months; and their content – like voice calls and texts – for up to six months, starting from July 1, 2018. The initiative was severely criticized by experts and operators, expecting tariffs to triple. The total needed investment is estimated at a shattering 5.2 trillion rubles, according to Ustinova.

“The news has become a grave blow for the telecom companies. Shares of MTS, Rostelecom and MegaFon immediately plunged amid a growing market. For companies, whose activities will be regulated by the new law, it means the need to create expensive systems to store and process data,” Vitaly Manzhos, senior analyst at bank Obrazovanie, said.

“Moreover, the fulfillment of the requirements will be linked to the necessity to overcome a number of technical problems. The most unpleasant consequence for the telecom operators would be the fact of heavy overhead spending, which would carry no positive economic impact in the future.”

Communications Minister Nikolai Nikiforov said content storage should be deliberated jointly with the industry and returned in September–November to the State Duma, the parliament’s lower house. The minister does not expect mobile connection tariffs to rise in 2016.

“The time of coming into force of the ambiguous regulation, regarding the issues of storage of users’ data, falls on 2018. The necessary order of data storage will be determined by the government,” the minister said shortly after the adoption of the law.

Gazprombank analyst Sergei Vasin said he expects on the whole operators to remain on track in July–September, pay scheduled dividends for 2016 and offer investors some of the highest yields on the market.

“MTS and Rostelecom’s shares look most promising in July–September. MTS still demonstrates the fastest growth among listed telecom operators, while offering an attractive dividend yield.”

“Rostelecom’s preferred shares outperformed the broader market in April–June on the back of expectations of high dividends. We think that both common and preferred shares will outperform the market in July–September due to dividends and positive financial performance. Nor should it be ruled out that the company, as a leader of the data center market in the country, will minimize possible investment related to the new law and lease out its capacities to other firms,” Vasin said.

(64.2488 rubles – U.S. $1)

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