FOCUS: Huge invest hits VK 2022 margin, yet firm has solid growth points

By Yekaterina Yezhova

MOSCOW, Mar 27 (PRIME) -- VK’s intensive investment in new products and social media slowed down its 2022 margin rise and will continue doing so this year, but the strong growth points of online advertising and replacement of global players will compensate the heavy spending, analysts said.

“VK published mixed results, good revenue, but poor margin, below expectations as the company invests actively in new products and its social networks. We think the trend may continue this year,” BCS World of Investment senior analyst Maria Sukhanova told PRIME.

VK’s revenue grew by 19% in 2022 to 97.8 billion rubles thanks to a 29% rise of online advertising sales to 56.9 billion rubles. The adjusted EBITDA rose by 8.9% to 20 billion rubles with the EBITDA margin of 20.4%, according to the company’s financial statement.

Sinara Bank senior analyst Konstantin Belov expects VK’s revenue to grow by an 8% compound annual growth rate (CAGR) in 2023–2026 to 133 billion rubles in 2026, including 81 billion rubles from online advertising with a 9% CAGR; 12 billion rubles from EdTech with a 2% CAGR; 20 billion rubles from Internet value-added services with a 5% CAGR.

“We expect some pressure on the margin to persist due to the costs of development and marketing of new products and services, which will probably raise personnel and marketing costs,” he said in a research note.

According to his estimate, VK’s operating costs will grow in 2023–2026 with a 7% CAGR to 107 billion rubles in 2026 with an average EBITDA margin of 21.9% and adjusted EBITDA of 32 billion rubles in 2026 with a 12% CAGR in 2023–2026.

“The key economic risk, from our point of view, is return on investment on the new initiatives. For an economically tangible scale and the provision of high-quality services, large resources may be required, which can negatively affect margins in the short and medium term,” Belov said in the research.

“The overall economic situation can also depress the advertising market, which is highly sensitive to economic growth rates, and hence on the advertising revenue. We also note that VK is registered abroad, on the British Virgin Islands, which poses a threat in the current situation. The company, however, said it plans to redomicile to the Russian Federation, yet no terms or conditions are clear.

“Less significant risks include higher personnel costs – IT professional now enjoy high demand in all industries; the risks also involve an increase in the cost of equipment and its availability, but we find these problems solvable.”

VK’s personnel costs widened to 38.8 billion rubles in 2022 from 27.9 billion rubles a year earlier, and its total operating expenses grew to 83 billion rubles from 65.7 billion rubles.

The analysts said a widening of the advertising market share, replacement of the global services, and support of the IT sector will act as growth drivers.

“VK is Russia’s biggest online asset with the largest audience thanks to its leadership in the social networks,” Belov at Sinara Bank said.

The company owns VKontakte and Odnoklassniki. “VKontakte continued to strengthen its leading position among Russian social networks: the average monthly active users in October–December 2022 grew by 9.6% on the year to a record of 79.5 million users. The global average audience of VKontakte in October–December 2022 reached a record high of 101.7 million monthly active users, while the average daily active users in Russia grew by 8.9% compared to October–December 2021 to a record of 51.1 million users,” VK said in its statement.

Belov said that VK sold some non-core assets in 2022 such as the services of ride sharing and food delivery and through signing of several large deals, including an asset swap with Yandex, strengthened its footing in the segment of media and content focusing on business in this industry.

“The acquisition of Dzen and News (from Yandex in exchange for Delivery Club) expands the operating vista for development and audience coverage,” Alexander Tsyganov, head of the investment and corporate business department at Cifra Broker, told PRIME.

“VK and Yandex have different bases for progress, in particular, VK possesses a well-advanced social network with a large audience that secures certain advantages in following the mood, the interests, and the trends of its participants,” he said.

Tsyganov pointed to the fact that the withdrawal of the foreign competitors has opened promising prospects for VK and the fields where it can grow have become vacant.

“The IT sector will certainly advance, and we expect VK’s quotes to go upwards. We see steady demand for VK’s depositary receipts,” the Cifra Broker analyst said.

VK’s depositary receipts gained 1.6% over the month and 9.5% since the beginning of 2023 closing at 478 rubles on the Moscow Exchange on March 24.

Sukhanova at BCS set the 12-month target at 630 rubles with a Buy recommendation, and Sinara Bank has the target of 520 rubles.

(76.4479 rubles – U.S. $1)

End