FOCUS: Improvement in Russian economy can help shattered telecom index to restore

By Yekaterina Yezhova

MOSCOW, Jan 9 (PRIME) -- Russia’s telecom stock index, MICEX TLC, hit by the adoption of data retention laws and tough competition, started to recover in December adding 4.3% over the year in contrast with 26.8% gained by the broader MICEX index. Analysts expect the telecom index to start reviving in 2017.

“As the country’s economy is stepping out of recession, ruble-denominated incomes could start rising, and a stronger ruble could play into the hands of operators. Lower expenses on distribution along with slashing retail chains could be an additional factor of support,” Ilya Frolov, a senior analyst of Promsvyazbank, told PRIME.

Although, the analyst does not expect to see strong dynamics soon with quotes tending to recover gradually.

“Telecom shares could show firmer growth no sooner than in the second half of 2017,” said Alexander Kopytov, an investment consultant at KIT Finance Broker.

The stock market in 2016 was underpinned by higher oil prices and the firming ruble, he said, adding that higher company profits were also an encouraging factor.  

“Growth sped up by the end of the year thanks to, among others, the election of Donald Trump as the U.S. next president, which Western mass media saw as success of Russia’s foreign policy. We can also mention OPEC’s agreement to limit oil production,” the analyst said.  

“We’ve seen different dynamics in the telecom industry. The data retention laws, obliging connection operators to store subscribers’ traffic, were adopted. Uncertainty of economic consequences of the move resulted in sales in the sector and its long oblivion. The share price of telecom companies started to recover only at the end of the year.” 

The TLC index went up 4.3% since December 30, 2015, closing at 1,754.08 on December 30, 2016, with the capitalization of 384.5 billion rubles. The MICEX index soared 26.8% to 2,232.72 with the capitalization of 10.5 trillion rubles.

The telecom index comprised six securities as of the end of 2016: 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 December 29, 2016:

“Shares of the telecom industry have shown rather weak results this year due to woes over bigger investments in storage and data processing infrastructure to comply with the data retention laws, as well as limited growth opportunities because of stronger competition, high market saturation and fragile macroeconomy,” Frolov of Promsvyazbank said.

Alexei Pavlov, a chief specialist of Otkritie Broker’s market analysis department, said it is difficult to weigh the impact of the data retention laws. “The thing is that nobody knows for sure how the laws will influence the industry. Even those who are behind the move. It’s a concept. Officials are yet to decide how the laws will be applied,” Pavlov said.

Kopytov of KIT Finance Broker said operators’ business model is transforming.  “A soaring number of subscribers prefer using applications for calls and messages. Traditional monetization in terms of calls and SMSs seems to have stopped working.  Telecom service is focused on traffic. It means companies will have to revise their business model and, possibly, reject unlimited tariffs,” he said.

 “A subsidiary of mobile operator MegaFon, Yota, plans to cancel the unlimited Internet in 2017. Traffic grows too quickly, and fixed payments fail to cover it. There is also a global general trend of lower growth rates of smartphone sales. Competition is getting only tougher, and subscriber base growth is weakening.”

STOCKS

Of the three heaviest stocks in the index, common shares of MTS, have advanced 23.3% since the end of 2015 to 259 rubles on December 30, 2016, while common shares of Rostelecom and MegaFon lost 7.2% to 84 rubles and 31.8% to 579.60 rubles respectively.

“MTS showed better than the industry’s average dynamics. The company managed to return to an OIBDA margin of over 40% in July–September, surpassed MegaFon by the number of base stations and was less active in mergers and acquisitions,” Frolov of Promsvyazbank said.

Kopytov of KIT Finance Broker said MTS’ shares had risen too much to see further prospects. “It’s a good dividend story, a kind of a ‘dividend’ deposit,” he said. 

“MegaFon looked interesting at the beginning, but its indicators have worsened. It’s unclear what the company will do with cell towers, how capital expenditures will be justified, and how the dividend policy will improve. The purchase of 63.8% of voting shares of Mail.Ru Group is dissolving the operator’s money cushion. The question of whether its quotes will rebound is open since MegaFon’s debt is growing,” Kopytov said.

Frolov said that MegaFon had been hit by delisting from the MSCI Russia index and worsened operating results, “along with a series of unclear acquisitions, like the big stake in Mail.Ru, to mention the latest.”

“Rostelecom has just recovered after the adoption of the data retention laws. The company bears costs which are not always justified, and this undermines quotes. From the point of view of the dividend yield, Rostelecom’s preferred shares are more interesting, because while carrying equal payments with the common stock, they cost less,” Kopytov said.

(60.6569 rubles – U.S. $1)

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