FOCUS: MTS, Rostelecom push telecom index 10% up in Jan–Sep, future depends on divs

By Yekaterina Yezhova

MOSCOW, Oct 7 (PRIME) -- The telecommunications index of the Moscow Exchange gained 10.3% in January–September as top mobile company MTS seems to have abandoned plans to quit the NYSE, and state-controlled Rostelecom is on its way to merge with Tele2, but analysts say the indicator’s future depends heavily on the firms’ dividends.

“Investors want dividends from the local telecom companies because they view the industry as mature and do not expect any innovative products or services able to multiply revenue,” group of companies Finam analyst Leonid Delitsyn told PRIME.

“Since organic growth ended, acquisitions of small firms are mainly over, the subscriber base does not grow any more, and no revolutionary services pop up, the stock market players see no ground for the sector’s capitalization to increase. In this case, dividends are the only thing they’re interested in.”

Investment company Veles Capital analyst Artyom Mikhailin said that before there is clarity about development of 5G in the country, the sector is mostly appealing to investors by return on investment in dividends and buybacks, because potential of organic growth is mainly exhausted.

Common shares of MTS accounted for 74.53% of the telecommunications index weight as of September 30, the last trading day in September, while Rostelecom’s common shares accounted for 20.23% and preferred shares for 2.82%. Preferred shares of Moscow City Telephone Network (MGTS), MTS’s fixed line unit, accounted for 2.41%.

MTS

“The telecommunications index has been and will be driven by MTS’ shares, which have the heaviest weight,” Mikhailin said.

MTS’ common shares increased 11.3% since the beginning of the year to 265 rubles on September 30, and its American depositary receipts, traded on the New York Stock Exchange (NYSE), gained 15.4% to U.S. $8.1 apiece.

The company’s possible withdrawal from New York would certainly undermine quotes, Delitsyn at Finam said.

Mikhailin at Veles said, “MTS’ shares are depressed, although less than earlier, by a possible change of its listing structure and withdrawal from the NYSE. We think that investors are becoming more certain that there would be no delisting from the NYSE since the move is undesired so far by the operator’s core owner, multi-industry holding Sistema.”

Sistema’s main owner Vladimir Yevtushenkov said in early September that the holding had not considered delisting MTS from New York.

“If the operator officially announces keeping its listing structure unchanged, it could push the quotes upward, we believe, as it would diminish uncertainty and would not reduce the positions of foreign funds. The dividend yield of the operator’s shares with the current prices is at about 10.5% for year,” Mikhailin said.

“Besides, MTS’ shares could have risen since the beginning of the year thanks to the settlement of disputes with the U.S. Securities and Exchange Commission and the Department of Justice (regarding its former business in Uzbekistan) and improvement of the dividend policy in March.”

Delitsyn at Finam said MTS approved the January–June dividend of 8.68 rubles per share. According to the plan endorsed in March, the total volume of dividend payments in 2019 will be 28 rubles per share.

“The operator’s revenue stood at 480.3 billion rubles in 2018, and if there is growth of at least 4%, it will produce 500 billion rubles in 2019,” he said. MTS expects its 2019 revenue to rise 4–6%.

Rostelecom

Common shares of the state-controlled operator gained 7.4% since the beginning of the year to 78.50 rubles on September 30. Preferred shares rose 3.4% to 62.45 rubles.

“In early 2019 we set the target for Rostelecom’s stock at 79.7 rubles for the end of the year with a 12% growth. We explained it by the operator’s unique position as the main beneficiary of the policy of building the sovereign digital economy. Now, the quote is close to the target,” Delitsyn said.

“Consolidation of Tele2 (brand of mobile operator T2 RTK Holding) would create a company with a revenue of about 500 billion rubles to compete with MTS for the top status and should raise value in five years.

“However, the stock market cares not about five-year prospects, but regular dividends, the probability of which is not increased by the deal, because it will have to pay for Tele2 shares, whose debt burden is heavy.”

If the government sells a large stake in Rostelecom, but keeps control, the market would hardly look at anything but dividends. “This is why we expect Rostelecom’s quotes to ease until there is clarity about the Tele2 deal,” the Finam analyst said.

Mikhailin at Veles agreed that it is still hard to predict results of the consolidation deal because its terms are still vague.

“From the point of view of strategy, raising interest in the mobile operator is justified and promises long-term advantages, because Tele2 expands faster and shows a higher margin than Rostelecom. The asset will be extremely useful in unrolling 5G networks,” he said.

President Vladimir Putin signed a decree on October 3 allowing Rostelecom to raise its stake in T2 RTK Holding to 100% from 45%.

(65.0300 rubles – U.S. $1)

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