FOCUS: MTS, Rostelecom’s high divs, digital ideas push telecoms index up 5% in H1

By Yekaterina Yezhova

MOSCOW, Jul 6 (PRIME) -- Unlike the broad MOEX Russia Index that lost 9.9% in January–June, the Moscow Exchange’s telecoms index rose by 5.2% thanks to the robust growth of its core elements, ordinary shares of MTS and Rostelecom on sustainably high dividends and promising digital services, analysts said.

“The telecoms industry has not fully escaped the impact of the virus and the lockdown. According to the Digital Development Ministry, the market will contract by 2.5–3% on the year, and according to mobile operator MegaFon, operators’ EBITDA could lose some 30 billion rubles in total this year due to the absence of income from roaming, closed retail, the loss of some clients, like migrant workers or tourists,” investment company Veles Capital analyst Artyom Mikhailin said in a research.

“A jump of exchange rates and traffic on fixed-line and mobile networks raised capital expenditures. Nevertheless, we think the connection industry will be hurt less than many others and the market leaders will weather the crisis without heavy losses.”

The telecoms index is driven by ordinary shares of MTS, accounting for 77.73% of its weight as of June 30, and of Rostelecom, 17.08% of the weight. The rest are the preferred shares of Rostelecom, 2.94%, and of MTS-controlled MGTS, 2.25% of the weight.

MTS’ shares rose by 3.3% in January–June, closing at 330.45 rubles on June 30 on the Moscow Exchange.

“In our view, MTS keeps steady market positions, and the group’s cash flows are stable even amid the pandemic. As economic rates fall generally, the operator’s shares offer an inviting dividend yield, supported by a heavy buyback,” Mikhailin said.

The Veles Capital analyst sees no significant risk for the operator’s dividends either this year or next.

“MTS will pay shareholders more than 73 billion rubles in total in dividends in 2020, or 41.25 rubles per share, including the already paid special dividend of 13.25 rubles per share,” Mikhailin said referring to the payout made after the sale of MTS’ business in Ukraine.

“The minimal dividend of 28 rubles for a calendar year stipulated by the operator’s current dividend policy till 2021 offers a yield of 8.5% under the current price.”

The operator announced a 15 billion ruble buyback on March 31, which is to be completed during a year. “By May 22, the group had purchased 1.5 million shares for 480 million rubles. After the program ends, the quasi-treasury shares on MTS’ books could reach 75 billion rubles. We do not expect these securities to be paid off soon,” the Veles Capital analyst said.

Investment company Algo Capital senior risk manager Vitaly Manzhos said MTS stocks have been traditionally and duly seen as dividend securities. “MTS’ stocks sagged together with the market amid the panic March sellouts, but they had won back the bulk of their recent losses by mid-May and are consolidating now slightly above 320 rubles,” he told PRIME.

“The forthcoming July ex-dividend date will push them down to 300 rubles. In autumn, the mood on the country’s stock market would most likely worsen, but MTS shares, as dividend securities, will be resilient in comparison to the dynamics of the MOEX Russia Index. The next dividend to be paid is 20.57 rubles, or 6.3% of their current price. The dividends are stable, paid twice a year, and we expect interim payments for 2020 in October.”

Rostelecom’s ordinary shares advanced by 11.9% in January–June to 87.70 rubles on June 30.

Investment company Finam analyst Leonid Delitsyn said the stock reached its 92 ruble peak in mid-February thanks to consolidation of mobile operator Tele2 and a high valuation by VTB Bank, which swapped a stake in Tele2 for Rostelecom’s shares.

“Since then, Rostelecom’s shares have not returned to the highs, and it’s still early to speak about any new drivers. But Rostelecom has many advantages as a participant of large infrastructure projects of the future Russian digital economy. Growth of its shares is quite probable during two to three years,” Delitsyn told PRIME.

Rostelecom’s current dividend policy promises investors at least 5 rubles per share every year. “Payments on ordinary and preferred stocks have been equal since 2016. The annual dividend yield on ordinary shares is 5.7%, and of preferred shares 6.4%, which is not bad, but not the best either,” Manzhos at Algo Capital said.

Broker-dealer Xtellus Capital Partners equities analyst Ivan Kim said that Rostelecom now offers what telecom operators seldom do these days, which is growth. “Its two growth drivers, the mobile business and digital services, are set to prompt a 10% EBITDA compound annual growth rate (CAGR) in 2019–2022, on our estimates,” he said in a note.

“Rostelecom is the go-to operator when it comes to smart cities and e-government. Over the next five years, we believe that Digital Economy could bring in as much cumulative revenue as the company now generates annually in its fixed business. Rostelecom has established itself as a market leader, or a top player, across the high-growth markets – data centers, cloud services, information security and video surveillance. These markets are underpenetrated and provide Rostelecom with an unprecedented growth opportunity.”

(70.4999 rubles – U.S. $1)

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