FOCUS: MTS deal to buy VisionLabs needed to boost ecosystem rise

By Yekaterina Yezhova

MOSCOW, Dec 20 (PRIME) -- Major Russian mobile operator MTS will acquire IT company VisionLabs for 7 billion rubles in a move that analysts praised as a worthwhile investment as the company develops its ecosystem.

“I think MTS concentrates on further progress of digitalization under its business diversification strategy. The acquisition costs of 7 billion rubles equal about 9% of the annual net profit. But it is a significant investment for the business. By comparison, MTS will invest some 14 billion rubles in 2022 in the network in the Moscow Region, its key market and key business direction,” Alexander Osin, an analyst of trade transactions on the Russian stock market at investment company Freedom Finance, told PRIME.

MTS said earlier in December that Luxembourg-registered Intema, a unit of MTS AI, the operator’s artificial intelligence (AI)-focused accelerator and venture capital fund, had signed a definitive agreement to acquire 100% of VisionLabs for 7 billion rubles, but the final price is subject to VisionLabs’ performance in the next three years.

“This is a good investment for MTS, in our view, which will enhance the development of its beyond-connectivity service. VisionLabs is acquired for around 6.4x 2020 EV/Sales, which implies a significant discount to the global computer vision peers,” investment company Aton said in a research note.

Osin at Freedom Finance sees MTS’ mid- and long-term tactical and strategical goals in the deal. “For MTS’ financial figures, business diversification remains the key long-term driver. In 2012–2020, the share of the mobile connection segment in its revenue shrank by 7 percentage points to 68%. We expect the trend will continue and the share would fall to 60% till 2026. Second, the market, social, and macroeconomic situation plays its role,” he said.

Established in 2012, VisionLabs is a resident of the Skolkovo Foundation, Russia’s Silicon Valley, and one of the world’s leaders in new products based on computer vision and machine learning. It fulfilled more than 500 computer vision projects in 37 countries for more than 270 customers across the financial, telecommunications, retail, transportation, and power sectors. VisionLabs’ revenue amounted to 1.1 billion rubles in 2020.

“VisionLabs’ revenue accounts for 0.1% of MTS’ revenue. I would not rule out acquisition of several similar businesses,” Osin said. MTS’ revenue increased by 8.4% on the year to 138.2 billion rubles in July–September, as calculated under International Financial Reporting Standards.

After the deal, VisionLabs will become the largest asset in the portfolio of Intema, established by MTS AI as a new brand aimed at developing, launching, and marketing AI-based products on the global scale. Before the deal, VisionLabs’ shareholders included its founders with 51.77%, bank-turned-ecosystem Sber with 25.07%, and venture fund Sistema_VC with 23.16%, a unit of multi-industry holding Sistema, MTS’ core shareholder.

Osin said that VisionLabs’ main product is a platform of face recognition, which analyzes photo and video content online and identifies people comparing their images with several databases. “Unlike the majority of similar young fast-growing businesses, the company has been demonstrating a positive and actively rising average annual net financial result together with its high average annual growth of revenue since 2015,” the Freedom Finance analyst said.

Investment company Finam analyst Leonid Delitsyn said VisionLabs is well known and has high revenue, whose growth has accelerated during the pandemic. “When building a high-tech ecosystem, a company focused on computer vision is useful and maybe even necessary. These technologies can be applied in many ways inside the ecosystem – these are connection services, retail, finance, and media. The computer vision technologies are already used in this industry, and the ecosystem needs them urgently,” he told PRIME.

“If such a company holds an initial public offering on a U.S. stock exchange, it would be valued at least twice the price (paid by MTS). But preparation for a floatation takes much time.”

MTS’ ordinary shares decreased 13.2% since the beginning of the year and closed at 287 rubles on the Moscow Exchange on December 16 and 13.1% to U.S. $7.78 per American depositary receipt (ADR) on the New York Stock Exchange.

Finam set the 12-month target price for MTS’ ordinary shares at 312.90 rubles with the Hold recommendation.

“MTS’ fair value on the base of the mid and long-term calculations and outlooks stands at 388.83 rubles per share and $8.6–10.5 per ADR,” Osin at Freedom Finance said.

“The operator’s shares do not have clear defensive qualities. But the basic features of the company’s business, which enabled it to demonstrate its flexibility to the specific shocks caused by the social and economic restrictions during the coronavirus pandemic made the shares trade steadily above the market during the falls in 2020–2021. We expect similar dynamics of MTS shares in case of a bearish mood in the next weeks and months.”

(73.7330 rubles – U.S. $1)

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