FOCUS: MTS likely to show solid 2018 results, to keep divs high unless delists from US

By Yekaterina Yezhova

MOSCOW, Mar 18 (PRIME) -- Major Russian mobile operator MTS could disclose strong financials for 2018 on Tuesday, including a six-year record revenue growth on an ailing telecom market. Analysts say the company’s quotes have already priced in the big fine settling the Uzbek case, while its currently-generous dividends may be cut if MTS quits the New York exchange.

Georgy Vashchenko, director of operations on the Russian stock market at investment company Freedom Finance, forecast 2018 revenue at 470–475 billion rubles, operating income before depreciation and amortization (OIBDA) at 200 billion rubles and net profit at about 60 billion rubles.

The OIBDA margin could maintain above 40%, and the debt burden may stand at below 1.2x OIBDA, which are important indicators for investors, he said.

The strong points include a high margin and growth dynamics. “Perhaps, the year of 2018 will be a record one over the last six years by revenue growth on a rather weak market. MTS develops not only on telecommunications, but also on other businesses. In July–September 2018, revenue from retail, financial and cloud services increased significantly, and mobile connection accounted for two thirds of revenue,” the analyst told PRIME.

“Risks and challenges comprise the need to raise capital expenditures, which won’t go below 80 billion rubles in the coming years, as well as dependence on imports and external financing with 9% of debt in foreign currency.”

Dmitry Bedenkov, head of the research department at investment company IC RUSS-INVEST, said MTS has stable incomes and a high margin.

Investment company Algo Capital senior risk manager Vitaly Manzhos said MTS is a well-shaped and mature business that needs subtle management.

“The company’s mid- and long-term prospects cannot be viewed disregarding the situation on the local telecom market, whose future is not cloudless at all. Legal requirements to connection operators and Internet companies have been strengthening for a long time already, and the firms are watched by regulators closely, just to name a few derailing factors,” he said.

In addition to extra expenses to respect laws, mobile operators have to participate in an endless expensive race of new technologies and standards that entails permanent investments in costly equipment. Besides, evolution of new connection channels force mobile operators to compete with IT firms.

“A logical outcome of influence of all these factors on the telecom companies is the need to master a whole range of new directions, like the Internet of Things, financial services, and e-commerce. Success in these segments is very money-intensive with no guarantees of financial triumphs,” Manzhos said.

Dividends & quotes

Under its current dividend policy, MTS pays 25–26 rubles per share, traded on the Moscow Exchange, or 50–52 rubles per American depositary receipt (ADR), traded on the New York Stock Exchange (NYSE), but no less than 20 rubles per share and 40 rubles per ADR. The total annual dividend payments amount to 50–52 billion rubles, but no less than 40 billion rubles.

In late February President Alexei Kornya said the operator would not reduce dividends after revision of the dividend policy, planned by April. The payment of a U.S. $850 million fine for bribery in Uzbekistan will not affect dividends either, the CEO also said.

“An additional argument in favor of stable dividends is a financial stance of the operator’s major shareholder, multi-industry holding Sistema. After 100 billion rubles paid to stay friends with oil major Rosneft, Sistema strives for a sustainable money inflow to service its mounting debt,” Manzhos said.

“On the whole, with the current quotes of the common stock at 258 rubles, an annual share yield amounts to 7.75–10%, which is an attractive figure.”

High dividends with a 10% yield also helped MTS to win foreign investors. However, the operator said in February it will assess whether it needs listing in New York in view of heavy costs on its maintenance and will consider an increase of volume of trading in Moscow.  

“Further policy will closely correlate with the probability of delisting from the NYSE. If it takes place, I think chances are high that dividends could be cut,” Vashchenko at Freedom Finance said.

“I think MTS would most unlikely delist from the NYSE this year. Foreign minority owners hold more than 30% of the company, and a buyback would cost over $2.5 billion. It would not be easy to replace foreign holders with local ones, in particular if the delisting from the NYSE cuts dividends.”

News on the matter may add volatility to MTS’ quotes in the coming months, Bedenkov at IC RUSS-INVEST said.

Manzhos at Algo Capital does not expect MTS to retreat from the NYSE soon either. “It’s explained by the fact that the U.S. listing is one of the factors keeping quotes at the current level,” he said.

MTS’ ADRs have gained 15.2% since the beginning of the year and closed at $8.09 on March 14, and common shares ascended 8.9% to 259.30 rubles.

Common shares of MTS are traded at the 2007 level with no clear long-term trend. “Most likely, the stock will fluctuate within 200–320 rubles in the next few weeks and months. These shares are worthy of a lengthy ownership to get dividends,” Manzhos told PRIME.

Bedenkov at IC RUSS-INVEST does not think MTS’ quotes will change dramatically after the release of its financial statement. “However, the situation on the Russian stock market is unbalanced and higher external risks could add volatility to the whole market, including MTS’ dynamics,” he said.

(65.4201 rubles – U.S. $1)

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