FOCUS: MTS may cut costs, raise shareholder value with MGTS reorganization

By Yekaterina Yezhova

MOSCOW, Sep 9 (PRIME) -- Mobile giant MTS is reported to consider a large-scale reorganization of its Moscow City Telephone Network (MGTS), the capital’s biggest fixed-line and broadband provider, to cut the parent company’s costs and support quotes in the wake of a possible retreat of its receipts from New York, analysts said.

“While it’s still hard to speak about clear vectors of MGTS’ reorganization before its official confirmation, MTS is certainly interested in cutting costs and raising operating effectiveness. This is why the most probable incentive for reorganization could be the intention to cut management costs,” Dmitry Bedenkov, head of the research department at investment company IC RUSS-INVEST, told PRIME.

Business daily Kommersant said quoting sources that MTS, which owns 94.7% of MGTS’ capital and 99.2% of its common shares, is studying merging commercial blocks, cutting the management team, getting rid of doubling functions, and promoting household services under the MTS brand to reduce the mobile carrier’s operating expenses by at least 10% and raise shareholder value.

The matter may be put on the agenda of an autumn meeting of MTS’ board of directors.

According to researcher TMT Consulting, MGTS held 36% of the Moscow broadband market in April–June. On the nationwide scale, MTS together with MGTS was the third largest broadband operator after Rostelecom and ER-Telecom with a share of 10%.

Bedenkov said MGTS’ margins improved in 2019. “In January–June, MGTS’ commercial, general, and administrative expenses shrank 10% on the year to 3.4 billion rubles. Stable revenue ensured an increase of the operating margin to 45% from 28% a year earlier,” he said.

“Lower revenue from fixed-line services was offset by a higher-than-average rise of revenue from broadband services, pay TV, and services of its mobile virtual network operator, functioning on MTS’ networks. All these profitable services accounted for about 20% of MGTS’ revenue.”

While MGTS’ IFRS revenue for January–June accounted for about 8.5% of MTS’ group revenue, or 19.7 billion rubles against 243.1 billion rubles, MGTS’ net profit of 7.9 billion rubles was a quarter of MTS’ group net profit of 30.3 billion rubles. MGTS’ results are included into IFRS figures of the MTS group.

“If the companies succeed in cutting costs without undermining operating activities, while improving effectiveness, MTS’ shareholders will win because financial results would rise in the medium and long-term and boost potential dividend base,” Bedenkov said.

Investment company UralSib Capital agreed that MGTS’ reorganization could reduce MTS’ expenses and support the mobile operator’s margin.

“The key factor for MTS’ quotes will remain the risk of delisting of its American depositary receipts (ADRs) from the New York Stock Exchange in the short term,” UralSib said in a research note.

So far, the companies have demonstrated solid growth since the beginning of the year.

On the Moscow Exchange, MGTS’ common shares gained 20% since the beginning of the year to 2,040 rubles and its preferred shares went up 11.7% to 1,808 rubles on September 5, and MTS’ common shares put on 15.6% to 275.10 rubles. On the New York Stock Exchange, MTS’ ADRs added 17.5% since the beginning of the year, closing the September 5 session at U.S. $8.25.

(65.9981 rubles – U.S. $1)

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