FOCUS: Monopoly on fixed-line govt services to help Rostelecom’s revenue, quotes

By Yekaterina Yezhova

MOSCOW, Oct 16 (PRIME) -- The Russian government’s decision to award the right to provide it with fixed-line connection services exclusively to state-controlled telecom operator Rostelecom will add 5% to its annual revenue, or some 15 billion rubles, and could support its quotes, analysts said.

“The decision was made by the president (Vladimir Putin)…A large meeting was held last week at the communications ministry, and it was explained in detail how this work will be done,” Rostelecom’s President Mikhail Oseyevsky told reporters on October 5.

Promsvyazbank senior analyst Ilya Frolov said Rostelecom looks for points of growth for the business whose revenue has been stagnating over the last three years and whose margin has been falling. “This is why the provision of fixed-line connection services to state entities could become one of the springboards that will contribute to an increase in Rostelecom’s income,” he told PRIME.

“Before Putin’s approval of a special decree, Rostelecom’s share in the segment of connection services for state entities amounted to more than 55%, and obtaining the second half will bring the company an extra 15 billion rubles annually, which will raise its revenue by 5% as compared to the 2016 figures,” Frolov said.

In its reports, Rostelecom mentions revenue from corporate clients and state authorities together, and the indicator has been performing much better than its total revenue. It went up 2% on the year to 49.2 billion rubles in January–June, while the operator’s total revenue rose 1% to 145.6 billion rubles. In 2016, revenue from corporate and state clients added 2.5% to 100.8 billion rubles, while total revenue grew only 0.03% to 297.4 billion rubles.

Motives of state entities for switching to a single operator vary, said Georgy Vashchenko, director of the department of operations on the Russian stock market at investment company Freedom Finance.

“The move centralizes, facilitates, and makes state purchases more transparent. It reduces risks of cyberthreats since it’s easier for one operator within its network to resist attacks from the outside. The company will establish a center to monitor cyberattacks under a federal program. Rostelecom has all the needed licenses and is up to clients’ demands,” he said.

Choosing Rostelecom as a single operator was mostly predetermined by the company’s regional presence and servicing of key Internet exchange points. State customers can impose requirements on disposing their own long-haul channels and separate nodes, using domestic or localized equipment.

Apart from Rostelecom, some government requirements can be met only by Multiregional TransitTelecom (MTT); TransTeleCom (TTK), controlled by Russian Railways; or Voentelecom, the Defense Ministry’s telecom operator, Vashchenko said.

Frolov at Promsvyazbank said that the choice of Rostelecom will hit TTK hard, while the impact on mobile operators MTS and VimpelCom, which also provide fixed-line services, will be less painful with a loss of 1–2% of their consolidated revenue.

Vashchenko said that private companies have never strived to get a significant part of the state service market since they will not cope with capital expenditures, because margins of state contracts are, as a rule, at the lowest, no more than 10%, and are possible only if an operator has required resources. “Demands are, however, strict and vast,” he said.

“For example, the economy of projects would not allow the companies to engage expensive specialists and loans, while Rostelecom already has much of the above, and manufacturers of equipment and sub-contractors are ready to grant big discounts on huge volumes.”

Rostelecom started building the required infrastructure beforehand, and its capital expenditures will not exceed 15 billion–20 billion rubles in 2018, with the bulk of it to be taken from the government under target programs to develop the digital economy, Vashchenko said.

The Promsvyazbank analyst does not think Rostelecom would face huge capital expenditures while connecting new subscribers, but the investment program for 2018–2019, currently weighed at about 60 billion rubles, could be raised.

Besides, although the decree does not include mobile connection yet, services of Rostelecom’s half-owned mobile operator T2 RTK Holding (Tele2) could be promoted under its umbrella, which could raise the cumulative effect from the move, Frolov said.

The analysts said the news could propel Rostelecom’s quotes, but not quickly. Rostelecom’s common stock has slid 19.5% since the beginning of the year, closing at 67.61 rubles on October 12 on the Moscow Exchange. Preferred stock lost 15.7% to 52.91 rubles.

UralSib Capital said in its research note that Rostelecom more than other operators depends on involvement into state projects. “It creates options for getting an additional income, but only partially helps offset shrinking incomes from traditional connection services,” the analysts said.

According to the Freedom Finance analyst, Rostelecom is seriously underestimated and valued below its balance cost despite the lack of a bankruptcy risk and a positive profit margin. “Growth potential for the common shares is some 30% with the target of 87 rubles on the horizon of seven months,” Vashchenko said.

Frolov said, “We think the news could support Rostelecom’s quotes, and our fundamental guideline for ordinary shares is at 86 rubles and 73 rubles for preferred stock with a Hold recommendation.”

(57.6196 rubles – U.S. $1)

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