FOCUS: Rostelecom likely to top Russia’s TMT sector by revenue next 2 yrs

By Yekaterina Yezhova

MOSCOW, Aug 16 (PRIME) -- State-controlled Rostelecom will eclipse all firms in the next two years in Russia’s technology, media, and telecom (TMT) sector by revenue as seen from its April–June results, which could push buyers to lift the operator’s shares from their lows, analysts said.

“A 9% revenue increase is not simply growth but an extremely high indicator for the telecom companies in the recent years, not only in Russia. Any of its competitors will hardly manage to show the same growth. Rostelecom has won a very large share on many markets for the scale effect – known on the Web as ‘the winner takes it all’ – to start working,” investment company Finam analyst Leonid Delitsyn told PRIME.

“Rostelecom does not take it all, but has already taken the leading positions on such markets as broadband Internet access, and clearly announces the same goal for the other markets, like cloud services, information security, biometry, telemedicine, and the like.”

The company certainly has rivals in every industry of operation, like broadband and pay TV operator ER-Telecom Holding and the mobile operators in provision of broadband services or Internet giant Yandex and bank-turned-ecosystem Sber in the artificial intelligence sphere.

“But none of the Russian telecom firms or TMT firms will catch up with Rostelecom by revenue in the next two years. Rostelecom will take advantage of the scale and synergies, because despite its presence in many fields, they all focus on telecom and IT. For example, the operator has no media assets or projects in e-commerce or financial services. Perhaps, in two years, when new sources of growth are needed, Rostelecom will acquire a player in these industries,” Delitsyn said.

The company’s April–June revenue advanced by 9% on the year to 138.6 billion rubles. Of the total, mobile services revenue rose by 12% to 47.9 billion rubles; broadband services revenue added 7% to 23.8 billion rubles; digital services revenue jumped by 19% to 17.9 billion rubles; and TV services revenue grew by 7% to 9.9 billion rubles. Fixed telephony revenue decreased by 10% to 12.3 billion rubles.

Operating income before depreciation and amortization (OIBDA) increased by 15% to 55.9 billion rubles, and the OIBDA margin went up 2.1 percentage points to 40.4%. The company reported a free cash flow of 1.1 billion rubles against a 9.6 billion ruble loss in the same period of 2020.

Artyom Tuzov, executive director of the capital market department at investment company Univer Capital, said that Rostelecom’s business is stable and the 2020 crisis year did not hurt the company much. Its upbeat figures are organic, not a recovery.

Rostelecom’s net income rocketed by 46% to 11.2 billion rubles, “which became a strong signal for the stock market to get emotional. The stock market, which has valued the company in the recent month strictly judging by the dividend volume, seems to have believed in growth,” Delitsyn at Finam said.

Investment company Veles Capital analyst Yelena Kozhukhova said that Rostelecom’s ordinary shares are firming technically from the end-2020 lows. “Buyers look ready to lift the stocks from the bottom,” she said in a note.

Rostelecom’s ordinary shares edged down 1.5% since the beginning of the year and closed at 95.30 rubles on the Moscow Exchange on August 13. The preferred shares gained 3.2% to 88.30 rubles.

“Rostelecom’s preferred shares are now traded at the level of early 2021. Rostelecom said it could raise dividends to 5.5–6 rubles per share, which translates into a yield of between 6.4 and 7% per preferred share for 2021 and from 11 to 14% of the dividend yield by 2025 at current prices,” Tuzov at Univer Capital said in a note.

“Rostelecom’s preferred shares can be seen as quasi-bonds with a rising coupon, and they can be interesting for adding to a portfolio by conservative investors.”

Broker dealer Xtellus Capital Partners’ equities analyst Ivan Kim sees the 12-month target for the ordinary shares at 145 rubles and 120 rubles for the preferred stock with the Buy recommendation for both.

“We recommend ‘Hold’ for Rostelecom’s ordinaries with a target price of 115 rubles for the end of the year,” Delitsyn told PRIME.

(73.4721 rubles – U.S. $1)

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