FOCUS: Rostelecom’s 5-year strategy seen ambitious, but hard to achieve

By Yekaterina Yezhova

MOSCOW, Apr 2 (PRIME) -- A new development strategy of Rostelecom for 2018–2022 is enthusiastic and the dividend plans are good, but the Russian state-controlled telecom operator could get trapped by its own hawkish plans if it misses the targets, analysts and investors say.

“Strategy and dividend policy parameters look rather advantageous from the shareholder point of view, offering a combination of good growth rates and an attractive dividend yield,” investment company UralSib Capital said in a research note.

“But targets for growth, margin and capital expenditures look quite aggressive compared to expectations of other Russian connection operators, and the risk that the company fails to attain them could not be ignored by the market.”

Rostelecom’s new strategy stands on four pillars: development of products and services and customer experience improvement; modernization of the technological platform; improvement of the human resources function; and efficiency enhancement.

CEO Mikhail Oseyevsky said the five-year roadmap aims at transforming Rostelecom into a provider of digital solutions for all key client segments. “We have also accomplished an important target of the strategy alignment with the state digital economy program where we play a significant role as an offtaker,” he said at the presentation of the plan.

Natalya Milchakova, deputy director of the analytical department at Alpari, said that the strategy’s intentions are good, but hard to attain.

“We may positively assess that Rostelecom as a state company will take part in such government modernization initiatives as elaboration of the electronic government, digitization of state services, creation of smart cities,” she told PRIME.

“However, in the best case scenario, we think these plans are only partially feasible. In the worst case scenario, they’re unachievable. The problem is in the quality of the company’s management and its frequent reshuffle.”

Financial targets

The operator expects its revenue to grow by 4–5% on average per year in 2018–2022 to 375 billion rubles in 2022, after a 3% rise in 2017 to 305.3 billion rubles.

“The revenue outlook seems rather ambitious, keeping in mind that a significant part of income still originates from fixed-line telephony, whose revenue continues to shrink,” UralSib Capital said in a research note.

Rostelecom said its fixed-line voice revenue will lose 40 billion rubles in the coming five years, but it will be offset by growth of digital sales.

The operating income before depreciation and amortization (OIBDA) margin is seen at over 32% in the forecast period, close to 31.7% in 2017. The capex/revenue ratio, excluding state programs, will decrease to 17% in 2018–2022 from 19.9% in 2017. Starting from 2019 Rostelecom will invest 1% of sales, or 5% of capex, into the development of innovative technologies.

The operator will downsize its staff by 10–15% to 115,000–120,000 people by 2022 from 134,000 at present, according to the strategy.

Rostelecom expects to receive more than 30 billion rubles from its real estate property management in 2018–2022: half from sale and half from renting out. The real estate portfolio will shrink to 7 million square meters by 2022 from 8.6 million square meters in 2017, which will enable the company to save 3 billion rubles in 2018–2022 and over 1 billion rubles per year after that. In 2017, Rostelecom raised 4.4 billion rubles from excessive property sales.

Investment company Aton regards the strategy as clear and ambitious, and therefore positive for sentiment. Investors will appreciate the optimization strategy, it said in a research note.

Milchakova, however, is critical: “A beautifully painted presentation is certainly good of the new management, but hard-to-achieve promises are more likely a cover version for old ideas.”

Dividends

Rostelecom CEO Oseyevsky said that consistent execution of the plan will pave the way for solid dividends for shareholders. “Our ambition is that Rostelecom shares be amongst the most attractive ones from the dividend yield perspective,” he said.

VTB Capital equities analyst Ivan Kim said the new dividend policy stipulates a 7.3% yield on common and an 8% yield on preferred shares.

The new dividend policy provides a pay-out of at least 75% of free cash flow, or 5 rubles per share minimum, and 50–100% of the net profit calculated under International Financial Reporting Standards (IFRS). Rostelecom paid 5.4 rubles per common and preferred share in dividends for 2016 and 5.9 rubles for 2015.

UralSib Capital said the new dividend plan “complies with the previous strategy and maintains the company’s status as one of the most attractive in the sector,” but Sberbank CIB pointed to key drawbacks, like the lack of a clear commitment to higher dividends.

Rostelecom’s common shares climbed 6% since the start of the year as of March 30, which is close to mobile giant MTS, whose common shares advanced 6.6%, and to the telecom index with a 6.8% rise.

The government owns 45.04% of Rostelecom’s capital; state development bank Vnesheconombank has 3.96%; Mobitel, Rostelecom’s subsidiary, has 12.01%; and 38.98% are free float.

(57.2649 rubles – U.S. $1)

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