FOCUS: Rostelecom’s quotes tumble with CEO change, talks on bigger stake in Tele2

By Yekaterina Yezhova

MOSCOW, Mar 20 (PRIME) -- A recent replacement of Rostelecom’s head has worsened turmoil in the company’s quotes, already shattered by the market’s bearish mood. Analysts said that current talks on raising share in Rostelecom’s half-owned mobile operator T2 RTK Holding, which threaten dividends, are adding fuel to the fire.

Sergei Kalugin, who has been at the helm since 2013, was replaced by Mikhail Oseyevsky from VTB Bank. Shortly after his appointment, Rostelecom’s new president said he will focus on cost management, improvement of investment efficiency and relations with T2 RTK Holding, working under the Tele2 brand.

“Probably, cost management, control over expenses, is one of serious resources to improve financial results. And here, perhaps, the bulk of our activities will be concentrated. The company is quite large and constantly works on downsizing,” Oseyevsky told reporters.

His comments about a possible increase in the ownership of T2 RTK Holding from the currently held 45% sent jitters through the market, although Oseyevsky said a 100% consolidation is out of the question.

The other holders of 55% in T2 RTK Holding – a consortium of VTB Bank, Bank Rossiya, insurance group Sogaz and businessman Alexei Mordashov – have never discussed a full sale of their stakes to Rostelecom.

Common shares of Rostelecom on the Moscow Exchange plummeted to 76.20 rubles on March 16 from 81.75 rubles on February 16, when mass media reported on Kalugin’s possible replacement.

The shares lost 11% as of the March 16 closure since January 3, the first trading day of 2017, and 7% since March 6, the company’s first working day under Oseyevsky. Kalugin has repeatedly said that the company’s shares were undervalued.

UralSib Capital said the risk of raising the stake in T2 RTK Holding maintains and will undermine Rostelecom’s quotes in the near-term. Sberbank CIB warned the increase would hit the state-controlled operator’s value.

“Tele2’s debt burden is high, and the company would likely keep on bringing losses in the mid-term, while the purchase price could be extremely high. We see Tele2’s capital at 26.6 billion rubles, while VTB values it at 195 billion rubles, which would mean 107 billion rubles for 55%. It’s five times more than an expected free cash flow of Rostelecom for 2017, and we think the deal could imply a risk for Rostelecom’s dividends,” Sberbank CIB said in a research note.

Anna Ustinova, a leading analyst at KIT Finance Broker, agreed that investors dislike the idea, but said that not only this possibility and management reshuffle are behind falling Rostelecom’s capitalization.

“It’s also a general negative trend on the local market, which has been contracting for six weeks in a row. Sales are of a massive character,” Ustinova told PRIME.

“I’d like to mention the financial results of the company for 2016 disclosed earlier in March. Rostelecom’s statement is slightly below our expectations. A modest free cash flow has discouraged us, and everyone was looking for higher dividends, which could be doubtful in case of spending on a bigger slice in T2 RTK Holding. The company’s quotes reflect some worsening in dividend expectations,” the analyst said.

In order to improve results, Rostelecom needs a stable and company-centered management with experience of work in the industry, as Sberbank CIB said.

“That’s why the change of the general director not only deepen the risks linked to Tele2, but could also cap prospects of growth for Rostelecom,” it said, adding that the reshuffle was a surprise since the operator’s investment attractiveness had improved under Kalugin.

Ustinova from KIT Finance Broker said, however, that Rostelecom’s track record during the time of its former president was not so bright, and results were more than modest from the point of view of financial and operating performance.

“Under Kalugin, the company succeeded in raising its market share, but only slightly. For example, its share on the broadband Internet access market stepped up to 37% from 35% and on the pay TV market to 23% from 22% by subscribers and to 32% from 22% by income,” Ustinova said.

“As to financial results, the outcome is negative. Under Kalugin, the company’s revenue contracted 2.3%, while the net profit tumbled 50%. These results were also certainly impacted by complicated macroeconomic results and stronger competition in the industry.

“When comparing Rostelecom’s shares with those of competitors, we can say, from the point of market multipliers, that its securities are traded with a discount, which is justified by financial results and a heavy debt burden. Rostelecom’s prospects, as well as those of the industry, are limited,” the analyst said.

Rostelecom’s net debt widened 2% in 2016 to 177.5 billion rubles, according to the company’s International Financial Reporting Standards results.

(57.9344 rubles – U.S. $1)

End