FOCUS: Ruble devaluation slows down MTS-led telecom index growth in ‘15

By Yekaterina Yezhova

MOSCOW, Dec 21 (PRIME) -- The Russian telecommunications stock index advanced slightly less than the broad index in 2015 as negative trends on the market were still in force, including the ruble devaluation that dwarfed operator’s incomes. MTS pushed the index higher, while Rostelecom limped, although analysts are more optimistic about the state-controlled company’s further performance.

“The telecom industry has been depressed this year by external circumstances, like other consumer industries. The key causes include downsized spending of companies on connection and additional services. The same trend is evident in the retail sector. Consumers are switching from calls to traffic,” Vladimir Kapustyansky, a senior manager at KIT Finance Broker’s asset management department, told Russian Connection.

Other reasons include a high share of foreign equipment used by telecom operators and expenses on its maintenance, as well as higher spending on introduction of new services, he said.

Sergei Ilyin, an analyst at investment company Premier, said that the situation in the telecom sector is stable, but long-term trends are still discouraging. “Competition intensifies, while the capital-output ratio remains high with no increase in incomes per subscriber in view,” he said.

“Operators actually invest to hold their share of the market. The number of services for which subscribers are ready to pay is vanishing, and the margin is shrinking. Telecom companies grant high dividends, but the idea seems not so much appealing to investors in conditions of the ruble’s devaluation.”

The telecom companies tend to cut costs, spin off and merge infrastructure to have a more flexible control over spending. State regulation of the industry, including abolition of internal roaming and introduction of mobile portability, is also negative from the point of view of the companies, Ilyin said.

The MICEX TLC index comprised six securities as of December 17: common shares of mobile operators MTS (MTSS) and MegaFon (MFON); common and preferred stocks of state-controlled Rostelecom (RTKM, RTKMP); preferred shares of Moscow City Telephone Company (MGTSP), a fixed line unit of mobile operator MTS; and preferred shares of Central Telegraph (CNTLP).

Below is a breakdown of the index as of December 17:

“MTS lagged far behind its peers last year due to the story with Yevtushenkov and caught up with the market this year,” Andrei Stoyanov, an asset manager at BCS, said.

Vladimir Yevtushenkov, head of MTS’s main shareholder Sistema, was kept under house arrest for several months at the end of 2014 following a probe of illegal privatization of oil company Bashneft in 1990s.

Ilyin at Premier also said that MTS regained its leadership in 2015, as “it effectively holds its market share keeping a high margin and a lavish dividend yield.” MTS’s common shares ratcheted up 30.3% since the beginning of the year as of December 17, and MegaFon’s common shares went up 13.7%.

Rostelecom is still undergoing restructuring after spinning off its cellular assets and merging them with Tele2 to create the country’s fourth largest federal operator after MTS, MegaFon and VimpelCom, working under the Beeline brand.

“After the Tele2 deal, Rostelecom may keep not the most attractive, but clear and transparent assets, like fixed line telephony and broadband. In total, we affirm a positive outlook for the company, but the market is more skeptical. Possibly, a promise of more generous dividends will improve the situation,” Ilyin said.

Rostelecom’s board of directors has tied dividends to a free cash flow instead of a net profit and said it will pay at least 45 billion rubles in 2016–2018.

Rostelecom’s common shares have risen 6.3% since the beginning of the year.

On foreign floors

MTS, MegaFon and VimpelCom Ltd., an Amsterdam-based sole owner of VimpelCom, trade abroad in the form of depositary receipts.

Since the beginning of the year, quotes of MTS’s American Depositary Receipts (ADRs) on the New York Stock Exchange have slid 16.9%. Global Depositary Receipts (GDRs) of MegaFon have sagged 9.9% on the London Stock Exchange over the same period.

“Investors are fond of MegaFon mostly thanks to it being a new security, as its IPO took place not a long time ago and large investors are not in a hurry to sell shares,” Ilyin said.

“As to the others, the trends are the same: the companies face partially foreign currency expenses, but ruble-denominated incomes, that is why the ruble’s tailspin suppresses quotes.”

“Among all domestic telecom companies, VimpelCom Ltd. was the only to perform worse than Rostelecom. VimpelCom Ltd. will have to pay for the rapid expansion inside the CIS,” Stoyanov at BCS said. VimpelCom Ltd.’s ADRs have plunged 31.9% on the NASDAQ since the beginning of the year.

VimpelCom Ltd. is involved in a multi-national bribery probe about its entrance to the Uzbek market. The company already set aside U.S. $900 million for potential fines.

The NASDAQ said earlier it will delist VimpelCom Ltd.’s ADRs from its NASDAQ-100 Index from Monday due to the company’s shrinking capitalization. “The exclusion from the index will result in an outflow of investors,” BCS said in a research note.

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