FOCUS: Russian software law, taxi unit’s IPO likely to benefit Yandex in 2020

By Yekaterina Yezhova

MOSCOW, Feb 25 (PRIME) -- Yandex has disappointed the market with its 2019 results and a conservative 2020 guidance, but analysts say the tech giant has all the chances to win investors back thanks to the law on compulsory preinstallation of Russian software on gadgets and a probable floatation of its growth-champion, the taxi-hailing business.

The net income plunged 75% in 2019 to 11.199 billion rubles. Investment company Veles Capital analyst Artyom Mikhailin explained the fall by the high base effect as the company deconsolidated Yandex.Market worth more than 30 billion rubles in 2018.

Total revenue grew by 37% to 175.391 billion rubles. Total online advertising revenue rose by 18% to 121.738 billion rubles, and revenue related to the taxi segment jumped by 97% to 37.931 billion rubles. Adjusted EBITDA rose 29% to 51.014 billion rubles.

“Advertising revenue is a rather mature source of income and a stable ground used to finance new business directions. Therefore, we can expect a more active rise of revenue in other segments. As to online advertising, it’s important here not to hike revenue aggressively, but to maintain the position,” investment company Algo Capital senior risk manager Vitaly Manzhos told PRIME.

Yandex expects its revenue to increase by 22–26% in 2020 to 214–221 billion rubles. Alfa-Bank said the company normally tends to be cautious at the beginning of the year.

“We view the current 2020 outlook as conservative and believe it will be revised up later,” Mikhailin at Veles Capital said.

Georgy Vashchenko, head of trade operations on the Russian stock market at investment company Freedom Finance, expects the company’s revenue at 215 billion rubles as of the end of 2020, EBITDA at 65 billion rubles, and profit at 35 billion rubles.

“Judging by the main multipliers for 2021, Yandex trades similar to Google and Mail.ru, but below Alibaba and Baidu. Its shares look overvalued for the current year. I assume that foreign funds will not revise their positions in the shares of Russia’s leading Internet giant, whose business extends to the retail services segment, like taxi and delivery,” Vashchenko said in a research note.

“Competition with Mail.ru on the market of advertising and taxi does not threaten Yandex, but could slow down the margin growth in these segments. The quotes would be most likely within the range of 2,800–3,000 rubles till the end of the quarter,” Vashchenko said.

Yandex’s ordinary shares increased 10.8% since the beginning of the year to 2,988.40 rubles on February 20 in Moscow and its American depositary receipts (ADRs) rose 7.3% to U.S. $46.67 in New York.

Alfa-Bank said Yandex’s market position and revenue could improve when the new law on pre-installation of Russian applications on new digital devices comes in force, which is on July 1.

“In our view, Yandex’s growth pace is not under the question by investors given the solid portfolio of rapidly expanding projects, like food delivery, car-sharing, Zen. We expect the focus to gradually move to profitability, as core Search & Portal remains the main source of EBITDA generation, and the timing of other segments getting on the sustainably positive profitability track gains importance,” the bank said.

Manzhos at Algo Capital said that the main threat for Yandex has nothing to do with its business, but regulation. “As experience shows, Yandex’s quotes plunged on the news about possible adoption of a bill on significant Internet resources, which is not still abandoned, but revoked for deliberation,” he told PRIME.

“We should understand that the bourgeoning IT industry is depressed by the lengthy trend of toughening of laws. The recent story with revision of Yandex’s management structure looked like forcing the company into obedience, but investors and speculators turned a blind eye to it because of bright market prospects of the company.”

Mikhailin at Veles Capital said, “On the whole, we like Yandex’s shares.” The company’s core and new businesses will continue to expand fast, and its prospects have improved with the law on compulsory preinstallation of domestic software on digital devices and the purchase of assets of group Vezyot, which is still being considered by the Federal Antimonopoly Service.

“The projected initial public offering (IPO) of the company’s online taxi hailing business Yandex.Taxi could also be beneficial for the company’s quotes,” he said.

Investment company Aton said that Yandex.Taxi’s IPO in 2020–2021 will be an important potential catalyst for the stock.

According to earlier reports, a joint venture of Yandex.Taxi and Uber, MLU BV, is said to be preparing for a dual listing in Russia and the U.S. with potential valuations ranging from $5 billion to $8 billion.

(64.3008 rubles – U.S. $1)

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