FOCUS: Russian telecom shares to sag as investors look for new opportunities, on MTS woes

By Yekaterina Yezhova

MOSCOW, Jul 10 (PRIME) -- Russia’s telecommunications index will continue to dip in the second half of the year as investors are looking for more promising new technology stories, while the indicator’s key component, MTS, is depressed by a staggering U.S. $3 billion suit against its core shareholder, analysts said.

“On the one hand, telecom companies are frank about flagging prospects. MTS President Andrei Dubovskov called the current stage of the Russian connection development as ‘a zone of bad stability’. On the other hand, the market has been waiting for a new technological wave for a long time, and like a thirsty wanderer in the desert has seen a glimpse of an oasis,” Finam analyst Leonid Delitsyn told PRIME.

“Every day market players read in press that new tools, like cryptocurrencies, have tripled in price since the beginning of the year. There are all prerequisites for scenarios similar to those of the late 1990s, when the market sold quite well-performing telecom companies, oil majors, and airlines to raise money for the purchase of Yahoo!, Lycos, Excite, and other firms of the new economy.”

However, the industry indicator has resisted the general stock market weakness losing 9.4% since the beginning of the year against a 15.8% slump of the broader MICEX.

“We think that the fall of the telecom index in January–June was restrained primarily by an upward revision of dividend policy of major companies or by changing the method of their calculation. For example, MTS now links dividends to a free cash flow instead of a net profit, which translates into higher dividends per share,” Natalya Milchakova, deputy director of the analytical department at Alpari, said.

Below is a breakdown of the TLC index by the companies’ stocks it comprised as of June 30:

MTS and MegaFon

Heavily dependent on MTS’ shares, the telecom index moved in line with the stock that also lost 9.5% since January 1 and closed at 234.50 rubles on June 30.

MTS supported its quotes by spending 10 billion rubles to buy back 35.1 million shares in October 2016–March. “The buyback program could be expanded to 30 billion rubles in the next three years. We think, the move hugely helped the company to maintain its quotes,” Delitsyn at Finam said.

The stock has been undermined by a 170.6 billion ruble lawsuit filed by oil major Rosneft against MTS’ core owner multi-industry holding Sistema. A court has frozen Sistema’s assets worth 185 billion rubles, including a 31.76% stake of its 48.94% interest in MTS’ charter capital.

“In addition to corporate conflicts, there are other factors. The Russian mobile connection market is stagnating, and high growth rates are in the past. MegaFon showed strong January–March results but only thanks to the purchase of control in Internet behemoth Mail.Ru Group. From the point of view of organic growth, that is without the deal, results of the telecom giant look much weaker,” Milchakova at Alpari said.

MegaFon’s common shares dropped 7.2% since January 1 to 538 rubles on June 30.

Delitsyn at Finam said new niches, like retail, broadband, and system integration, cannot compare with the mobile connection by revenue.

“In faster-growing industries, like the Internet business, big players have become even bigger, up to the scale of telecoms or more. Telecom companies will unlikely buy a permit to the digital future at a cheap price. They hire international consultors to elaborate strategies, but only general phrases have been voiced so far, and strategies do not look like convincing growth roadmaps,” he said.

Rostelecom

Rostelecom’s common shares lost 15% since the beginning of the year to 71.37 rubles as of the end of June.  The state-controlled company appointed Mikhail Oseyevsky, a descendant from VTB Bank, as president for five years.

“Apart from the management changes, we think that Rostelecom’s quotes are depressed by reports of the company’s intention to gain control in mobile operator T2 RTK Holding (working as Tele2), where it already holds 45%,” Milchakova said.

“Investors don’t like the possibility of Rostelecom’s growing debt burden as a result of such a deal. By the end of the year, dynamics of Rostelecom’s shares will be set by the fulfillment of the intention and financial results of the state-controlled operator itself.”

As Oseyevsky said in March, shortly after his appointment, Rostelecom will cut costs while moving towards digital services and bridging the digital divide.

“While informatization of commercially-irrelevant regions is crucial for people and international ratings, it’s no less important for the company that the government will finance this unprofitable activity. The main shareholder appointed the new director to look for profitable vectors to develop communications in remote areas at the expense of the company’s profit instead of spending budget money,” Delitsyn said.

“Oseyevsky was cautiously optimistic about the task. Where can minority holders see optimism when the company bears the social burden that should be carried at the expense of internal resources, meaning that minority holders along with the government should invest into the country’s digital future. The country will certainly win, but minority holders are still thinking of other ways to invest money, like in bitcoins, for example.”

Outsiders

Although not included into the index, but watched by PRIME’s journal Russian Connection, Central Telegraph, the country’s oldest telecom operator now working in Moscow and the Moscow Region, nosedived 26.8% in January–June to 18.3 rubles on June 30.

“Investors have never been much interested in Central Telegraph, and the few who have been were discouraged by weak financial results for January–March,” Milchakova said.

On the contrary, common shares of Moscow City Telephone Company (MGTS) shined with a 73.5% growth thanks to paying 22 billion rubles in dividends for 2016, which is twice the size of its net profit for the year. MTS held 94.6% in MGTS’s charter capital, or 99.1% of common shares, as of March 31.

“In such a way, MGTS’s dividend yield turned out to be the highest on record at about 26%, which is several times more than the country’s annual inflation. Probably, such a dividend requirement came from the core shareholders, indirectly comprising Sistema that might need money due to the conflict with Rosneft. Similar growth does not usually last long and could dwindle in the second half of the year,” the Alpari analyst said.

(60.3792 rubles – U.S. $1)

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