FOCUS: Russia’s MTS rally propels telecom index higher than broad peer in Q1

By Yekaterina Yezhova

MOSCOW, May 4 (PRIME) -- The Russian telecommunications index, MICEX TLC, outperformed its broader companion, the MICEX index, in January–March, driven upward by the ruble’s strengthening and its pillar, MTS stocks. Dependent on the economy’s health, the industrial index will likely continue moving in sync with MICEX in the months to come, analysts said.

“The main growth factors of the TLC index, in our view, are excessive negative feelings in the sector over 2015, dividend expectations and the ruble’s growth. Tele2’s aggressive efforts to bite a piece of the market did not impress, and investors have started to buy MTS’s stocks, though with some caution,” Ilya Balakirev, analyst at investment company Premier, told Russian Connection.

The TLC index gained 7.0% since December 30, 2015, closing at 1,799.36 points on March 31. The MICEX index climbed 6.2% to 1871.15.

The TLC index comprised six securities as of March 31: 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 the weight of stocks in the TLC index as of the end of March:

Of the three heaviest stocks in the index, common shares of MTS and Rostelecom advanced in January–March by 14.3% to 240.1 rubles on March 31 and 8.9% to 98.6 rubles respectively, while common shares of MegaFon lost 11.8% and closed at 750 rubles.

“More than 95% of dynamics of the TLC index is determined by only three stocks: MTS, MegaFon and Rostelecom’s common shares. MTS held 55–60% of the index’s whole weight during the first quarter and a rising price of its shares along with a big share in the index allowed the indicator to offset the negative effect from shrinking capitalization of MegaFon,” Vasily Koposov, an analyst of the asset management department at KIT Finance Broker, said.

As a result, MTS became the main driver of the TLC growth, the analyst said.

At the end of 2015, MTS’s shares were among outsiders on the stock market. “A weak investor interest to MTS was explained by a number of factors. First, the company’s dividend policy, adopted several years ago, was to expire in March. Investors were worried that amid an unfavorable situation on the financial market, the operator’s board of directors would not prolong hefty dividend payments,” Koposov said.

“Second, 32% of MTS’s debt is denominated in foreign currency. With a prevailing part of income in rubles, devaluation of the domestic currency raises debt servicing costs undermining the company’s profitability.”

The ruble’s firming, which started in February, along with the approval of a new dividend policy, which stipulates dividends of at least 20 rubles per share in 2016–2018, and a lag of MTS’s shares from other stocks resulted in a delayed demand in March–April, Koposov said.

“MTS’s stocks were among the best performers due to good financial results, less encouraging figures of rivals and dividend expectations. Some stocks of the TLC index, like Rostelecom and MGTS, showed strong dynamics in January–March, but earlier they decreased after a New Year rally and could later boast less outstanding dynamics as a result,” Balakirev at Premier said.

“MegaFon seems to be an outsider due to poor dividend expectations, the fact that it was oversold at the end of 2015, which forced the stocks to keep lower during the whole of the first quarter.”

Koposov added that MegaFon’s dividend prospects will depend on the company’s financial performance in 2016. “I’d remind that MegaFon’s management expects OIBDA to slid 5–9%,” he said.

Senior analyst at Bank Obrazovanie Vitaly Manzhos told Russian Connection that a difficult economic situation in the country is a factor of risk for telecom companies. “It worsens prospects of firms targeted at the internal demand,” he said.

Close prospects

The industry’s index seems to continue following its broader peer in general in the nearest future, the analysts said.

“Certain stocks can be skittish because of the looming closure of shareholders’ registers for dividends. However, the ‘seasonal’ move is pandemic for the whole market,” Manzhos said.

Koposov at KIT Finance Broker sees MegaFon’s shares continue fluctuating at 700–750 rubles and MTS’s shares try to reach a 270 ruble notch.

“The index’s further dynamics will depend on the situation on the foreign exchange market. Approaching dates of closures of shareholders’ registers will be supporting the market, but the index will unlikely strongly overtake the broad market,” Balakirev said.

On foreign floors

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

MTS’s American Depositary Receipts (ADRs) on the New York Stock Exchange jumped 30.9% in January–March closing at U.S. $8.09 at the end of March. VimpelCom Ltd.’s ADRs on the NASDAQ floor added 29.9% and closed at $4.26 on March 31, while Global Depositary Receipts (GDRs) of MegaFon sagged 5.6% to $11.00 on the London Stock Exchange.

“VimpelCom Ltd. grew on internal factors as well as MTS. MegaFon’s receipts went down on poor dividend expectations,” Balakirev at Premier said.

(64.3334 rubles – U.S. $1)

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