FOCUS: With Tele2 aboard, Rostelecom to show solid 2020 results, yet quotes may lag

By Yekaterina Yezhova

MOSCOW, May 25 (PRIME) -- Consolidation of mobile operator Tele2 has already improved the January–March performance of Rostelecom noticeably and will likely continue doing so later this year, analysts said, while some of them are still cautious to forecast a good future for the state-controlled operator’s stocks.

“We think Rostelecom demonstrated robust results and exceeded some expectations. The reporting quarter has become the first to consolidate Tele2 and (cloud services provider) DataLine figures. Revenue from mobile services now accounts for 34% of the operator’s revenue,” investment company Veles Capital analyst Artyom Mikhailin told PRIME.

“Consolidation of Tele2 business has improved Rostelecom’s growth and margin significantly and boosted its free cash flow. Digital services continued to develop quickly, by 63% on the year to 12.5 billion rubles, including projects of the smart city, data processing centers, and cyber security,” the analyst also said.

Total revenue, which has become of higher importance during turbulence, increased by 10% on the year to 121.6 billion rubles in January–March, investment company Algo Capital senior risk manager Vitaly Manzhos said.

Georgy Vashchenko, head of trading operations on the Russian stock market at investment company Freedom Finance, expects Rostelecom’s revenue to increase to 124 billion rubles in April–June.

Manzhos said, “The January–March rise of net income by 1% to 7.7 billion rubles is yet to be seen. We also saw the net debt widen by a noticeable 58.9 billion rubles to 392.8 billion rubles and capital expenditures shrink by 3.8 billion rubles to 22 billion rubles. These two indicators were influenced by consolidation of Tele2.”

The company’s client base of local telephony services contracted by 10% on the year to 15.3 million households in January–March, while the number of Internet access clients rose by 2% to 13.2 million.

Vashchenko at Freedom Finance expects growth of Rostelecom’s revenue from wireline Internet and mobile connection at low 5–8% in 2020, while demand for cloud and digital services could jump by 15–20% amid social distancing. “In general, such climate serves as a powerful driver to switch IT infrastructure to remote services,” he said.

Operating income before depreciation and amortization (OIBDA) rose by 12% to 47.1 billion rubles. The OIBDA margin added 0.7 percentage points to 38.7%.

“Rostelecom’s financial footing is steady. The debt burden of 2.2õ OIBDA is acceptable and does not threaten dividends. The increase of core expenses is under control, and we see the OIBDA margin at 36–37% till the end of the year,” Vashchenko said.

Rostelecom’s negative free cash flow narrowed to 5.9 billion rubles in January–March from 15.5 billion rubles in the same period in 2019, with figures of Tele2 and DataLine taken into account for the both indicators.

Manzhos at Algo Capital said the company’s free cash flow was still negative, a dissatisfying risk factor in the current situation, but a 13% increase of operating income to 18.9 billion rubles is optimistic.

“Consolidation of Tele2 and DataLine may give the company some space to increase dividends in the future,” Mikhailin at Veles Capital said.

Rostelecom CEO Mikhail Oseyevsky said on May 19 the company will stick to its dividend policy despite the coronavirus pandemic and the management board maintains its recommendation to pay 5 rubles per share for 2019.

“The current annual yield of ordinary shares amounts to some 6% and of preferred shares to 6.7%. This is good, but not the best. The main drawback of the securities is that they have not risen much since 2000. In U.S. dollar terms, their price has tumbled over the twenty years. After complete consolidation of Tele2, they still have potential for a strong rise, which may still not happen,” Manzhos told PRIME.

“In view of the economy’s recession and fall of households’ incomes, the 2020 prospects of Rostelecom’s sharers look flat,” he added.

Rostelecom’s ordinary shares added 4.2% since the beginning of the year and closed at 81.62 rubles on May 22 on the Moscow Exchange and its preferred shares advanced by 5.3% to 73.90 rubles.

(71.8804 rubles – U.S. $1)

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