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FOCUS: MTS may cut costs, raise shareholder value with MGTS reorganization

By Yekaterina Yezhova

MOSCOW, Sep 9 (PRIME) -- Mobile giant MTS is reported to consider a large-scale reorganization of its Moscow City Telephone Network (MGTS), the capitals biggest fixed-line and broadband provider, to cut the parent companys costs and support quotes in the wake of a possible retreat of its receipts from New York, analysts said.

While its still hard to speak about clear vectors of MGTS reorganization before its official confirmation, MTS is certainly interested in cutting costs and raising operating effectiveness. This is why the most probable incentive for reorganization could be the intention to cut management costs, Dmitry Bedenkov, head of the research department at investment company IC RUSS-INVEST, told PRIME.

Business daily Kommersant said quoting sources that MTS, which owns 94.7% of MGTS capital and 99.2% of its common shares, is studying merging commercial blocks, cutting the management team, getting rid of doubling functions, and promoting household services under the MTS brand to reduce the mobile carriers operating expenses by at least 10% and raise shareholder value.

The matter may be put on the agenda of an autumn meeting of MTS board of directors.

According to researcher TMT Consulting, MGTS held 36% of the Moscow broadband market in AprilJune. On the nationwide scale, MTS together with MGTS was the third largest broadband operator after Rostelecom and ER-Telecom with a share of 10%.

Bedenkov said MGTS margins improved in 2019. In JanuaryJune, MGTS commercial, general, and administrative expenses shrank 10% on the year to 3.4 billion rubles. Stable revenue ensured an increase of the operating margin to 45% from 28% a year earlier, he said.

Lower revenue from fixed-line services was offset by a higher-than-average rise of revenue from broadband services, pay TV, and services of its mobile virtual network operator, functioning on MTS networks. All these profitable services accounted for about 20% of MGTS revenue.

While MGTS IFRS revenue for JanuaryJune accounted for about 8.5% of MTS group revenue, or 19.7 billion rubles against 243.1 billion rubles, MGTS net profit of 7.9 billion rubles was a quarter of MTS group net profit of 30.3 billion rubles. MGTS results are included into IFRS figures of the MTS group.

If the companies succeed in cutting costs without undermining operating activities, while improving effectiveness, MTS shareholders will win because financial results would rise in the medium and long-term and boost potential dividend base, Bedenkov said.

Investment company UralSib Capital agreed that MGTS reorganization could reduce MTS expenses and support the mobile operators margin.

The key factor for MTS quotes will remain the risk of delisting of its American depositary receipts (ADRs) from the New York Stock Exchange in the short term, UralSib said in a research note.

So far, the companies have demonstrated solid growth since the beginning of the year.

On the Moscow Exchange, MGTS common shares gained 20% since the beginning of the year to 2,040 rubles and its preferred shares went up 11.7% to 1,808 rubles on September 5, and MTS common shares put on 15.6% to 275.10 rubles. On the New York Stock Exchange, MTS ADRs added 17.5% since the beginning of the year, closing the September 5 session at U.S. $8.25.

(65.9981 rubles U.S. $1)


09.09.2019 09:21
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