Daily analyst comments
MTS continues to broaden its sales channels: a virtual operator may be formed with X5 retail group
29.07.09 11:01
In contrast to the development of an in-house retail network, the establishment of a mobile virtual network operator (MVNO) is a practical and low-risk alternative to create a new channel for the sale of cellular services.
On July 28, Vedomosti cited unconfirmed information alledging that X5 Retail Group has signed a memorandum of intent with MTS to establish a mobile virtual network operator within the MTS network. Under the agreement, X5 is to buy the traffic at a significant discount, assuming all current expenses of a ‘non-technical’ nature (marketing, billing, production of SIM cards, etc.).
Russia has already had examples of MVNOs: Euroset, for one, has been operating in the Volga region since 2007, using the SMARTS network. Earlier still, in 2003, Corbina Telecom provided DAMPS services, efffectually under license from Vimpelcom. Admittedly, there are no cases as yet of successful virtual operators being established in Russia, in contrast to European countries, where this type of niche business has become common: such operators typically charge relatively special tariffs on some specific services such as data transmission, 3G, international telecoms and roaming.
We are upbeat on the initiative to establish a virtual operator with Russia’s leading retail network. Unlike investments in the formation of an in-house retail network (the company has also done work in this direction as well – see daily of July 27), the establishment of an MVNO makes it possible to get a large number of valuable subscribers and maintain margins on an in-house business without bearing large expenses on infrastructure. What is more, a virtual network should enable MTS to sharpen its focus on cellular telecoms services, (i.e., on its core business), rather than on relations with clients.
We assign a BUY rating to MTS shares, with a target price of USD 11.71 per share as of year-end, 2010.