Research Notes
MTS: leader amid crisis
| 28.11.08 |
In the face of the liquidity crisis on world and domestic financial markets, we have decided to update our valuation model for Mobile TeleSystems (MTS) and give our new estimates of the company’s financial indices and requirements for returns on investment. Our updated outlook for MTS specifically takes account of the 9M 2008 US GAAP financials recently disclosed by the company.
The 9M financial report largely outpaced expectations: revenue rose by 32% and the OIBDA margin touched 51%. However, the revenue structure reveals that the company primarily expanded within Russia, while CIS markets were of secondary importance. We view this as a negative trend that gives us no grounds to believe the company is evolving ideally.
Given the role mobile telecoms now play in human life and the low level of ARPU in absolute figures (for MTS, the monthly ARPU averaged USD 11.5 in 3Q 2008), we have concluded that even an acute financial crisis will not force phone users to drastically cut their cellular services. On the other hand, our valuation model takes into account the fact that the company’s revenue hinges on Russia’s GDP; so, we have downgraded our predictive estimate of the company’s revenue on the expectation that the Russian economy will slow down in upcoming years, while holding our outlook for the company’s operating expenses unchanged.
The company’s position on the cellular phone market, as compared to its rivals’, raises no doubts that MTS will retain its leadership in the market. For this reason, we do not expect the company’s financial standing to get drastically worse even if the economy slows its pace.
MTS management are fully aware of the current crisis situation, which has specifically prompted the company to scale down its investment program: the capex target for 2008 has been revised downward from USD 2.5 billion to USD 2.0 billion. We have also cut our projection for capital expenditures by the company in the forecast period. We would like to emphasize that it is highly unlikely that a shortage of investment resources could put MTS business plans in jeopardy: its rivals will likewise also have to cut down on their investment plans and, maybe, to a much larger extent.
We have adjusted our valuation model for the company, lowering our outlook for its revenue and margin indicators. This has brought about a 19% downward revision of our target price for MTS shares. Despite the significant downgrade, the company remains incredibly appealing in fundamental terms, given its market position and liquidity levels, its financial standing and its prospects for development. We estimate the fair price of MTS shares at USD 12.37 per share as of year-end 2009, which implies an upside potential of 241% to the current stock valuations.
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Sector: Telecommunications, ITCompany: Mobile TeleSystems