Research Notes
Sibirtelecom: fundamentally appealing MRK
| 12.02.09 |
We are resuming our analytical coverage of Sibirtelecom shares in view of the drastic changes that have occurred in the Russian economic climate and the new prospects for the company and the industry at large. Aware of the crisis, we have adopted a conservative approach towards our forecasts and have based our outlook for the company on a moderately pessimistic scenario. However, even under this scenario, Sibirtelecom shares seem undervalued.
- We are positive about fixed-line telecoms in terms of the risks involved in revenue generation. It is difficult to imagine that phone users would ever give up their customary life styles, inconceivable without telephones. Given the company’s monopoly position in the region and the low cost of fixed-line telecoms in the average consumer basket, we do not see any realistic scenario whereby the company’s ruble revenue would ever dry up.
- In addition, the company runs a stable and promising mobile phone business, enabling it to factor in robust long-term growth in cellular revenue, which offsets the implications arising from state regulation of fixed-lined telecoms. Mobile telecoms are a high-margin business, making it possible for the company to reap higher profits than the interregional phone companies engaged solely in fixed-line telecoms.
- The most serious risks now faced by the operator are ruble devaluation and high borrowing costs. We have used an average ruble/dollar rate of 33.06/USD for FY 2009 in our valuation model for the company. In dollar terms, the company may post negative proceeds for 2009, and investors should be prepared for that.
Inflation and ruble devaluation are closely interrelated: should the ruble sink to new lows, the company may see revenues drop due to exchange differences, but the fall could be offset by the steeper indexing of phone tariffs, although with a noticeable time lag. - We estimate the risk of growth in the company’s interest expenses as fairly high. However, there are two factors that benefit the company: Firstly, it is very unlikely that the state, represented by Svyazinvest, would allow a situation in which Sibirtelecom faced a default or a shortage of current assets. To add to this, 74% of the company’s debts are in rubles, making them easier to service.
- We have raised the required rate of return on investments in Sibirtelecom due to growth in the riskless rate and risk premium. We have also cut our projections for the company’s revenue and expenses, and insignificantly lowered our outlook for growth in the company’s subscriber base in the fallout of the economic crisis.
Despite current adverse conditions and instability on financial markets, the company continues to hold fundamental appeal, gaining from its clear competitive advantages and stable financial position. We estimate an upside potential for the company of 305% for common shares and 264% for preference shares as of year-end 2009.
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Sector: Telecommunications, ITCompany: SibirTelecom