Research Notes
MTS: the cost of the crisis
| 23.03.09 |
MTS is the first company in the telecoms sector to disclose FY 2008 finances. Having analyzed the disastrous impact of the fourth quarter, when CIS economies and currencies went into a spin, we have updated our valuation model for the company.
- The CIS cellular phone market has reached saturation point: the telephone penetration rate in Russia and Ukraine, the two core markets for MTS, rose to above 120% in 2008. On the Russian market, the company is firmly in the lead in terms of the size of its subscriber base, having seen its respective market share grow to 35% in 2008, from 33% the year before. The company’s subscriber base in Ukraine virtually coincides with our estimates: MTS’s market share in Ukraine has shrunk, and MTS management has not devoted enough attention to the region.
- We view the company’s FY 2008 financial results as neutral. On the one hand, the company’s revenue, ARPU and net income fell short of expectations, while its capex outpaced expectations. On the other hand, the company reported a robust EBITDA margin. In the current climate, even the moderately negative news that the company does not plan to raise its tariffs and peg them to the dollar in advance of looming price wars, looks neutral or even positive, given that the overall economic conditions are even worse.
- MTS management has voiced a plan, which we find quiet appealing: it calls for maximum possible cuts in capex, payroll costs and marketing expenses. The company has already notably limited the recruitment of new employees and stemmed growth in wages.
- Consolidation of Telefon.ru has prompted us to raise our outlook for MTS revenues in the forecast period by 6% and simultaneously lower our estimate of the EBITDA margin by 2%. Investments into a retail network of its own seem to make sense, but the prospects for this undertaking hinge on how the future network is managed. The acquisition has lifted the estimated price of MTS shares by approximately 1%.
- The company’s financial position raises no questions as its debt could have been much higher than the net debt/EBITDA ratio of 0.6 at the close of FY 2008. Debt servicing had caused no problems, with just slightly over 2% of operating income spent on interest payments. We foresee a gradual shrinkage of debts in the forecast period, which will make the company’s net income even more immune to fluctuations in the dollar rate.
We are upbeat on MTS shares as a vehicle for investment. Despite the saturation of the cellular phone market, the company has good prospects, stable finances and low leverage. Another important factor is that MTS shares have a significant upside potential in fundamental terms. We assign a BUY recommendation on MTS shares and set a year-end 2009 target price at USD 10.55 per share.
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Sector: Telecommunications, ITCompany: Mobile TeleSystems