Research Notes
Dalsvyaz: island of stability
| 10.06.09 |
Recently published FY 2008 IFRS financials, the imminent reform of Svyazinvest and the final rejection of a plan to sell off its cellular business, as well as other news, have given us grounds to update our financial model and ratings for Dalsvyaz shares.
The impending reform of Svyazinvest may be risky for all minority shareholders of inter-regional telecoms companies (Russian acronym, MRK), including Dalsvyaz, as it is quite likely that swap ratios will not be very lucrative, given the current market prices of shares in Svyazinvest subsidiaries. As of now, uncertainty still hangs over the details of the reform and consolidation of assets.
The reform could benefit Svyazinvest considerably, leading to lower financing costs, synergy between fixed-line and wireless businesses and lower costs for purchased equipment and services due to economies of scale.
The FY 2008 financial results of Dalsvyaz look sound, with a robust 7% growth in revenue (despite the non-indexing of local phone tariffs), a record high OIBDA margin, a 67% surge in net income and a 13% decline in net debt. However, revenue growth in 2009 may slow in dollar terms due to a stronger US currency.
The head of Dalsvyaz has been appointed to head Rostelecom, most probably in recognition of his success in management. Given the high likelihood of Svyazinvest reform, we do not believe that operating activities at Dalsvyaz will be badly affected by the replacement of its head.
The company has dropped plans to sell off its cellular business, which we regard as a plus under current market conditions, despite the unclear prospects for this business. Making a hefty profit on the sale of a mobile business is hardly possible in times of crisis and it is possible that consolidation with the other mobile assets of Svyazinvest could fuel growth in the value of this business.
As before, our financial model identifies Dalsvyaz as an isolated business, as it is impossible to calculate the effect of consolidation for each specific MRK until the details of the Svyazinvest reorganization are revealed. We also take no notice of any discount, due to the possible ‘loss of value’; following a merger with the overvalued Rostelecom, given that swap ratios for the shares are still unknown.
We are extremely upbeat on the prospects for Dalsvyaz. The company has been showing strong margins, and its financials for FY 2009 are likely to be one of the strongest within Svyazinvest. The company has low debt, virtually all of which is denominated in rubles. In fundamental terms, Dalsvyaz common shares have an upside potential of 113% as of year-end 2009, while its preferred shares have an upside of 101%. A comparative analysis shows that Dalsvyaz is the cheapest MRK operator, which is really unjust, given its sound financials.
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Sector: Telecommunications, ITCompany: Far East Telecommunications Company