Research Notes
MTS: now also fixed-line telecoms
| 10.12.09 |
By acquiring Comstar’s fixed-line telecoms business, MTS has turned into a company of another magnitude, with a different ideology and financial indicators. After analyzing 3Q 2009 financials from the company and the planned changes in the operator’s business model, we have reviewed our financials forecast and target price for MTS.
- The takeover of a controlling interest in Comstar from Sistema proved to be the key event for the company in 2009. Given the high telephone penetration on the Russian and Ukrainian cellular markets, we look upon Comstar’s fixed-line telecoms business as an attractive asset, even though the core of this business, Moscow City Telephone Network, is subject to tariff regulation by the state. Another important advantage for MTS is that the asset acquired will have practically no debts (provided a transaction with the state for the swap of a blocking stake in Svyazinvest is a success).
- Comstar has been the owner of a blocking stake in Svyazinvest since 2006. Our analysis of the operator accounts neither for this investment nor for its RUB 26 billion debt to Sberbank. Under an agreement between the state and Sistema on the exchange of assets, the blocking stake in Svyazinvest will go back to the state, while the debt to the bank will be written off. We expect the transaction, which is the key to Svyazinvest reform, to be completed in early 2010.
- We view the 9M 2009 financial results from both Comstar and MTS as neutral. Both companies had their revenue indicators impaired by the ruble devaluation in early 2009. We expect their full-year results to be significantly better than their nine-month financials. We point out the strong profit margins of Comstar; a nearly 40% OIBDA margin is a very strong result for a fixed-line operator.
- The retail business, which MTS has actively built up in recent months, has so far shown modest revenue. The company earned just USD 195 million on equipment sales in the first three quarters of 2009. By comparison, Telefon.ru alone (owned by MTS from February 2009) has reported revenues of USD 535 million for FY 2008. We have lowered our revenue outlook for this sector, which has led to a marginal growth in the profitability of MTS as a whole.
We believe that MTS holds appeal as an investment vehicle and raise our target price for the company by 4%, from USD 11.71 to USD 12.17 per share as of year-end 2010. MTS shares have an estimated upside potential of 64%, reflecting the company’s good prospects for revenue growth on highly-penetrated markets, its sound financials and its relatively low financial leverage.
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Sector: Telecommunications, ITCompany: Mobile TeleSystems