Assessment of the investment potential of Russian mobile network operator MTS

Assessment of the investment potential of Russian mobile network operator MTS

Iuliia Belokurova

Summary: Investment attractiveness is a basic concept that characterizes the ability of invested capital to generate income in the long run. The purpose of this article is to assess the investment attractiveness of a company on the example of the Russian mobile operator MTS.

Key words: investment attractiveness assessment, telecommunications industry.

Investment attractiveness is one of the central concepts in the modern economic system. Before analyzing the investment attractiveness of mobile network operator MTS, I would like to consider the main factors that affect the investment attractiveness of the enterprise. The set of factors and indicators that form the investment attractiveness of an organization can be divided into internal and external. Internal factors that determine the investment attractiveness of an organization include: the economic potential of the enterprise, its financial condition, the level of management and the investment program. External factors that significantly affect the efficiency of an enterprise are understood as the country, region, industry, and direct location of the enterprise, as well as its relationship with the authorities, and the organizational and legal form of ownership of the enterprise.

The main criteria for selecting investment objects in Russia are:

1) organization's management structure;

2) independent Directors;

3) ownership structure;

4) transparency;

5) return on investment;

6) growth prospects;

7) operations on the stock market;

8) duration of investment.

Currently, MTS is the leading telecommunications operator in the Russian Federation. The company together with its subsidiaries serves more than 100 million people. Now MTS is gradually moving away from the role of just a communications and mobile network operator, developing its own ecosystem that affects various industries.

Average trading volume: 450 million rubles per day

Share price: 286 rubles as of 31.10.2019

Capitalization: 575 billion rubles as of 31.10.2019

Official Free-float (shares in free circulation): 45%

Major shareholders:

44.57% - Sistema PJSC

5.36% - Bastion Ltd

5.21% - Stream digital Ltd

0.38% - PJSC MGTS

44.48% - other shareholders

Dynamics of the company's assets

Dynamics of the company's liabilities

After conducting a general analysis of the structure of the company's balance sheet, it turned out that at the end of the analyzed period, the total value of the company's property is 841,624,797 thousand rubles. During the analyzed period, the total assets of the balance sheet increased by 450,151,742 thousand rubles (115.0%). This may indicate an expansion of the company's activities. The company also has a fairly high value of the market value added indicator, which indicates that MTS was able to create significant market value for its shareholders. The value of MTS' residual profit is also at a high level. This indicates that in 2017 it managed to increase the value for shareholders.

Income statement of MTS

Having conducted a general analysis of the income statement, we can conclude that the excess of the rate of revenue growth over the rate of cost growth indicates effective operating activities. Exceeding the rate of revenue growth over the rate of cost growth indicates effective operating activities.

Profitability of sales shows the share of profit from sales in sales revenue. At the end of the analyzed period, the profitability of sales is: 160.5%. During the analyzed period, the profitability of sales did not change significantly.

At the end of the analyzed period, the profitability of all activities is: -789.1%. At the end of the analyzed period, the cost profitability is: -265.3%. During the analyzed period, the profitability of expenses did not change significantly.

Solvency ratio

At the end of the analyzed period, the company's net working capital is 84,003,318 thousand rubles. During the analyzed period, net working capital increased by 98,139,925 thousand rubles (694.2%). To fully reflect the situation with the financing of current assets at the expense of own funds, the share of PSCS in the total assets of the company is determined. During the analyzed period, the share of net working capital in the company's assets increased by 376.4% and amounted to 10.0%. This may indicate an improvement in the company's condition in terms of financing assets from its own funds - an increase in stability and potential solvency.

According to the most important indicators, the financial stability of the company does not raise too serious questions, but MTS does not have enough working capital to pay off short-term debts, and the share of equity in the balance sheet currency is critically small. The indicator that characterizes the financial stability of an organization is the coefficient of autonomy (the ratio of equity and debt capital). At the end of the analyzed period, the value of the autonomy coefficient is 0.134. During the analyzed period, the value of the autonomy coefficient did not change significantly (0.2% per year).

Liquidity

In general, there is a dynamic growth of the main financial indicators. The decrease in net profit by 88% in 2018 is due to a one-time factor (payment for the "Uzbek case"), while revenue, EBITDA and profitability for this indicator are growing moderately. The dynamics of net debt and CAPEX for 2018 can be considered neutral.

For the first half of 2019, MTS ' net profit under IFRS increased by 3.3% to 30.9 billion rubles. The third quarter of 2019 in comparison with the same period last year should be much stronger, since the reserve for the "Uzbek case" was formed in the 3rd quarter of 2018. MTS revenue for the first half of 2019 increased by 9.5% to 243 billion RUB. EBITDA amounted to 111.4 billion RUB, which is 5% higher than in the same period of 2018. The company is characterized by a stable indicator of sales profitability.

In March 2019, the company adopted a new dividend policy. The target dividend rate is at least RUB 28 per share for each calendar year. Previously, annual payments were at the level of 25-26 rubles per share. Dividend yield: from 2014 to the present, the dividend yield is about 8-10% per annum. Frequency of dividend payments is every six months.

Note from 25.11.2019: the Board of Directors of MGTS recommended paying special dividends for 9 months of 2019 in the amount of 13.25 rubles per share. The payment will be one-time. That is, the company's dividend yield for 2019 may be about 13.5% per annum.

Dynamics of MTS shares since the launch of the exchange

In the summer of 2018, MTS adopted a share repurchase program for 30 billion rubles for a period of 2 years. This "buyback", by analogy with the past", was completed ahead of schedule in March 2019. Up to 15% of the total trading volume for MTS on the Moscow exchange was redeemed daily. In September 2019, the head of Sistema, Vladimir Yevtushenkov, said that a new program for the repurchase of MTS shares is not planned.

Back in April 2019, it became known that MTS is considering buying an online cinema " Ivi "for 20 billion rubles." Ivi " is the largest online cinema in Russia with a market share of 36%. This was planned to increase the number of Internet services (Red Taxi, ticket booking, etc.) as part of the policy to transform business from telecommunications to IT. However, since then, no official information has been received regarding this transaction.

In early 2019, the company agreed to pay $850 million to us authorities as a fine for corruption when entering the Uzbek market (bribes to Uzbek officials). Because of this fine, MTS ' profit for 2018 decreased by 88%.

In early 2019, the company announced a possible delisting from the New York stock exchange. Reason: high listing costs, as well as a focus on the Moscow exchange. The news put pressure on the stock due to the potential outflow of some portfolio investors, possible decline in the quality of corporate governance, etc. However, in October of this year, it became clear that there would be no delisting. This was reported by Vladimir Yevtushenkov.

Since June 1, 2019, national roaming has been completely canceled in the Russian Federation. However, it is reported that operators receive only 1.5% of revenue from internal roaming.

At the moment, as a result of two transactions (the first – July 2018, and the second – February 2019) on the sale of MTS-Bank from Sistema AFC in favor of MTS, the Russian Telecom operator received a controlling stake in the Bank. The deal is not the most profitable for MTS – the price was quite high.

At the end of summer 2019, the company announced the reduction of its own network of communication salons. By the end of this year, up to 300 salons should be closed (about 5% of the total number). It is stated that this is all done for the "improvement of operator retail".

MTS plans to invest up to RUB 100 million in an incubation program for 5G startups in Moscow by the end of 2020. Investments are appropriate for the company as part of its digital transformation model.

The President of MTS Alexey Korna argues that in the near future the operator will have to compete with banks and Internet companies. At the moment, more than 20% of MTS' business is not telecommunications products and services.

When evaluating the investment attractiveness of a company, it is impossible not to mention the main risks.

These are the following:

High level of competition in the sector;

Risks of new regulatory changes in the presence of existing ones;

Risks of continued customer outflow;

Sistema may continue to shift "disputed assets" to MTS to reduce its own debt burden.

Factors FOR investing:

a high level of dividend payments, which is highly likely, at least, to continue in the future.

the company actively develops alternative business lines, thereby reducing the damage caused by the reduction of the customer base.

financial indicators of the company are, though in a weak, but rising trend. Payments for the "Uzbek case" are of a one-time nature and have long been included in the quotes.

most analytical companies recommend buying MTS shares with a target range of 310 rubles.

FactorsAGAINST investing:

in the Russian telecommunications sector, there is still a high level of competition, characterized by the inability to significantly increase the customer base.

existing old and likely new regulatory changes carry significant risks for the company.

MTS shares, which guarantee their owners a high level of dividend payments, are a kind of "quasi-bonds", the growth potential of which is quite limited. However, the company, being one of the few available for investment in the sector, looks quite attractive, characterized by the growth of financial indicators, as well as the development of alternative business lines. At the moment, the Russian Federation is in the midst of a trend to reduce the key rate, which may lead to a limited market revaluation of MTS shares due to maintaining the level of dividend payments unchanged.

On the other hand, there are a lot of investment risks, including outflow of clients, relatively high debt burden, regulatory changes, etc. Buy MTS shares should be based on stable dividends, and not on the growth of the exchange rate. In addition, the current price (286 rubles) locally it looks quite high, but the long-term investor should not be seriously concerned about it.

In relation to this company, I have only neutral epithets in my head: "not bad", "stable", etc. Most likely, the shares will continue to move sideways in the coming years, but the high dividend yield will not go away: MTS dividends are critical for Sistema. In General, the paper is decent, but I would like to enter it at the opposite border of the sideways movement, otherwise you can become a "long-term investor" and not by your own will.

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