Mobile TeleSystems: A Stable Company With Growth Prospects And Generous Dividends (NYSE:MBT)


Note: Some of the source links in this article are in Russian.

Mobile TeleSystems (NYSE:MBT) (“MTS”) is a major Russian telecommunications company that provides mobile and fixed-line communications services, broadband internet, TV, and related services. In addition, MTS offers banking, digital, media services (jointly with the First TV channel), as well as develops cloud technologies. 85.2 mln users benefited from mobile communications services provided by MTS in 1Q20. Russia accounts for 98.7% of the company’s revenue.

Mobile TeleSystems 1Q20 revenue structure

Mobile communications and internet services accounted for the largest part of MTS revenue (65.2%) in 1Q20. Also, sales of devices and fixed-line communications services bring the company considerable profit.

Sources: company data

Mobile communications and internet

Over 78.5 mln people in Russia use MTS services. The company is one of the leaders of the telecommunications area. Mobile TeleSystems earnings grew 6.9% y-o-y in this area in 1Q20. In general, the number of MTS service users and the amount of time they spend on mobile phone calls has remained unchanged (+1.2% y-o-y). Given a slight decline in the Russian population (146.748 mln people as of January 1, 2020, vs. 146.780 mln people as of January 2019), the numbers suggest Mobile TeleSystems market share has not changed.

Sources: company data

What is more, mobile internet has gained in popularity: the volume of traffic has increased by over 50% a year, more and more users of telecommunications services start surfing the net using their mobile phones (their number rose 3.7% to account for 63.5% of users of mobile communications services). The volume of data usage surged 50.5%, it similarly went up 50.4% y-o-y in 1Q19. This trend is common for the entire market, and it may bring more profit to telecommunications companies in the future.

Sources: company data

Fixed-line telecommunications

Mobile TeleSystems also offers fixed-line telecommunications for individual and corporate clients. MTS has a controlling stake in MGTS, a provider of fixed-line telecommunications services and internet (especially home internet) in Moscow. The number of new clients (B2B, B2C) using the GPON technology jumped 6.7% in 1Q20. The number of users of subscription-based television and fixed-line internet services has also risen in Russian regions. That said, the segment of fixed-line communications services has been stagnating, but this is common for the entire industry.

Sources: company data

Selling gadgets

Mobile TeleSystems sells such gadgets as smartphones, tablet computers, as well as related accessories. Earnings surged 18.6% y-o-y in this segment in 1Q20 to account for 13.4% of the total revenue. The company has seen the growth of online sales, which has been significantly supported by the coronavirus pandemics and quarantine.

Sources: company data

Mobile TeleSystems is currently planning to develop smart home technologies that will strengthen its positions on the fixed-line internet and mobile communications market through cross-selling. MTS is one of the few players in this niche in Russia, the company is one of the rare companies that supply digital solutions for apartment houses. Only 5% of property management companies in Russia apply such technologies, but the market is actively expanding.

The smart home devices segment has seen exponential growth in the world. According to some experts, the global market will increase 40.9% to USD 62 bln by 2021 and will continue to grow 15% per year further on, reaching USD 88 billion in 2025.

Head of MTS IoT Department Mikhail Kozlov says that the Russian digital home solutions market will expand 20-30% a year. Retail sales of smart home appliances have been accelerating at this very pace. Around 250 mln households around the world use such devices, it is expected that more than 110 mln devices will be supplied to the European market in 2020.

MTS Bank

Mobile TeleSystems also provides banking services. Retail loans account for the largest share in MTS Bank earnings. The bank’s net interest income skyrocketed 42.8% y-o-y over 3M20. The asset volume jumped 35.3% y-o-y, funding turned out to be 34.5% higher y-o-y over the same period. The amount of NPL climbed insignificantly from 6.1% in January to 7.3% in late April.

Sources: company data

Media and entertainment ecosystem

Mobile TeleSystems is building up its own ecosystem that includes music and streaming services in particular. MTS President Alexey Kornya believes that media business could be one of the core directions for telecoms boosting their development. For instance, AT&T (NYSE:T), which purchased Time Warner and has become a media giant, is one of the good examples to illustrate this fact. According to Kornya, MTS’s key advantage in the new markets is regular financial relations with its clients. The company has a large subscription base, and client data provide ample opportunities for content personalisation.

Spotify (NYSE:SPOT) may become MTS’s next partner in this area. Spotify has recently launched its services in Russia. Mobile TeleSystems will be able to sell subscriptions for Spotify services as part of its tariffs making its offer more attractive compared to other telecoms. Moreover, MTS has established partnership with Apple Music (NASDAQ:AAPL) and opened a showroom to demonstrate its new services in Moscow. MTS is also launching its own TV channels as part of MTS Media service. To set up a media platform, the company has purchased a cinema studio, invited Head of the First Channel, Russia’s key TV channel, Konstantin Ernst to join the BoD and appointed TNT TV channel’s co-founder and ex-director Igor Mishin Head of TV Services.

Sources: company data

Cloud technologies prospects

Cloud services are one of the most rapidly developing areas in the world, especially over the recent period. They have contributed to growth of US giants, such as Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and IBM (NYSE:IBM). Microsoft has seen a 43% expansion in its cloud services over a year, they brought the company 30.4% of revenue in 2019. Microsoft’s Microsoft Azure cloud computing platform provides a range of cloud services, including compute, analytics, storage, and networking. Earnings generated by the platform surged 72%.

Mobile TeleSystems is a key player in the cloud technologies market. It has taken up leadership positions and says this area will be one of the key growth drivers in the future. MTS’s revenue increased 2.3 times in this segment in 1Q20. Earnings in the Big Data segment were 1.5 higher, in the Internet of Things segment and related services segments – by 47%.

Mobile TeleSystems’ total revenue may increase 5% due to cloud technologies by 2021. The share of cloud and digital services in its revenue may rise 2-3 times to 4.4-6.5% based on 2020 results. The numbers may once again double in 2021, which will result in the total increase in revenue of around 5% y-o-y based on 2021 results.

MTS has recently launched a platform for independent management of cloud infrastructure. Small and medium enterprises will get access to solutions that are currently available to large businesses to see an average decline of 20% in costs. A number of financial and retail companies have already started using the services, the head of this segment expects 15-20% monthly growth in the number of users.

5G prospects

5G will become the basis of the digital economy. Companies who will become the first to invest in this area will become market leaders and get great benefits:

  1. 5G speeds are up to 100 times higher compared to 4G: from 10 to 25 Gbit/s with minimum delays in signal transmission. Thanks to this, the technology may bring drastic changes to such industries as medicine, transport, Internet of Things, and gaming.
  2. 5G will allow the expansion of basic virtual networks and cloud architecture, as well as creating more data processing opportunities. Notably, 5G uses network slicing – the creation of a number of logically isolated networks to solve certain tasks, for instance, one network – for Internet of Things, another – for video broadcasting. Network slicing will help avoid network overload and signal transmission delays.
  3. The development of virtual and augmented reality. These are already popular mass market segments. The global 5G services market is currently estimated to total USD 40 bln. According to experts, it will grow at an average annual rate of 44% until 2025.
  4. New 5G technologies will be implemented at a record pace, which is already happening. China launched the commercial use of 5G in late October 2019, while one of the Chinese telecoms had almost 32 mln of 5G subscribers in March 2020 compared to 6.7 mln in late January 2020. It is expected that 5G will take only 3.5 years to hit 1 bln subscribers. Technologies of the previous generation will lose a considerable market share, just like it happened after the launch of 4G.

Companies that develop 5G services will leave rivals far behind and take the lead. For instance, as a result of processes directly or indirectly caused by the commercial use of the technology, the Chinese economy is expected to generate USD 3.5 trln from 2020 to 2025 given the investment of USD 494 bln.

Mobile TeleSystems is looking both to develop 5G networks in Russia and create telephones that support the technology. The main impediment for 5G services in Russia is that few devices support the format. MTS has already worked at technologies and infrastructure, while updated telephones will help consumers start using the technology. MTS has announced it is developing a smartphone for first 5G networks in Russia jointly with Motorola (NYSE:MSI) and Qualcomm (NASDAQ:QCOM). ‘Motorola edge+’ gadget will support the millimeter range that has been allocated for 5G networks in Russia, its sales will start in the coming months.

Mobile TeleSystems has already tested the first Russian 5G industrial network. MTS deployed video surveillance and group communication systems, enabled a protected access to local information resources, and VR/AR solutions for remote employee training at Kamaz factory in the Russian city of Naberezhnye Chelny.

MTS continues to develop technologies and invest in startups in its 5G centre. The list of projects features a system of unmanned aircraft management based on 5G technologies, industrial robots that are 6 times more efficient than previous models thanks to 5G and cloud computing, as well as a holographic communications system that supports volumetric video.

Mobile TeleSystems is the first Russian company to obtain a license for 5G services. The license implies the operation in 24.25-24.65 GHz mm wave band in almost all the regions (83 out of 85) and will be valid through July 16, 2025. Thus, the company will be the first to enter the prospective 5G market in Russia.

Mobile TeleSystems may become the leader in terms of 5G technologies in Russia. Such innovations as the development of Motorola edge+ smartphone will grant individual and corporate subscribers access to applications and solutions that require the data transmission speed measured in Gbit/s, a feature that will be in demand in the future. It is unlikely that 5G will be used on a massive scale in Russia soon, but it may be applied by businesses as early as now.

Dividends and dividend policy

Sources: company data

The company has been increasing dividend per share and maintaining a high dividend yield since 2011. MTS’s BoD recently recommended paying out RUB 8.93 dividend per share (USD 0.242 per ADR) for 1H20, which is 2.8% higher compared to 1H19 dividend per share (RUB 8.68 = USD 0.234 per ADR). This could mean 2H20 dividend per share may total RUB 21.16 (USD 0.572 per ADR) or an annual dividend per share of RUB 30.09 per share (USD 0.814 per ADR), with the dividend yield of 9.2%. 2019 annual dividend per share was RUB 29.25 (USD 0.809 per ADR for the current exchange rate equal to 74 RUB per USD).

In addition, MTS has resumed a share buyback. The company purchased 1,143,820 shares, it currently owns 5.88% of the chartered capital. If these shares get cancelled, a share price will rise 6.4% (the company’s value stays intact, while the number of shares declines).

Also, MTS shares continue to close the dividend gap. They have overcome 43% of the gap, while the remaining movement will provide 2.7% yield. Hence, the total yield will stand at 9.2%+6.4%+2.7%=18.3%. The company has a transparent dividend policy. According to this policy, dividend payments in 2019, 2020, and 2021 are to total at least RUB 28 per share. The company may increase this amount after 2021.

Conclusions

Mobile TeleSystems is a stable company with upbeat growth prospects. In addition, it offers high dividend yield. The company has resisted the negative impact from coronavirus, and investment in its shares may offer a good investment strategy in case of the second pandemics wave.

To estimate the fundamental share price, we use the following factors:

  • the 2020 and 2021 dividend forecast of RUB 28 per share (the minimum amount according to the dividend policy)
  • the average dividend growth of 1% per year after 2021
  • Weighted Average Cost of Capital equal to 11.85% (risk-free rate is 4.25%, beta is 0.95, risk premium is 8%)

Thus, the fundamental share price is RUB 407.9, which is equal to USD 11 per ADR. The upside potential is 24.5% of the current share price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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