Mail.ru Group - Honing Its Social Skills

We reiterate our BUY rating on Mail.ru Group (MRG) while raising our ruble-denominated target price by 7% to R2,696 per GDR (or $35.48 per London-listed GDR). We see the company as a balanced mix of verticals focused on communication and entertainment that are well set to outperform in their respective segments. > MRG ad revenues to outpace the market. Thanks to the leading positions of its social networks, VKontakte (VK) and Odnoklassniki (OK), we continue to view MRG as a beneficiary of the shift in ad budgets to social networks. We expect MRG's ad revenues to outpace the internet ad market in 2020E-23E (13.2% CAGR), growing at a 16.0% CAGR. We see community IVAS revenues growing at a 14.0% CAGR and reaching R26.9 bln in 2023.> VK: Most attractive social network for advertisers. VK is Russia's leading social network both in terms of users and engagement, according to Mediascope data. The fact that some 88-94% of users of other social networks have a profile on VK, in our view, makes VK the most attractive advertising platform in Russia. We expect VK revenues to grow at a 19.6% 2020-23E CAGR to R41.8 bln by 2023. We see upside both for users and engagement (especially from the more affluent 35 and older group), VK's nimbleness in responding to trending media content formats (including vertical videos), its further penetration into the SME segment, and its development of a super app and social commerce.> OK: Entertainment in focus. According to Mediascope data, OK ranks third among social networks in Russia in terms of reach and engagement, and both of these figures have been stable over the past year. OK differentiates itself as a social network focused on sharing feelings and emotions and also entertainment. Most of its revenues (circa 65% on our estimate) come from community IVAS, while we expect ad revenues to outperform from a low base. > Valuation. MRG is trading at a 2021E EV/EBITDA of 12.8 and a P/E of 30.0. MRG (unlike peers) does not yet include its share of the losses from strategic associates in its EPS estimates. We see the 2021E P/E at around 47 including such losses. MRG in September placed 7.1 mln shares to equity investors and issued 12.15 mln shares to the Employee Benefit Trust, which implies around 8% dilution to equity. Key catalysts include expected MSCI Index inclusion next month; the possible IPO of the games business in 2021; and possible value-accretive M&A.