Mail.ru Group - Subscribing to the Upside

Following the 4Q20 earnings yesterday, we reiterate our BUY rating on Mail.ru Group (MRG) while raising our ruble-denominated target price by 5% to R2,819 per GDR, which at the current FX rate implies $38.10 per London-listed GDR.> Valuation. MRG is trading at a 2021E EV/EBITDA of 11.2 and 2022E EV/EBITDA of 8.6 and a P/E of 63 and 28, respectively. Our PE estimates are based on MRG management accounts and include MRG's share of the losses from strategic associates in its diluted EPS estimates. Yandex is trading at a 44 and 26 P/E, respectively. We believe the best way to compare the two stocks is on a P/E basis to account for the difference in treatment of its O2O verticals, which are on the balance sheet for Yandex but off in the case of MRG. > Catalysts start materializing. MRG remains our trade idea, and in our report from January 25 we noted three potential triggers for a rerating, including a rerating of MRG's JV, ed-tech vertical and a possible IPO of the games vertical, which would help to crystalize its value. The first two triggers are reflected in our valuation and were the leading contributors to our target price upgrade. In particular, the rerating of the O2O JV contributed most to the upgrade of our target price for MRG as we aligned O2O JV valuation with new post-Covid market reality versus the 2019 deal price, which we had used before in our SOTP. We now value the O2O JV at $2.3 bln. We do not yet include in the valuation MRG's Cloud and B2B businesses, and we do not apply any holding discount.> Positive news on governance. The results reported on March 4 revealed some long-awaited news from the governance perspective: MRG disclosed more financial details on its O2O JV, which is off the balance sheet; it guided that it will no longer be reporting on a pro forma basis starting in 2021, meaning it will cease its regular practice of revising historical financial statements. We welcome both decisions and are looking forward to the extended disclosure of the AER JV that MRG guided for April.> Tailwinds in 2021. We expect tailwinds for MRG in 2021, coming both from the economic recovery (beneficial for ad revenues, which we expect to grow 17% in 2021, while MRG yesterday revealed 20% y-o-y growth in January-February) and a structural shift to online consumption, which we saw emerge during the lockdown that boosted O2O and the entertainment verticals (including social networks, games and education) and which we think already resulted in new habits post-lockdown.> Execution remains key concern. On March 4, MRG revealed that its VK Combo subscribers (the majority being music subscribers) number around 3.5 mln, which implies very modest growth in 2020 and which is well below Yandex.Plus subscribers (where the anchor product has historically been music), which numbered around 8 mln in mid-February. That is a worrisome read through given that MRG was the incumbent in music services via the music available on VK.