Mail.ru Group - Games Growth Will Mitigate Shocks from Ad Market

We reiterate our BUY rating on the GDRs of Mail.ru Group (MRG) and reduce our target price by 30% to $23.35 per share, which is mainly triggered by the FX effect and a downgrade of our valuation for the communication and social vertical.> Well positioned in terms of FX sensitivity. MRG derives around 30% of its revenues in FX. A large portion of the FX revenues come from the games division, which gets 70% of its revenues outside of Russia. Hence, a weaker ruble could have a positive effect. The company confirmed that its revenues and opex are largely matched when it comes to FX exposure, which might imply a positive impact on earnings. Some of MRG's capex (about 10% of revenues) is FX-denominated, and it will need to make an $82 mln payment in October for the stake in the AliExpress Russia JV. All in all, given its diversified revenue stream, we see MRG as highly resilient to the financial stress.> Pressure on online ad market will be stronger than in 2015 and stronger than we originally expected. We now expect the online ad market to grow just 1.3% in 2020 (and to drop 10% in 2Q20 and 3% in 3Q20). However, we expect MRG's ad revenues to grow behind the market (we anticipate a 1% y-o-y decline) due to its positioning in social and media advertising. This caused us to reduce our estimate for MRG's ad revenues in 2020E by 18% and by 17% for the "communication and social" vertical.> Expected strong performance of games vertical should be able to offset this pressure. With widespread lockdowns, games are seeing growing engagement across all platforms, including mobile (70% of MRG's game revenues), console and PC (PC is higher-margin than the other two categories). MRG reported that games saw an acceleration to above 20% y-o-y growth in March, it also confirmed that the pipeline of new games remains strong and on track for release in 2020. This, supported by FX tailwinds, triggered us to upgrade our forecast for MMO game revenues by 4% and the game vertical by 6%.> Valuation. We reiterate our BUY rating for MRG but reduce our target price by 30% to $23.35 per share, due to the FX effect and downgrade of our forecast for the "communication and social" vertical. MRG is trading at a 2020E EV/EBITDA of 8.3 and P/E of 21.1 (for 2021E at a respective 5.7 and 12.6). This is a 40% discount to Yandex on 2021E EV/EBITDA and a 12.5% discount to Yandex's core business excluding the taxi JV stake (at the $4.0 bln implied valuation).> Events to watch. The length of the lockdown and what support measures come from the government are key right now. We would also watch how private consumption, the advertising market and the use of shared and O2O services shape up. The local share listing the company is considering might boost liquidity, attract incremental investor interest and make MRG shares eligible for MSCI index inclusion.