Mail.ru Group - Local and Social

We reiterate our BUY rating for Mail.ru Group (MRG) and raise our target price 17.4% to $33.10 per share. Key catalysts for the stock are the discussed local listing (which could boost liquidity and make MRG shares eligible for MSCI index inclusion); successful execution of the ecosystem strategy; and more JVs, potentially in the media and classifieds segments. The key concerns include a mixed execution track record, potentially overpaying in related-party deals; and possible further short to medium-term pressure on earnings from investments in new projects.> Building an ecosystem around VK. MRG's strategy involves building a mobile-first platform around content and commerce that is centered on VK, with a single ID, a broad loyalty program and VK Pay integrated across the ecosystem. VK is by far the leader among social networks in Russia both in terms of monthly reach and user engagement (62% and 57%, respectively, in December 2019). We believe that MRG lags behind the competition in terms of execution of new and existing projects, and we wonder why it did not launch this strategy a couple years earlier. We expect social segment revenues to grow at a 16.5% 2019-22E CAGR, while VK should be the driver with a 23.8% CAGR, on our estimates.> Game performance again deteriorated. In 4Q19, MMO game revenues rose just 9.5% (14% in dollar terms). The weak growth was attributable to no new launches in 2H19, as two games were moved to 1H20. MRG nevertheless reiterated its medium-term guidance that the games division's EBITDA should double from the 2018 level by 2022. > Valuation. We reiterate our BUY recommendation for MRG and lift our target price 17.4% to $33.10 per share. About a third of the increase owes to FX effects and the rest mainly to a re-rating of the communication and social vertical due to its good traction and the company's strategic push in that direction. MRG is trading at an attractive 8.5 2020E EV/EBITDA (we project a 20% 2019-22E EBITDA CAGR), which is below Yandex's 14.3 (34% EBITDA CAGR) and the 9.5 for Yandex's core business (excluding the $6 bln market-implied valuation for the Yandex.Taxi JV; 22% EBITDA CAGR).> Catalysts. The local listing the company is considering might boost liquidity, attract incremental investor interest and make MRG shares eligible for MSCI index inclusion. MRG benefits from the ongoing shift of online ad budgets to social platforms, and we expect its ad revenues to grow ahead of the market. We think MRG might potentially create more partnerships in the next 12 months, including in media and classifieds.> Risks. Key concerns include a mixed execution track record, potentially overpaying in related-party deals and possible further short to medium-term pressure on earnings from investments in new projects.