Mail.ru Group - Lockdown Tailwind Triggers Upgrade

We reiterate our BUY rating on Mail.ru Group (MRG) and increase our ruble-denominated target price by 22% to R2,531 per GDR, which at the current FX rate implies a price of $35.67 per London-listed GDR (11% upgrade). The target price upgrade was triggered by strong 2Q20 results, while we believe the increase in engagement that we saw during the lockdown should ultimately translate into improved monetization across MRG's businesses over time. The next catalyst to watch for is the stock's possible inclusion into the MSCI Index during the November review.> Strong 2Q20 results trigger earnings upgrade. MRG's 2Q20 results beat the Interfax consensus by 10.1% on revenues and 31.1% on EBITDA. Revenues rose 25.5% y-o-y to R25.4 bln and EBITDA was up 3.9% at R7.5 bln (margin down 6.1 pp y-o-y to 29.5%) amid a shift in the revenue mix toward the lower-margin games segment. The strong 2Q20 results led us to upgrade our 2020 revenue forecast by 6% and adjusted EBITDA by 15%. For 2020, MRG is guiding LFL revenue growth in the teens to above R100 bln; we now expect R103 bln. It is guiding "lower profitability" (we now expect a 28.4% EBITDA margin, down 6.8 pp y-o-y, on EBITDA of R29.2 bln, versus the R28.3 bln Bloomberg consensus), affected by both the revenue mix and investment (including R1 bln in Covid-19 related support initiatives), which will likely reverse in 2021.> Lockdown was a tailwind. We believe the increase in engagement that we saw during the lockdown should ultimately translate into improved monetization across MRG's businesses over time. We project a 2019-23E CAGR of 23% for revenues and 18% for EBITDA.> Local listing could trigger MSCI Index inclusion in November. Our equity strategy team expects that, should the liquidity criterion be met, the GDR could enter the MSCI indexes in the next semiannual rebalancing in November. Our strategy team estimates that a $1.6 mln Moscow ADT will be the minimum to be eligible for the November review, versus an ADT of $5.9 mln so far since the local listing. MRG would constitute 1.0-1.1% of the MSCI Russia at current market prices, implying a minimum inflow from passive funds of $67 mln.> Valuation. We reiterate our BUY rating on MRG while raising our ruble-denominated target price by 22% to R2,531 per GDR, which at the current rate implies $35.67 per London-listed GDR (11% upgrade; we use the spot USD/RUB of 71). Our target price upgrade was triggered by better than expected 2Q20 results of the communication and social vertical (88% contribution to the upgrade) and games. MRG is trading at a 2021E EV/EBITDA of 9.4 and a P/E of 18.9. This represents a 43% discount to Yandex on 2021E EV/EBITDA and a 34% discount to Yandex's core business excluding the taxi JV stake (at the $5.0 bln implied valuation). MRG (unlike peers) does not yet include its share of the losses from strategic associates in its EPS estimates under management accounting. Including this, we see the 2021E P/E at around 28.