Mail.ru Group - Tailwind for Games and Social

We reiterate our BUY rating on the GDRs of Mail.ru Group (MRG) while raising our target price by 38% to $32.12 per GDR (R2,082 per share for the Moscow listing), which is attributable mostly to an FX effect and a re-rating of the communication and social vertical.> Performance ads driving recovery of digital advertising. We expect the digital ad market to expand 1.1% in 2020, and this includes an expected drop of 10% in 2Q20. According to our Ivanov survey conducted in May, self-isolation has given people around 2.5 hours per day of extra spare time, while social networking was the third most popular use of spare time given (62% of respondents). We believe that increased time on social networks will ultimately convert into ad revenue growth, though perhaps with a lag. We expect MRG's ad revenues to be broadly flat y-o-y in 2020, with an 11-12% y-o-y decrease in 2Q20 (broadly in line with the 11-14% decline guided by Yandex). > Strong start and tailwind for game division. Three factors should support strong revenue growth in games in 2020 (we expect 26% growth this year): a weak ruble (as around 70% of revenues are in FX), a tailwind from the lockdown and a strong pipeline with five launches YTD (see the next page). According to our June Ivanov survey, 36% of respondents who play video games have been playing more often, while 23% of those who pay for games (28% of those who play) have also started playing more often. > Local listing last week could trigger MSCI Index inclusion in November. We have been pointing to a MRG local listing as a catalyst since early this year, and the GDRs have risen 16% since the official application. A local listing has been the missing piece of the puzzle for MRG in order to join the MSCI indexes. Our equity strategy team expects that, should the liquidity criterion be met, the GDR would appear set to enter the MSCI indexes in the next semiannual rebalancing in November. The strategy team estimates that $1.6 mln daily Moscow ADT (versus the current $2.1 mln 30d London ADT) will be the minimum benchmark to be eligible for the November review. 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, equivalent to 32 times the GDR's current London ADT.> Valuation. We reiterate our BUY recommendation on MRG and raise our target price by 38% to $32.12 per GDR (R2,082 per share for the Moscow listing). Half of the TP upgrade is due to an FX change (we use an average USD/RUB of 64.8 for 2021) and another 40% due to the re-rating of the communication and social vertical. MRG is trading at a 2021E EV/EBITDA of 8.6 and a P/E of 18. This represents a 40% discount to Yandex on 2021E EV/EBITDA and a 28% 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 at its strategic associates in its EPS estimates under management accounts. Including this, we see the 2021E P/E at around 27.