MTS - Conflux of Factors Calls for a BUY

We upgrade MTS to BUY. Our new target price per common share is R467, which at the current FX rate (USD/RUB 73) implies $12.78 per ADR (30% upgrade, which is to a large extent driven by lower WACC). We estimate MTS's dividend yield at an attractive 8.8%, while we estimate that R12.3 bln remains to be spent on the announced buyback. Despite the short-term headwind from the pandemic, MTS enjoys favorable momentum in terms of the down cycle in capex and benign competitive environment.> 2Q20 beat consensus; guidance reiterated. MTS's 2Q20 results beat the Interfax consensus by 2.9% on revenues and 6.8% on EBITDA, despite being pressured by a drop-off in high-margin international roaming revenues, lower goods sales and provisions for MTS Bank. Revenues rose 1.3% y-o-y to R117.7 bln, with EBITDA rising 0.6% y-o-y to R51.6 bln (for a 43.8% margin, flat Q-o-Q). Net income was down 6.4% y-o-y to R11.9 bln. Revenues of the Russian business were up 0.8% y-o-y to R116.3 bln and EBITDA for Russia was up 0.3% to R50.4 bln. Mobile service revenues increased by 1.9% y-o-y, which is a deceleration from 6.9% in 1Q20, mainly due to a drop-off in high-margin international roaming revenues. Subscribers in Russia decreased 1.7% Q-o-Q and 1.2% y-o-y to 77.2 mln. Post-IFRS 16 net debt/EBITDA (including lease obligations) was 1.9, flat Q-o-Q and down from 2.3 a year ago. FCF in 2Q20 was R24.8 bln, up 9.2% on an LFL basis y-o-y. Cash capex was R20.2 bln, for 17.2% of revenues. MTS reiterated 2020 guidance of flat to 3% growth in revenues and a 2% decline to flat for EBITDA. > Valuation. We upgrade MTS to BUY. Our new target price per common share is R467, which at the current FX rate of USD/RUB 73 implies $12.78 per ADR. The 30% upgrade is largely driven by lower WACC, which was cut to 9.9% from 12.2%. We expect MTS to pay R30 per share, which is an 8.8% yield, the largest among Russian telecom peers and overall attractive in the Russian context. This supports our BUY rating. We estimate that out of R15 bln buyback announced in March 2020, R12.3 bln remains to be spent. On our estimates MTS is trading at a 4.6 2021E EV/EBITDA and 8.9 P/E. > Favorable momentum. Despite the current pressure on the company's highly profitable roaming revenues (due to significantly reduced travel), we think that telecom companies enjoy favorable momentum. One key reason for that is that the capex cycle is at an ebb: 4G coverage is decent and 5G implementation is delayed due to regulatory issues. The competitive environment remains benign: all of the Big-4 mobile operators have increased prices YTD. We believe that they might opt to increase prices once again by the end of this year given the increased demand for mobile data, which triggers higher investments. MTS planned to close 400 stores in 2020 and managed to complete this goal already in 1H20. We think that the company will close more stores by the end of the year (driven by the structural shift to more online consumption, triggered by the lockdown), which would ultimately be supportive for the returns and profitability.