MTS - Defensive Play

We reiterate our BUY rating on MTS but cut our DCF-derived target price by 12% to $9.73 per ADR, which is primarily attributable to the FX effect. MTS's dividend yield is 10.4% for the ADRs, and the company plans to support the share price by buying back local shares. We think that MTS is resilient to the slowdown of economic growth given its low prices, the utility nature of communications services and its FX hedge. The competitive environment looks reasonable and 5G implementation has been delayed, which is supportive to FCF. We expect EBITDA to grow at a CAGR of 3.1% in 2019-22E and net income from continued operations to grow at 11.7%.> Use of communication services likely to continue growing. We see MTS as being resilient to a slowdown in economic growth, given the low prices for communication services and the fact that these services have high utility. MTS increased prices by 4% across the board in January and guided for about 3% top-line growth in 2020. We think it will enjoy a stable competitive environment in 2020, compared to the downturn in 2015, when telecom operators were in the midst of a price war.> Resilient to a weaker currency. The effect on P&L from a weaker currency is pretty translational, given that MTS makes most of its revenues in Russia, while its revenues and costs are well matched. Its net debt/EBITDA ratio at end-2019 was 2.1 including the IFRS 16 effect (1.3 excluding it), with about 8.1% of the debt portfolio in FX. The FX debt position was fully covered by FX-denominated cash on the books and hedges. MTS is currently enjoying a down-cycle in terms of capex, given that 4G coverage is decent and 5G implementation is delayed due to regulatory issues. That contrasts with 2015, when MTS incurred high capex expenses (21% of sales), driven by the rollout of 4G and affected by the weaker currency. For 2020, we expect an 18.5% capex/sales ratio, around half of which is FX-linked (hedged by accumulated hard currency).> Dividend and buyback would be supportive. We expect a R29 dividend per share (10.4% dividend yield for the ADRs and 10.9% for the commons) for 2020, slightly above the minimum dividend of R28. MTS announced a voluntary buyback for R15 bln, which had been pre-announced last week but still must be approved by the BoD this year. It is also carrying out the mandatory buyback (deadline is March 30) following the EGM on February 14.> Monetization mood is on. Overall, telecom operators will benefit in 2020 from the market's "monetization mood" - which means a stable competitive environment, downsizing of loss-making retail operations, and the 5G launch delay in Russia. These factors smooth out the pressure on FCF. All operators repriced their tariffs in early 2020, including MTS, which increased prices by around 4% in January. Both VEON and MTS have reduced the store count by 200 stores y-o-y and guided further downsizing. MTS plans to close another 400 stores this year, though this is quite likely to be skewed to year-end.