MTS - Solid Credentials Priced In

We cut MTS to HOLD due to the stock's strong performance: the ADR price is up 16% in rubles and 24% in dollars since March 17. We slightly increase our target price by 1% to $9.83 per ADR, which is due to stronger ruble assumptions, although this is partially offset by a downward fine-tuning of our forecasts. 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. However, the drop-off in high-margin international roaming revenues and provisions on the retail loan portfolio of MTS Bank are likely to put more pressure on the bottom line than we had originally anticipated. On the positive front, the competitive environment looks reasonable (we do not rule out another upward repricing in 2020) and 5G implementation has been delayed, which is supportive for FCF. MTS's dividend yield is 9.0% for the ADRs and the company has been supporting the share price by buying back local shares.> 1Q20 results broadly in line with consensus. MTS's revenues came in 2.4% above the Interfax consensus, having risen 8.9% y-o-y to R119.6 bln. EBITDA, which was broadly in line with the consensus, rose 1.6% y-o-y to R51.5 bln from the high base of 1Q19 (when there was a R1.9 bln gain on the sale of real estate). Net income was broadly flat y-o-y at R17.7 bln, while excluding discontinued operations it grew by 33.8%. Revenues of the Russian business were up 8.3% y-o-y to R118.1 bln and EBITDA for Russia was up 1.4% to R50.7 bln. Mobile service revenues increased by 6.9% y-o-y, supported by a hike in mobile tariffs in mid-January by circa 4% across the board (in 2019 the tariff adjustment took place later). Overall, subscribers in Russia decreased 0.7% Q-o-Q but y-o-y were up 1.2% to 78.5 mln. MTS closed 169 stores in Russia in 1Q20 out of the annual target of 400, which put the store count at 5,510. EBITDA was negatively affected by MTS Bank provisions for bad debt of R480 mln (on its R98 bln retail loan portfolio). Post-IFRS 16 net debt/EBITDA was 2.1, up from 2.2 a year ago. FCF in 1Q20 stood at R17.5 bln, down 27.8% on an LFL basis y-o-y, excluding a one-off payment. Cash capex in the quarter increased to R20.2 bln, 16.9% of revenues versus 16.3% a year ago.> 2020 guidance now more conservative. MTS now expects flat to 3% growth in revenues; a 2% decline to flat for EBITDA (negative effect from the drop-off in high-margin roaming revenues and provisions on MTS Bank's retail loans). Capex guidance was reiterated at R90 bln, including Yarovaya law-related investment.> Valuation. We cut MTS to HOLD given that the ADR price is up 16% in rubles and 24% in dollars since March 17, when our last report was priced. We nudge our target price 1% higher to $9.83 per ADR, due to stronger ruble assumptions, although this is partially offset by a downward tweak of our forecasts. MTS is trading at a 5.1 2020E EV/EBITDA and 11.2 P/E (4.7 and 9.5 for 2021, respectively). Its dividend yield is 9.0% for the ADRs, while the company has been supporting the share price by buying back local shares.