MTS - High Dividend and Ecosystem Optionality

We reiterate our BUY rating on MTS but cut our DCF-derived target price by 6% to R438 per common share ($11.53 per ADR at the current FX rate), which is primarily attributable to a higher WACC. MTS's dividend yield is 9.7% for the ADRs, and the company is planning to support the share price by buying back up to R15 bln of stock. The competitive environment remains healthy and 5G implementation has been delayed, which should support FCF. The key factor to watch is the returns on the ecosystem investments. We expect EBITDA to expand at a 4.6% CAGR in 2020-23E and net income to grow at a 5.4% CAGR.> Healthy market environment. We believe that MTS enjoys favorable momentum thanks to the benign competitive environment, which gives it headroom for ARPU to grow this year, while the roaming revenues well set to grow from low base. We now expect revenues to expand 5.9% in 2021 (above the guidance of at least 4%), including 3.2% for service revenues in Russia and 31.4% for MTS Bank. > Cash capex at 21% of revenues for 2021E, up 2 pp y-o-y. We see cash capex expanding 18% this year to R108 bln, toward the upper end of the company's guidance, driven by investments in the ecosystem and associated digital products, the expiry of supportive currency hedges, as well as further LTE network investment. Uncertainty lingers over 5G frequencies and local equipment requirements for network rollout, which we think will prove benign for FCF this year, while overall we do not expect notable 5G-associated investments any earlier than 2023. The company has said it may inject up to R5 bln of additional capital in MTS Bank to support above-market growth.> Ecosystem development could be sped up. We believe the recent promotion of Vyacheslav Nikolaev (previously MTS's first vice president for customer experience, marketing and ecosystem development) to the CEO role is a clear signal of MTS's strategic priorities and that it is likely to speed up its "CLV 2.0" ecosystem strategy, which was announced in November 2019 and focuses predominantly on the fintech and media sub-segments. The key things to watch will be the pace of development, associated investment and the impact on overall earnings.> Dividend and buyback should be supportive. We project a DPS of R30 (9.7% yield for the ADRs and 9.5% for the commons) for 2021, above the minimum dividend of R28 stipulated in the current dividend policy for 2019-21. We expect the BoD to decide on a new dividend policy next spring. MTS's current dividend yield is the largest among Russian telecom peers (Rostelecom's 4.6% for the common shares) and is attractive in the general Russian context (6.4% average for companies under SberCIB Investment Research coverage). MTS is also planning a voluntary buyback for up to R15 bln by the end of 2021, which at the current share price implies 2.8% of the outstanding shares and 5.5% of the free float. That said, MTS has in the past bought back stock pro-rata from both minorities and Sistema (about a 50% share). MTS is also carrying out a mandatory buyback offer (with a March 31 deadline) following the EGM on February 15. The buyback price is R328.18, and we estimate that MTS could buy back up to 3.7% of the free float given the regulatory limit on the value to be spent is set at 10% of net assets.> Valuation. We reiterate our BUY rating on MTS. Our new target price for the commons is R438, which at the current FX rate of USD/RUB 76 translates into $11.53 per ADR. The 6% downgrade in ruble terms is largely driven by a higher WACC, triggered by the higher risk-free rate. This has not been fully offset by an upward revision to our FCF forecasts. On our estimates, MTS is trading at a 2021E EV/EBITDA of 4.5 and P/E of 8.7.