Moscow Exchange - Defensive Properties, But Earnings Headwinds; HOLD

In this report, we refresh our numbers on Moscow Exchange (MOEX), extending our modeling period through 2022. After a very robust fee income showing in 1Q20, we see fee income growth normalizing to around 10-11% in 2021-22, as we expect volumes and volatility to decline. Meanwhile, a more dovish CBR monetary policy and the plunge in dollar rates will exert strong downward pressure on NII next year - even in a fairly solid environment for ruble client funds - and we see a worsening outlook for bond sale gains, which have been boosting the bottom line for several quarters. Overall, we have made only slight changes to our 2020E/21E earnings (+2%/-1%). There are clear positives in the story: stable earnings, which compare favorably to Russian banks'; defensive properties; an improving revenue mix; and a more or less nailed-on dividend (yielding 7.2% for 2020). That all said, the stock is trading at a 2021E P/E of almost 12, close to the top of its historical range. This, combined with earnings headwinds, leads us to reiterate our HOLD recommendation while moving our target price up to R125 per share on a lower risk-free rate. > Fee income growth to slow, but its share in revenues to rise to 75%. Unsurprisingly, trading volumes have declined over the past couple of months from their March highs, though almost halfway through 2020 it is clear that this year is going to be excellent for fee income, with 14% y-o-y growth, on our numbers. However, we see fee income growth slowing to 11% and 10% in 2021 and 2022. Meanwhile, falling interest rates are likely to exert strong downward pressure on net interest income in 2H20-2021. Our rates team expects the CBR key rate to drop a further 150 bps to 4% by the end of this year, while dollar rates are close to zero. Given the prospect of realized gains on securities sales fading, we see NII dropping by 22% and 15% this year and next. As a result, we see the share of fee income in total revenues rising to 75% in 2021 and 2022, which is a welcome long-term dynamic. > Minimal assumption changes, limited 2020-21 earnings growth. We have nudged up our 2020E net income by 2% to R21.4 bln (+6% y-o-y), and cut our 2021E earnings by 1% to R21.9 bln (+2% y-o-y). We are 3-4% below the Bloomberg consensus for 2020 and 2021. We also roll our model through 2022, when we expect 9% earnings growth to R23.9 bln. > Bottom line: Minimal upside at current levels. We continue to use a blended valuation approach, using the DDM and P/E methods, weighted 60-40. We have reduced our cost of equity by 1 pp to 12.5% on a lower risk-free rate. We derive a R125 per share target price. MOEX trades at a 2021E P/E of 11.9. This looks fair to us considering both its defensive properties and improving revenue mix, and the earnings headwinds we expect over the next 18 months or so. Barring a major Covid-19 second wave and risk-off move, we see MOEX performing broadly in line with the Russian market.