QIWI - Building Momentum, BUY Reiterated

We reiterate our BUY rating on QIWI and increase our 12-month target price to $28.86 (R1,870 per QIWI RDR), which is primarily driven by our stronger ruble assumption (USD/RUB 64.80 average for 2021E, which accounted for one third of the target-price increase) and the re-rating of risk assumptions for Russian equity. We think the momentum for QIWI is favorable given the pickup of SME activity, the return of sporting events and the recovery in the use of taxi services.> With sporting events coming back, betting is coming back. According to Liga Stavok, the restart of Germany's Bundesliga on May 16 triggered a 21-23% rise in betting volumes over the following two weekends (versus May 9-10). Meanwhile, the suspension of live sporting events benefitted e-sports: Liga Stavok estimates that during the lockdown betting volumes on e-sports increased 19-fold, representing about a third of all bets. Parimatch estimates that in April e-sports betting volumes tripled compared to January-February, and in May it expected growth of 15% m-o-m. Interestingly, prior to the lockdown, the most popular e-sport disciplines were CSGO and Dota 2, while during the lockdown e-football gained a substantial share, according to the founder of the site Bookmaker Ratings. The next big triggers for betting are the restart of the English Premier League on June 17 and Russian Premier League on June 21. We expect QIWI's betting-related net payment revenues to decrease by 10% y-o-y in 2020 and to be around 37% of the company's total payment net revenues.> SME activity recovering. QIWI predominantly provides payment services to SMEs and those who are self-employed (outside of processing betting-related payments), so the recovery of SME activity is an important driver for the company. According to SberIndex, SME activity nationwide recovered from the trough of -60% y-o-y for the week starting March 30 to -31% in the week of June 1. Moscow is recovering too but is lagging behind (-76% and -46%, respectively), as it has been hit hardest by the virus and had the strictest lockdown measures in Russia. HeadHunter has seen a similar trend: in some regions outside Moscow recruitment spending (predominantly by SMEs) is close to flat y-o-y, according to the company and the HeadHunter index (which tracks vacancies posted). Yandex is also saying that in May SMEs outperformed larger enterprises in terms of ad spending, thus driving the recovery.> Positive read-through to Sovest from TCS Group. Our banking team noted in a recent report on TCS Group that overdue loan dynamics have been improving in recent weeks, although levels are still above pre-crisis times. Our colleagues also believe that the cost of risk peaked for Tinkoff in 1Q20 at 16% and expect it to drop to 13.3% in 2Q20. We think this entails a positive read-through to Sovest, which provisioned R186 mln in 1Q20. That said, the lower purchasing activity during the lockdown and pressure on consumer income should dampen Sovest's payment volumes (we estimate just 4% y-o-y growth in 2020E versus 75% in 2019), which would delay Sovest's breaking-even until 2021. > Taxi use is growing. Providing pay-out services to taxi fleet companies and taxi drivers is a meaningful source of revenues for QIWI. According to SberIndex data, the trough of spending on taxis (-60% y-o-y) was in the week starting March 30, the first week of Russia's nationwide lockdown, but this gradually recovered to -42% for the week starting June 1. Given that during the lockdown many taxi companies developed B2B services, such as deliveries from merchants to end consumers, which are often paid for by the merchants themselves (e.g. the costs of grocery delivery by Yandex.Taxi from the grocery chain VkusVill are paid by VkusVill and free to the consumer), we believe that the SberIndex data (which is based on banking card payments) might not fully capture that revenue stream and that the actual recovery in taxi GMV might be closer to a 25-30% decline. We think that this should imply around a 10-15% drop in the number of rides. To put that into context, Citymobil has seen a recovery to 90% of the rides it had before the lockdown. Given that Yandex.Taxi has a lower share of GMV in the hardest-hit Moscow, we think it should have recovered faster than Citymobil. > Digital goods were among the few categories that grew during the lockdown. According to SberIndex data, spending on digital goods (traditionally a strong category for QIWI; this includes spending on games), increased by 47% y-o-y when the lockdown began (March 30) but slowed down to 10% growth for the week starting May 18 and even fell in the week starting May 25 (down 11-13%).> Possible changes in betting regulation. According to Kommersant, the Russian Boxing Federation has proposed to the government changing regulations for bookmakers to make them accountable to a single regulator, thus also unifying the processing of betting payment through a single payment processing center. The aim of the Boxing Federation is to boost financing for sports from betting-related payments (thanks in part to the legalization of the online betting market). To recall, currently in Russia there are two self-regulated associations of bookmakers, each having its own payment processing center. QIWI is the payment processor partner for one of them. Bookmaker Ratings estimates the share of legal bookmakers in total industry revenues in 2019 at 65%, and we believe that the share has been consistently growing. We do not think that a switch to a single regulator could trigger the growth of the legal segment, while a single payment processor for the industry could create a monopoly situation. Given that the share of illegal players has been consistently shrinking, we do not think that changing the regulation of betting is a priority for the government. Nevertheless, given QIWI's high exposure to betting-related revenues, we see possible changes in betting regulations as one of the key longer-term risks for the company. > Valuation. We reiterate our BUY rating on QIWI and increase our 12-month target price to $28.86 (R1,870 per QIWI RDR), which is primarily driven by a stronger ruble assumption (average USD/RUB of 64.80 for 2021E; this accounted for one third of the target-price increase) and re-rating of the risk assumptions for Russian equity. We moved back to a DCF-based valuation for QIWI and now use a 5.5% risk-free rate, 5% equity risk premium and 4% company-specific risk premium to account for the low liquidity of the shares ($5.5 mln ADT) and the uncertainty about the banking assets and the timing of Otkritie Bank's stake placement (34% of equity). We see QIWI attractively priced at a 2020E P/E of 7.8 and 2021E P/E of 4.7. We expect a dividend yield of 6.1% in 2020E based on a 50% payout ratio and 12.2% in 2021E based on a 60% payout. We expect a 45% rise in adjusted net income in 2021E to R12.8 bln, driven by a 16% increase in payment services net income to R13.1 bln, the winding-down of Rocket Bank (we expect a R1.5 bln loss in 2020E) and the breakeven of Sovest (after a R1.6 bln loss in 2020E). In our view, QIWI is attractively priced and remains one of the cheapest stocks among payment companies globally.