Rostelecom - Hedged Against Covid-19

We reiterate our HOLD recommendation for Rostelecom commons and reduce our target price by 2% to R93 per share, as we have updated our model to fully consolidate Tele2. We expect the lockdown to have mixed effects on Rostelecom, with growth cooling in certain areas of the B2G segment and the SME segment, growing demand for digital services, stable demand amid rising prices and a growing subscriber base for mobile services. On our estimates, the stock is trading at a 2020E EV/EBITDA of 3.3. We expect dividends of R5.0 (for a 6.4% yield per common share) over a 12-month horizon.> Resilient to current volatility due to business mix. Rostelecom has stated that it has seen a decline in business activity in certain areas of the B2G and SME segments, though this has been compensated for by increased demand for digital services and corporate infrastructure digitalization. We now expect Rostelecom's revenues and EBITDA to grow 4.8% and 6.8% in 2020.> Mobile business seems more resilient to the lockdown impact than peers. We believe Tele2's more limited exposure than peers to roaming revenues, its growing customer base (on our estimates) and its tariffs repricing to reduce the gap with peers should make Rostelecom's mobile segment less exposed to the negative effects of the lockdowns than peers. We expect mobile revenues to grow at a 2019-23E CAGR of 6.8%. Rostelecom has stated that it would merge its retail network (about 800 stores) with Tele2's (about 2,350 stores), which should optimize costs. Rostelecom estimates the total potential synergies from Tele2 over the next 2-3 years (including from better loan terms) at R10 bln.> Redistribution of investments should help temper capex growth in 2020. During its last call, the company stated that capex in 2020 would remain within the previously announced range (R70-75 bln excluding Tele2, DataLine and government projects), despite increased traffic and a negative FX effect, thanks to a redistribution of investments. Rostelecom expects Tele2's capex to be close to the 2019 level this year (i.e. around R33.8 bln). We see Rostelecom's total capex at about R123 bln, which is 23.8% of our total revenue estimate. > Dividends. The management plans to recommend a dividend of R5 per share for 2019, which is at the lower end of the range stipulated by the dividend policy. The BoD will make the official recommendation in the first half of August. We believe the company will not return to semiannual dividend payments this year, which would mean a dividend yield of 6.4% in 2020 and 9.2% in 2021, assuming a 75% of FCF payout in 2021 based on our 2020 forecasts.> Valuation. On our estimates, Rostelecom trades at a discount to MTS and in line with VEON on EV/EBITDA (3.3 in 2020E versus 4.9 and 3.3, respectively), though compared with MTS it is far less liquid (R0.4 bln traded per day versus R4.2 bln for MTS) and has a lower dividend yield (8.4% for MTS).