Sistema - Unlisted Optionality

We initiate coverage of Sistema with a BUY rating and target price of R42.30 per share ($11.51 per GDR), which implies 47% upside to our target price. Sistema is a Russian multi-industry investment company with a successful track record of value growth and monetization of assets. We see three key catalysts for Sistema to reach our price target: ongoing monetization of assets, a new dividend policy, and repricing of private assets. > Multi-industry investment company. Sistema's largest assets are MTS (49% contribution to NAV; telecom) and Ozon (29%; e-commerce). Among private assets, the largest are Segezha (8%; pulp and paper) and Medsi (6%; clinics). Sistema's major shareholder is Vladimir Evtushenkov (59.2%), while 31.5% of the share capital is in free float, nearly two thirds of which is in local shares. We see three key catalysts for Sistema to reach our price target:> Monetization of assets. Ongoing monetization of assets will reconfirm Sistema's recent solid execution track record (including monetization of Detsky Mir and crystallization of value in Ozon), reduce debt and streamline its corporate structure, which should ultimately reduce the implied holding discount. We believe that Segezha and Medsi - as the largest private assets - might be the next candidates for IPO. We see BPGC and RTI as candidates for sale.> New dividend policy. This should give move visibility to minority shareholders in terms of monetization of their investments. We expect the new dividend policy to be announced in 2021 once more visibility with respect to the pandemic emerges.> Repricing of private assets in the portfolio. This should be supported by a good operating performance. Sistema is working to create a pharma holding, which might trigger the repricing of this vertical. We do not yet include Sistema PE and VC funds into our valuation, while we note that Sistema's investments in Ozon first started through VC. > Valuation. We initiate coverage of Sistema with a BUY rating and target price of R42.30 per share ($11.51 per GDR), which implies 47% upside to our price target. Listed assets contribute 79% to Sistema's target NAV of R839 bln, net financial liabilities were R166 bln as of 9M20 and we estimate capitalized corporate expenses at R106 bln, which brings NAV net of debt and liabilities to R567 bln. We use an implied holding discount of 30% in our valuation, although over time we think this can drop to 15% amid realization of the three key catalysts described above. Key risks to Sistema are rather generic and include macro, regulation and execution of its operational and monetization strategy.