TCS Group - Opening Outperform Trade Idea

We are opening a trade idea for TCS to outperform against Russian financials. The past several weeks have been a veritable rollercoaster ride for TCS watchers, dominated by the potential acquisition by Yandex, which collapsed a fortnight ago. We recognize that there are different views on the impact on the investment case, but we see the current share price level as a good one to open this trade idea, for a few reasons: having caught up with the management, we feel fairly comfortable that the disruption at the top of the business will not be that unsettling; we think any M&A is off the table for a fair while at least; and, we expect strong 3Q20 results to start the process of refocusing investor minds on the excellent fundamentals of the business. > Time to move on. The way the Yandex deal played out was hardly ideal, in our view, in part due to the need to release an initial statement on the discussions when things were far from finalized, and TCS's share price suffered as a result. But with the prospect of any further M&A activity off the table for now, and even considering some overhang risks relating to Oleg Tinkov's ongoing US tax trial, we think it time to start moving on, and would argue that TCS's fundamentals are in great shape. > Catch-up with CEO. A call with the management gave us some reassurance that the whole process has not been too unsettling internally. While we do not know whether there will be much management and staff change, our impression was that the CEO is fired up to get back to fully focusing on running the business, and that many employees are fine with TCS remaining independent. > 3Q20 results should remind market of excellent fundamentals. TCS publishes 3Q20 IFRS results on November 12. We think it will be a strong quarter with R10 bln net income (implying 36% ROE), not far off 2Q20 earnings, which included almost R3 bln of realized securities gains. Risk costs are likely to come down quite strongly (as we saw with Sberbank's 3Q20 numbers, especially in consumer loans), while a loan growth recovery will help mitigate some downward pressure on loan yields. Meanwhile, we expect to see continued robust customer acquisition and F&C income up almost 20% Q-o-Q, with another booming quarter for the brokerage business. The management's current R30-35 bln 2020 net income guidance (and even our current R38.9 bln) looks quite a bit too low now. Looking further out, we expect the upcoming CMD (likely in 1Q21) to further reinforce the strengths of the story. > Kaspi.kz adds new reference point. While we do not formally cover Kaspi.kz yet, its recent IPO does add a point of reference for TCS. We think TCS's 8.4 2021E P/E (using the current USD/RUB rate) looks pretty attractive. > Main risk is another lockdown. One risk to our call is another widespread lockdown in Russia. However, we do not expect this, as there is very little indication of government appetite for highly restrictive measures - instead the government seems to favor a less disruptive and less economically damaging approach.