Yandex - Catalysts Start Materializing

On Tuesday, Yandex announced the reorganization of it e-commerce and fintech JVs - something that we had flagged in a recent report - and completed a $1 bln share placement, including a $600 mln private placement (both of which still look questionable to us). It also reported preliminary 2Q20 results, which looked rather neutral on balance. We reiterate our BUY recommendation on the stock and target price of $58.26 per share for the US listing and R3,775 per share for the Moscow listing. The next catalyst is potential entry to the MSCI Index in August.> Consolidation of Yandex.Market. It was officially announced that Yandex will buy out Sberbank's 45% share of the Yandex.Market JV for R42 bln, which is broadly in line with our valuation and takes into account R19 bln in cash on the balance sheet as of 1Q20. As we discussed in our recent report, we think that being the sole shareholder in Yandex.Market could help Yandex to be more nimble, make bolder decisions and help the unit to benefit from deeper integration into Yandex's ecosystem. Yandex expects the deal to close in 3Q20 subject to antitrust approvals. After the deal, Yandex would have to consolidate Yandex.Market's losses (see the chart on the next page), which could trim around 10% from the company's EBITDA and render its EV/EBITDA visibly worse than those of peers. Yandex expects Yandex.Market to break even at the end of 2023. Considering the 41% EBITDA margin of the Yandex.Market platform, it will take even longer for Beru to become profitable.> Termination of non-compete agreement in fintech. Yandex will sell its 25% share in Yandex.Money to Sberbank for R2.4 bln. Upon completion of the deal, Yandex's financial services non-compete obligations will be terminated. This will enable Yandex to develop financial services projects on its own, which we think will be positive and complement the company's ecosystem.> $1 bln placement. Yesterday, Yandex completed a public offering for $400 mln Class A shares (with a 30-day option to purchase up to an additional $60 mln of its Class A shares) at $49.25 per share and a $600 mln private placement involving $200 mln for each of three private investors: VTB Capital; a company whose ultimate beneficiary is Roman Abramovich; and a company whose ultimate beneficiaries are Alexander Abramov and Alexander Frolov. These three shareholders will enter two-year lockup periods and be restricted from increasing their stakes above 3.99% of the Class A shares but receive first refusal rights for potential investments in e-commerce projects. The dilution will be about 5%. We understand that Yandex chose the partners to be longer-term shareholders who are well established and will not interfere in day-to-day operations. Yandex said it needs cash to finance the unbundling of the e-commerce and taxi JVs (not many details about this) as well as to finance the growth of e-commerce and other ecosystem projects. Having $2.6 bln in cash on its balance sheet, Yandex has the capacity to raise more debt, which could also improve its capital structure, so the placement looks questionable to us.> Preliminary 2Q20 results look rather neutral on balance. Search and portal revenues (which the company expected to decline by 11-14%) and the EBITDA margin (which it projected at 40.8-43.5%) were weaker than we expected. Taxi segment net revenues were expected to grow 35-40% on a reported basis. We estimate that excluding Yandex.Lavka (on-demand grocery), which is accounted for on a gross basis rather than a take-rate basis, like Yandex.Eats and ride-hailing, taxi segment revenues could increase by 12% (our Lavka revenue estimates are based on a R950-1,000 average ticket and 2.5-2.8 mln orders in 2Q20). The company reported during the call that ride hailing net revenue dynamics excluding the effect of the B2B segment was in negative territory in 2Q20. Nevertheless, the taxi segment performed impressively on the adjusted EBITDA line (-R500 mln to R0). Taxi segment EBITDA - excluding self-driving cars (R700-750 mln investments in 2Q20) just for ride-hailing and foodtech - was in positive territory.