Yandex - Leading in an On-Demand World

We upgrade our target price for Yandex by 7% to $56.10 per share, mainly due to FX effects, and reiterate our BUY rating. We continue to praise Yandex for its strong track record of execution and for its ability to spot new opportunities, which helped it to launch a new, promising project in 2019 - Yandex.Lavka (an on-demand convenience store) - and will, in our view, help turn around ad revenue growth dynamics already this year.> Strong execution track record positions Yandex well to turn around ad revenue growth. Yandex expects ex-TAC search and portal revenues to grow 14-17% in 2020. We think this might be too conservative and expect 18.2% growth, which would imply 15.1% growth pre-TAC, although this would mark a slowdown from the 20.5% growth seen in 2019. In our view, given its track record (especially in 2015-16), and also thanks to support from a government initiative and the revenue contribution from Zen, Yandex is well positioned to turn around ad revenue growth in 2020, which should bear fruit in 2H20 and beyond.> Yandex.Lavka set to disrupt food retail in larger cities. Lavka was launched in June 2019 in Moscow. Its proposition involves delivering groceries within 15 minutes of an order being received. Its assortment (circa 2.3k SKUs) has a high share of fresh and ready-to-eat products. We think that Yandex.Lavka operates a highly scalable model and that it should be able to roll out this model quite quickly once it has passed the testing phase. We estimate that Lavka should break even at the store level (contribution) in late 2021 and at the EBITDA level in 2022. On our estimate, Lavka's sales density of R672k per m2 per annum is well above peers'.> Best positioned to be the leader in the transportation super app. One of Yandex's strengths is its proprietary technology, which ensures better matching and less idle mileage. Its proprietary maps are important, especially in smaller cities. The ownership of two brands gives it the ability to position the smaller one as a discounter in order to avoid diluting the core brand. We expect the Yandex.Taxi ride-hailing GMV and number of rides to deliver 2019E-22E CAGRs of 33% and 34%, respectively, with CAGRs of 42% for net revenues and 87% for EBITDA. We expect the EBITDA margin to reach 32.1% by 2022, which we think might be a conservative assumption.> Valuation: We upgrade our Yandex target price by 7% to $56.10 per share, mainly due to FX effects, and reiterate our BUY rating. We value the Yandex.Taxi JV at $8.3 bln, which implies $15.1 per Yandex share, which is 27% of our target price. We still do not include self-driving cars in the valuation of the taxi segment. On our estimates, Yandex is trading at a 15 2020E EV/EBITDA and 30 P/E (11 and 20, respectively, for 2021E). Excluding the taxi JV stake, Yandex is trading at a 10.5 2020E EV/EBITDA. The key catalysts are an expected IPO of Yandex.Taxi, acceleration of search and portal revenue growth and possible inclusion in the MSCI index. The key risks can come from growing competition and regulatory changes.