Yandex - Riding Positive Lockdown Waves

We reiterate our BUY rating on Yandex while raising our ruble target price 30% to R4,896 per share ($68 per US-listed share). We believe the company is well positioned to benefit from a structural increase in online consumption triggered by the lockdown. In addition, there are a number of short-term catalysts, including possible inclusion in the MSCI index. > Ad performance set to recover. Yandex's ad revenues declined 15% y-o-y in 2Q20 (down 11% across its own properties) - worse than for Mail.ru Group. We think this was driven by exposure to different segments of the economy, which in the case of Yandex include auto, real estate, travel and finance. Moving forward, the more the economy comes out of the lockdown, the more support we see for Yandex's ad revenues. Growth in Yandex's search share (up 3 pp overall to 60% y-o-y now, including up 6 pp to 59% on Android) should also help Yandex to expand its share in ad revenues.> Ride-hailing profitability remained superior despite headwinds. Ride-hailing GMV declined around 7% y-o-y in 2Q20, but has already recovered to around 20% growth in July. We estimate that despite the headwinds, ride-hailing EBITDA increased y-o-y in 2Q20, supported by lower costs and subsidies. This led us to upgrade our assumptions for the segment: we now expect adjusted EBITDA to grow 47% to R7.2 bln in 2020 and to R16.5 bln in 2021.> Food tech benefitted most during lockdown, benefits here to stay. Yandex.Eats orders doubled y-o-y and GMV grew ahead of that. The July trends were encouraging too, with orders growing in the very high double digits and GMV doubling. We now expect an adjusted EBITDA loss for Yandex.Eats of R600 mln in 2020 (versus our R1.1 bln loss estimate before), but for it to break above even next year with an R800 mln adjusted EBITDA gain. The Yandex.Lavka grocery delivery service reported net revenues of R2.3 bln in 2Q20 (having launched only in July 2019), circa 10% above peer Samokat.> Valuation. We reiterate our BUY rating on Yandex while raising our ruble target price by 30% to R4,896 per share, which at the current rate FX rate implies $68.00 per US-listed share. We value the Yandex.Taxi JV at $9.4 bln, or $16.04 per Yandex share. Yandex will have consolidated the e-commerce segment starting on July 23, which should trim 7-8% off of our adjusted EBITDA estimates in 2020-21. On our estimates (assuming the $7.0 bln valuation implied by the market for the taxi JV), Yandex is trading at a 2021E EV/EBITDA of 19.5 and P/E of 36; excluding the taxi JV stake, it is trading at a 2021E EV/EBITDA of 14.4.> Events to watch. Our equity strategy team sees Yandex on track to enter the MSCI Russia Index in August with 6.3% of the index. This could generate minimum passive inflow of nearly $350 mln. We welcome the potential buyout deal with Uber, but will be watching the implied price premium closely. We are also looking out for an unbundling deal for Yandex's self-driving cars that could crystalize the segment's value (still zero in our valuation).