Yandex - Secular Growth Stories Hold Up Well

Yandex's 1Q20 results beat the consensus on adjusted EBITDA by 7% and demonstrated that companies with the right business model and strong execution can weather even the perfect storm. We reiterate our BUY recommendation for Yandex and target price of $41.83 per share.> What was a positive surprise: Ad revenues and car-sharing. Ad revenues totaled R30.1 bln in 1Q20, which meant a slowdown to 11% y-o-y growth (13.7% ex-TAC and above Mail.ru Group's ad revenue growth of 9.3%), which was attributable to a 4% drop in revenues from the ad network. Ad revenues from Yandex's properties increased by 15.9% y-o-y (a slowdown from 23.2% in 4Q19). The growth rate of Yandex's ad revenues declined by 5 pp Q-o-Q, which is well below the 15.4 pp deceleration for Mail.ru. What we heard on the conference call about the current trends in ad revenues was also better than we expected: Yandex reported that in April to date revenues from the search and portal segment ex.-TAC declined in the high-teens percent, while in the last week search revenues recovered to a high-single-digit percent decline and on some days even saw flat to small growth. Car-sharing has been banned in Moscow and St Petersburg since April 13 (and we expect this to last at least until May 11). Its fixed costs are pretty high given the regular lease payments. We were pleased to learn that Yandex was able to renegotiate the lease contracts, which will reduce the cost base; it also plans to optimize the size of the fleet. All in all, this should limit the cash burn rate on the other bets line.> What was in line with expectations: Ride-hailing and food tech. The GMV for Moscow ride-hailing decreased by 60% y-o-y in April to date, which we estimate should imply around a 55% decline in the number of rides. This was in line with our expectations given that Moscow's transportation department reported a 58% y-o-y drop in the number of rides since the quarantine measures started on March 28. We estimate that other regions are doing better given that Moscow has been hit the hardest by the pandemic in Russia. As would be expected, Yandex's food-tech businesses reported strong growth in the number of users (up 73% since the beginning of March, including the online convenience store) and GMV (up 550% in April compared with December for Yandex.Lavka). > Any negative surprise? Not yet. Yandex slowed the pace of hiring, revised its marketing budget and certain non-essential costs that were able to be deprioritized. The top management took a pay cut and declined cash bonuses. The company is optimizing capex in order to keep it equal to the previous plan in ruble terms, despite some ruble depreciation. Yandex has $2.5 bln cash on its books, two thirds of which is in US dollars.> Valuation. We reiterate our BUY rating for Yandex and target price of $41.83 per share. It is trading at a 2020E EV/EBITDA of 17.4 and P/E of 40 (and a respective 9.9 and 21.6 for 2021E). Excluding the taxi JV stake (at a $4.0 bln implied valuation), Yandex is trading at an EV/EBITDA of 10.9 for 2020E and 7.0 for 2021E.