Yandex - The Strongest Getting Stronger

We reiterate our BUY recommendation for Yandex and increase our target price by 39% to $58.26 per share (R3,775 per RDR), half of which is attributable to an FX effect. We think that Yandex is building momentum well: ride-hailing is set to recover ahead of global peers, while leading indicators for digital advertising demand are encouraging. Catalysts for the stock include entering the MSCI Index (we see a good chance in August) and unbundling its JV in e-commerce and ride-hailing.> Performance ad driving recovery of digital advertising. We expect the digital ad market to expand 1.1% y-o-y in 2020, notwithstanding an expected drop of 10% in 2Q20. Meanwhile, Yandex's ad revenue should grow ahead of the market (+4.0% y-o-y), due to its favorable positioning in performance-based advertising. We see that leading indicators for SME business activity are on the rise, which supports Yandex's ad revenues (SMEs account for circa 50%). The company reported that in May SME ad spending outperformed that of larger enterprises.> Russian ride-hailing recovers ahead of global peers. We estimate that Russia's taxi aggregators have recovered such that rides are now down just 10-15% y-o-y, better than the situation for global peers. We attribute this to new sources of revenues, such as B2C delivery, and also the share of rides to airports being lower for Russian ride-hailing companies than for global peers. For taxi aggregators, we expect a V-shaped recovery in number of rides from the trough of 2Q20 (21% drop in Russia) to post 7.3% growth for the full-year 2020. We expect Yandex to grow rides by 10% y-o-y in 2020, despite a large exposure to pandemic-battered Moscow.> Valuation. We reiterate our BUY recommendation for Yandex and increase our target price by 39% to $58.26 per share (R3,775 per RDR), due to an FX effect (48% contribution) and valuation revisions for the core (38%) and taxi (14%) segments. We value the Yandex.Taxi JV at $8.3 bln, which implies $15.16 per Yandex share, or 26% of our target price. On our estimates (assuming the $5.0 bln valuation for the taxi JV that we think the market implies), Yandex is trading at a 2021E EV/EBITDA of 12.2 and P/E of 23.7. Excluding the taxi JV stake, Yandex is trading at an EV/EBITDA of 9.6 for 2021E. > 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. Also to watch is the unbundling of the Yandex JV in e-commerce and ride-hailing. In our view, this might allow the company to be more nimble and make bolder decisions. However, a consolidation of the e-commerce market would then not materialize, which we think is needed for profitable growth. In addition, Yandex would have to consolidate the losses of the Yandex.Market JV, which could trim around 10% off of EBITDA and make EV/EBITDA screen worse visually. We welcome the potential buyout deal with Uber, but need to watch closely what price premium it might imply.