Russian Technology: Digital battleground (initiating coverage on Yandex, Mail.ru and QIWI, with BUYs)
In this report, we initiate coverage of Russian technology companies which have superior economics relative to most of their EMEA peers (double-digit revenue growth, 30-40% EBITDA margins, net cash positions), yet remain significantly undervalued relative to their international peers (c.20-40% depending on the metric). We have analysed the sources and sustainability of exceptional returns on capital for those companies, taking into account their competitive positions, differentiating services and reinvestment opportunities. We see their evolution from single online services to a full digital ecosystem as the main source of their competitive advantage, especially relative to the US tech companies. Yandex (BUY, PT USD 50) is our preferred long-term quality stock in the sector, while QIWI (BUY, PT USD 33) offers the most upside to our PT. We also consider Mail.ru (BUY, PT USD 28) to be significantly undervalued, trading at a 40% discount to its international peers if adjusted for the value of its JVs, which limits its downside, while successful integration of recently-acquired assets creates strong upside potential.Mail.Ru Group is an Internet company based in the Russian Federation. Co. operates the email service [email protected] and two IM networks in Russia - Mail.Ru Agent and ICQ. Co. operates two Russian-language online social networking sites: Moi [email protected] and Odnoklassniki.ru, and owns a strategic minority equity stake in the social network Vkontakte. Co. is also engaged in developing projects in E-commerce and operating more than 40 thematic vertical sites, targeting various user categories. Co. is also Russia's predominant online games company. Co. maintains a portfolio of online games which includes 34 MMO games and over 30 games for social networking sites.
Yandex is an internet and technology company that operates an internet search engine in Russia. Co. builds intelligent products and services powered by machine learning. Co.'s products and services are based on complex, unique technologies that are not easily replicated. Co. generates substantially all of its revenues from online advertising. Co. also generates revenues from its e-commerce offerings, classifieds and e-hailing service. Co.'s businesses are organized in the following operating segments: Search and Portal; E-commerce; Taxi; Classifieds and Experimental businesses.
WOOD & Company is the leading investment bank in Emerging Europe. Founded in 1991 and head-quartered in Prague, our footprint spans the region and touches investors around the globe.
A pioneer in Emerging Europe, WOOD executed many of the first CEE equity trades and landmark investment banking transactions. Our electronic trading platform was the first in the region, and remains the best. We are continually expanding our relevance and reach in these ever-evolving markets.
Our equity market share reflects our stature: 7% in Warsaw, 20% in Bucharest, 16% in Hungary, 40% in Prague and 5% in Vienna. Our distribution is unparalleled, with the largest salesforce in the region, servicing a uniquely diverse investor base.
We couple local expertise with a truly international perspective. With offices on the ground in the region, and in key financial hubs such as London and Milano, we are never far from our clients and we remain at the forefront of what’s afoot in the CEE emerging and frontier landscape.
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