Russian Telecoms: Racing towards the digital goal (initiating on Mobile TeleSystems with a BUY and Rostelecom with a HOLD)

In this report, we initiate coverage of Russian telecom operators Mobile TeleSystems (MTS) (with a BUY rating and a price target (PT) of RUB 336/share, USD 10.1/ADR) and Rostelecom (RTKM) (with a HOLD rating and a PT of RUB 73.9/share, USD 6.7/ADR).
In a mature, competitive sector, the Russian telecoms operators are looking for growth in digital services on the one hand; while, on the other, automating and digitalising processes internally in order to optimise costs. Improving operating results and FCF for Russian telecoms is challenging in an unfriendly regulatory environment: telecoms’ operating results are likely to suffer from the ban on inter-region roaming charges and the hikes in frequency fees, while their FCF will be under pressure from the implementation of the Yarovaya Law. Despite this, the mobile segment appears to be the most promising in the Russian telecoms space, as the market is facing strong growth in data consumption, which is being monetised by all the players successfully. We believe MTS offers good exposure to the increasing Russian mobile data consumption, while also yielding over a 12% investor return in 2018-20E, on our estimates. We prefer MTS to Rostelecom, which is likely to record high capex intensity, which is unlikely to leave any room for dividend hikes (we expect a stable 7% yield in 2018-20E), despite the expected strong results growth (a 5% OIBDA CAGR for 2017-20E, on our estimates).