17 April 2020
Renaissance Capital holds online press briefing on Russian telecoms outlook amid COVID-19 pandemic

Renaissance Capital, a leading investment bank in emerging and frontier markets, today held an online press briefing – ‘Upsides & Downsides for Russian Telecoms in the Brave New World’ – for top Russian and international media, hosted by Alexander Vengranovich, the Firm’s telecoms research analyst.

Alexander underlined that Renaissance Capital remains bullish on Russian telecoms in the uncertain environment of the COVID-19 pandemic coupled with low oil prices and a weak rouble. He expects that local players will in many ways trace developments in telecoms sectors abroad – in China, Europe and the US, where lockdowns clearly spurred consumption of data traffic, voice and other services.

We estimate that Russian telecom operators should see a 20-30% increase in network traffic across fixed broadband and mobile networks, depending on network capacity, in particular cities and regions. Store closures will likely reduce the subscriber bases of the mobile operators, but positively affect selling, general and administrative (SG&A) costs and increase average revenue per user (ARPU). Alexander said that, given prior plans to cut back retail stores, telecom operators are very likely to take advantage of the quarantine and close from one-third to one-half of their outlet base in the coming months.

The current situation may also affect the structure of the subscriber base, towards a decline in B2C and a rise in B2B clients, which would subsequently provide higher ARPU. In addition, the limited mobility of the population should translate into lower churn rates that would also support ARPU levels.

Of all business segments, the lockdown is obviously primarily denting international roaming revenue, and telecom operators would likely seek to offset this via increased service consumption rather than tariff hikes. In Alexander’s view, tariff growth is not a likely avenue that telecom operators would go down, due to social responsibility considerations given the existing economic and social strains. Other lagging segments include financial services, due to a contraction in loan amounts, and event ticketing – the latter, however, partially offset by the gaming business.

Alexander said that dividends will be key in 2020, and while VEON may forgo a payout, MTS is set to meet its guidance of a RUB28/share dividend, even if the distribution amount exceeds the company’s free cash flow.

Alexander noted that capex and network quality will also be key. Rouble depreciation and growing data usage could put additional pressure on capex for telecoms operators, but the latter should be partly offset by growing usage of services.

Based on the existing macroeconomic scenarios prepared by Renaissance Capital’s research team: 1) bull case: a fast global recovery (Russian GDP growth at 1.5% YoY in 2020, RUB75/$ end-2020); 2) base case: longer quarantine/slower recovery (0.8% YoY recession, RUB79/$); and 3) bear case: a severe lockdown/multi-wave epidemic (a 2.5 %YoY GDP contraction, RUB82/$), Alexander sees varying top picks within the Russian telecom space. 

In our base-case scenario we prefer MTS, which offers solid FCF generation, the highest dividend yield in the sector and should be supported by the recently approved share buyback programme. Under the severe lockdown scenario we prefer Rostelecom, which should be supported by the higher share of B2G contracts, fixed broadband, PayTV and cloud services. Sistema is our top pick under a fast V-shaped recovery scenario. Sistema has been the most volatile stock among the Russian telecoms YtD due to the deterioration in capital markets, and we expect the market to start attributing value to its non-public assets as the capital markets reopen,” Alexander commented.