Via SeekingAlpha.com

Source: Tony Stoddard on Unsplash

Mobile TeleSystems (or MTS) (NYSE:MBT) performed slightly better than expected in Q1, beating the consensus forecast on revenue by 1.7%. Indeed, the telecommunications sector looks stable in the context of the pandemic. Nonetheless, the economic headwinds will ultimately pressurize revenue growth, and this is already reflected in the updated guidance of MTS.

If you’re looking for a quasi-bond stock that pays dividends with attractive yields, MTS is still one of the best candidates to consider in the Russian market. However, the company doesn’t have a tremendous upside or the potential for a dividend increase, so don’t expect too much from the stock.

Q1 Results Highlights

Revenue in the first quarter of 2020 amounted to 119.6 billion rubles, an increase of 8.9% YoY. The key drivers of growth were the increase in retail sales in anticipation of quarantine restrictions due to coronavirus and the revenue growth of MTS Bank. In Q1 2020, MTS also implemented tariff adjustments in line with the overall market environment and CPI inflation, which led to a 6.9% YoY increase in mobile services revenue.

Source: Company data, Author’s spreadsheet

Net income amounted to 17.9 billion rubles, an increase of 0.5% YoY. Net income was supported by positive exchange rate differences, but the retirement of Ukrainian business was a constraining factor for the overall results.

Source: Company data, Author’s spreadsheet

Free cash flow amounted to 17.5 billion rubles vs. -31.4 billion rubles a year earlier or 24.2 billion rubles of adjusted FCF for Q1 2019 (-27.8% YoY) due to an increase in capital expenditures.

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Source: Company data, Author’s spreadsheet

Net debt at the end of the first quarter of 2020 amounted to 284.8 billion rubles, an increase of 1.5% QoQ. The net debt/OIBDA ratio increased by 2 bps to 1.35x.

The revenue growth forecast in 2020 slightly changed. Earlier, the management expected growth of no less than 3%. Now, it expects revenues to grow within 3% or remain flat. The guidance for capital expenditures stood at the same level – 90 billion rubles.

The Bull Thesis Remains Intact

Let me weigh for and against arguments for the MTS bull case. I see the following reasons why the stock price is likely to continue to grow:

  • MTS is still one of the safest dividend stocks in the Russian market. While the O&G sector suffers from multi-decade lows, Russian telecoms withstand the economic chaos with much less significant losses. Because there are fewer dividend stocks with a secured outlook at a reasonable valuation, more investors may pay attention to Mobile TeleSystems.
  • Declining cash deposit rates in Russia may force more people to enter the stock market. Dividend yields of 5-6% are likely to become a new normal in the Russian market, hence the stock still has some room for growth.
  • MTS’s owner, AFK Sistema, still urgently needs cash to repay its debt. This means that MTS will keep its dividend policy unchanged at all costs.
  • The company continues to diversify its business with moderate success. Non-core segments (retail, banking, integration services) now amount to 22% of overall revenues.

On the contrary, the company has plenty of challenges to face in the medium term:

  • The management’s guidance became even more conservative. Now MTS expects revenues to stay unchanged or show low-single-digit growth. Domestic demand for goods and services will be certainly weaker due to the continuously declining disposable incomes of Russian households.
  • Last year, Rostelecom (OTCQX:ROSYY) acquired Tele2, the fourth-largest and most rapidly growing telecom company in Russia. If Rostelecom manages to unlock the synergy effect from the deal, Tele2 will challenge the Russian Big-3 of telecoms with renewed vigor.
  • MTS Bank loan portfolio quality may worsen amid the distressing situation in the Russian economy.
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On The Stock

Source: TradingView

MTS steadily recovers after the March crash, though I expect the way to full recovery to be a bit rough in the near term. If you managed to buy the stock at March levels, consider yourself lucky, as the market fueled by excessive liquidity doesn’t seem to offer such bargain prices anymore. Nevertheless, the volatility is still quite high, and this can be used to pick up shares at local lows.

Dividends

In March 2019, MTS adopted its current dividend policy, which implies payments of 28 rubles per share for 2019-2022. The company usually pays dividends twice a year: about 70% of the total amount in July and the rest in October. This July, the company is going to pay 20.57 rubles per share (41.14 rubles or ~$0.59 per ADR), which gives us a dividend yield of 6.2-6.4% for this particular payment. The payment is scheduled on July 9, so the last day to buy the stock with the dividends is July 7.

Final Thoughts

I’m not especially optimistic about the long-term prospects of MTS. I see a high risk that eventually the company will be overwhelmed with high debt, the deterioration of the user base, stagnating revenue growth, and significant investments in 5G tech. With that being said, dividends for 2019-2021 are more or less secured, but afterward, a lot will depend on how successfully the company will diversify its business.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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