Mobile Telesystems (or MTS) (MBT) made it through the second quarter with barely noticeable losses. In the foreground, key financials look more or less good compared to 2019, though in the background, a negative trend of declining user base persists. Nonetheless, the slow deterioration of the main segment (mobile) is compensated by growth in other segments.

I can’t say it’s a good idea to buy the stock at current prices, as there’s no margin of safety investors could enjoy earlier. I continue to view MTS as a conservative dividend stock for investors who are not willing to join the hype train of the US stock market.

Q2 Results Highlights

Source: Company data, Author’s spreadsheet

Revenue in Q2 2020 amounted to 117.7 billion rubles, an increase of 1.3% compared to Q2 2019. Revenue growth was under pressure due to the introduction of quarantine measures and the subsequent closure of the company’s retail outlets.

Source: Company data, Author’s spreadsheet

Net income for the second quarter amounted to 11.9 billion rubles, down 7.5% YoY. Reserves for loan impairment at MTS Bank had a major negative impact on its consolidated net income.

Source: Company data, Author’s spreadsheet

Free cash flow in the second quarter amounted to 7.4 billion rubles, against -1.5 billion rubles a year earlier.

In Q3, the company expects a stronger negative impact from roaming compared to Q2 amid continuing travel restrictions, as the third quarter historically accounts for a higher share of this segment in revenue.

Another negative trend we can observe is a decline in the customer base: the total number of MTS subscribers in Russia decreased by 1.1% in Q2 compared to the same period in 2019, from 85.8 million to 84.9 million.

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Overall, MTS didn’t change its current forecast for 2020:

  • Keeping revenue at the level of the previous year or delivering a slight increase within 3%
  • Maintaining EBITDA at the last-year level with a possible decrease up to -2% YoY
  • Maintaining capital expenditures at 90 billion rubles this year, including investments required to comply with the Yarovaya law

Why I’m Skeptical On 5G Perspectives In Russia

MTS was the first telecom company in Russia to obtain the first 5G license in Russia. The company now may use the 24,25–24,65 GHz frequency range, which is more suitable for use within industrial facilities rather than for operating the cellular network.

Despite the fact that MTS is the pioneer of adopting 5G in Russia, it doesn’t seem that Russia will adopt 5G as easily as 3G and 4G, and I doubt that the country, as well as MTS, will be able to fully utilize the potential of 5G.

The first serious obstacle in implementing 5G in Russia is regulation. According to Global Mobile Suppliers Association (GSA), 386 operators in 125 countries are investing in the creation of 5G networks, and the vast majority of them (173 companies) are betting on the 3.6-4.1 GHz frequency range. In Russia, President Putin doesn’t want to give access to these frequencies to telecoms because they’re used by the Russian military.

Therefore, in favor of convenience for 900,000 people busy in the Russian military, the remaining 145 million Russians will have to deal with limited or more expensive access to 5G. Technically, there’s no problem of getting the necessary equipment for maintaining a 5G mobile network in an acceptable range. The key issue is that using non-standard equipment will be more expensive than mass-produced analogs operating in “mainstream” ranges.

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The second problem is the structure of the Russian economy.

Source: Rossiyskaya Gazeta, Author’s spreadsheet

As you can see from the table above, a significant part of the Russian population is busy in low-paid, low-skill jobs. Probably, 5G could unlock tremendous potential for automation, but in today’s Russia, you can’t easily automate such jobs because the government is interested in keeping the unemployment rate as low as possible to avoid unnecessary social unrest. If we exclude the O&G gas sector and low-skill jobs listed above (excluding some exceptions), there won’t be much left to benefit from the “5G revolution” in Russia.

Summing Up The Bullish Case

Source: Seeking Alpha PREMIUM data; Author’s image

I’ve been consistently bullish on MBT for two years now, and I consider the results satisfactory. Sure, you could invest your money in hyped FAAMG, Tesla (TSLA), or AMD (AMD) two years ago and get far better results, but in the scope of a conservative dividend stock, Mobile Telesystems delivered solid results to its holders.

As you can see from the picture above, MBT generated over 58% of returns since my very first article about the company, vastly outperforming the S&P 500. If you invested in MBT this March, you could still enjoy slightly better returns compared to the S&P 500.

Bottom Line

It’s now obvious that the recovery momentum of the stock is fading, and MTS is entering a period of routinely slow stock growth, mainly driven by new Russian investors who join the stock market to find attractive and stable yield.

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In the medium term, management needs to prove and then bolster the success of its ecosystem of products before I can discuss MBT in bullish tones again. As for 5G, even if the government somehow cedes the popular frequencies to telecoms, I think it would require at the very least 3-5 years before investments in this technology start to pay off, so it’s too early to include the “5G factor” in the investment case.

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.