The Long Case for Russia's Mobile Telesystems

Includes: MBT, VIP, VOD
by: Paul Harper

Although in Q4 2008, Mobile Telesystems [MTS] (NYSE:MBT) suffered a disastrous $794.8 million foreign exchange loss to reflect book value of the company’s foreign-denominated debt due to the weak ruble, there are plenty of signs Russia’s largest mobile operator is worth investing in now. Revenue grew 4.0% to $2.42 billion from $2.33 billion a year ago, which is healthy in the current economic climate. Taking into account that the ruble declined by 16% against the dollar in the last three months of 2008, this is a signal that Mobile Telesystems is a very robust play indeed.

MTS operates GSM based mobile services across six countries within the CIS (Commonwealth of Independent States); Russia, Ukraine, Uzbekistan, Armenia, Turkmenistan and Belarus. It also has interests in foreign mobile operations in Daghestan and India, with more on this later. Within Russia, it has the highest number of post paid customers, as it looks to serve higher end users.

In mid-April the company released subscriber figures for the 12 months ending Q1 2009 and they show some impressive growth in all markets served : Russia-8.7%, Ukraine-8.5%, Uzbekistan-67.9%, Turkmenistan-141.4%, Armenia-44.8% and Belarus-11.9%. This brings the total subscriber number for MTS up to just short of 93 million end users of which 65 million are in Russia. In comparison, the next largest operator Beeline (Vimpelcom (NYSE:VIP)) has 49 million subscribers, out of a total addressable base of 190 million.

With a current market cap of $13.1Bn and sales of more than $10.2Bn in the last year, MTS looks set to be able to service its $2.9 billion in debt. With net annual income of $1.9Bn, MTS would not seem to be overly burdened by debt.

MTS' forward-looking strategy is working on two distinct areas: cost reduction and ARPU growth through the introduction of VAS (Value Added Services). A good example of both can be seen in the partnership with Vodafone (NASDAQ:VOD) last year, which should bring some interesting synergies, including CAPEx optimizations on the introduction of the Vodafone Live! platform, advice on network deployment, retail network insight to develop distribution and the introduction of CRM services based on the Vodafone Globals platform which will hopefully enhance subscriber loyalty and have a positive impact on churn.

Meanwhile, MTS is also introducing a number of new 3G based services, looking to capitalize on the low internet penetration rate in Russia. Chief Commercial Officer Mikhail Gerchuk said the company would double the number of large Russian cities in which it has third-generation mobile networks to 50 by the end of the year, and is looking for opportunities to enter the fixed-line market. MTS hopes to use its dominant position in post-paid to attract users to a slate of new services and has recently launched a new mobile internet platform, Omlet, to provide entertainment services to content hungry young Russians.

“We want to become what iTunes is for America,” Gerchuk told Reuters in an interview, referring to Apple’s online music store, from which more than 6 billion songs have been bought and downloaded since it launched in 2001.

Gerchuk said the relatively low presence in Russia of global brands such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) would help MTS. With less than 27% of Russians currently enjoying internet access and less than 4M broadband users, MTS has a good case of sucking up new users with all you can eat data plans via a mobile broadband USB offering. The company is also looking at the potential of entering the fixed line market, MTS plans to invest $1.5 billion in capital expenditures this year, including $450 million to develop infrastructure.

“We have the opportunity to give many people the chance to access the Internet for the first time,” Gerchuk said. “Acquisition is faster than building for fixed networks, but it has to be profitable.”

As previously mentioned, MTS is actively looking for further overseas expansion, including further expansion into ex-Soviet countries. The company has a track record of being able to manage these sorts of deals and partnerships. Of more interest is its position further afield, namely in India. MTS franchised its brand to Shyam TeleServices last year in what is becoming one of the fastest growing global mobile markets.

Shyam which currently has operations in 3 states in India, currently serves 5 million users and has ambitions to double that in the next three months. Shyam has also stated that it will be in a position to serve all 22 Indian states by the third quarter of 2010. MTS’s parent company, Sistema, owns a 74% stake in Shyam TeleServices. Gerchuk said MBT would have to monitor the situation in India before deciding whether to enter the market in earnest, and would probably do so through an acquisition if it decides to go that route.

“India is a very competitive market, with eight operators,” he said. “There’s also the possibility of entering the market by acquisition — probably the better option in a crowded market.”

Taking all of the above factors into consideration, it points to strong growth and some very interesting potential both through new services at home and new network operations abroad. For me, this is a good long term investment and as such, I initiated a buy last week.

Looking at the chart to the right shows that MTS has returned 62% through steady growth, which is pretty formidable. I’m just kicking myself that I didn’t move sooner. Mobile Telesystems closed on Friday at $35.15. So far the stock has recorded a 52-week low of $18.36 and 52-week high of $89.24

Disclosure: Long MBT