Vimpel Communications Is a Telecom VIP

| About: VimpelCom (VIP)

I'm starting to get very interested in Vimpel Communications (NYSE:VIP), a Russian mobile (moving to integrated) telecom player. I've invested in this stock a long time ago in my personal account (2004-2005 time frame) and after falling asleep a few times watching it do nothing, sold it off - of course much too early. Starting in middle 2006 it's rocketed, along with its peer Mobile Telesystems (MBT). The pickings in US listed Russian stocks are extremely limited; most choose to list in London (I suppose its a Cold War thing...). Many stocks are also simply a proxy on the energy trade, of which there are easier ways to play then going through Russia.

I've also had my beefs with the way business is run in Russia, but upon reflection and watching how the US business world works, I can't really say we are not throwing rocks from our glass house to criticize any other economic/political system, after what we do in our system that generally transfers wealth up to the elite few (no different than Russia, just with better packaging).

First, let me preface this by saying I don't touch US-based telecom because it's a saturated market, and I like secular growth. I even have been a bit wary of international telecom because frankly it seems to go from growth to saturation quite quickly, and Russia is already appearing to be hitting that situation; but some of the moves from Vimpel of late have been interesting, especially its move to become an integrated player combining land line with its mobile business, creating the potential for "package" services that are very popular in the US. Back in late December, Vimpel announced a $4.3B deal to buy Golden Telecom - that pretty much marked the top in Vimpel stock price, north of $45.

  • Russia's OAO Vimpel Communications agreed to buy broadband and fixed-line operator Golden Telecom Inc for about $4.3 billion. Under the deal announced Friday, VimpelCom will pay $105 for each Golden Telecom share, a 5% premium to where the shares closed Thursday.
  • The deal gives VimpelCom, Russia's second largest mobile operator, a foothold in Russia's growing market for broadband, as well as the slowing business of fixed-line telephony. Golden Telecom is also Russia's largest player in the business of providing telecommunications services to businesses.

As usual, the minute a deal is announced the acquirer gets struck down, and seems to have a ceiling on it's stock price - in Vimpel's case, it's been an even uglier road as the company has lost over 35% of its value in just over 3 months. But the transaction completed in late February 2008 so that overhead should begin to dissipate. Even as recently as a month ago the stock was near $39, but a "disappointing" earnings report mid month along with general retrenchment from the Russian market has booted the stock.

By disappointing I mean "wonderful growth numbers but not good enough for analysts".... a typical situation on Wall Street. My 2 risk factors are relative saturation of the Russian mobile market, plus degrading margins (in this case attributed to stock based compensation)- but the risks at $29 should be far less than the risks at mid $40s or mid $30s.

  • Vimpelcom (VIP), Russia's No.2 mobile phone operator, on Wednesday posted an 86 percent jump in fourth-quarter net profit but fell short of market expectations and saw its shares fall by about 5 percent.
  • The net profit, in U.S. GAAP terms, was up to $368.1 million against an average forecast of $401.5 million in a Reuters poll of nine analysts.
  • The OIBDA margin fell to 45.7 percent from 47.5 percent a year ago, below analysts' forecasts of about 49.3 percent.
  • "This shortfall to expectations was primarily due to higher than expected expenses related to stock-based compensation for management, which is a non-cash and non-recurring item," analysts from Uralsib Bank wrote in a results review.
  • Vimpelcom's Chief Executive Officer Alexander Izosimov told reporters the expenses amounted to $118.7 million in the fourth quarter, up by $78.2 million from the third quarter and by $94.5 million over the fourth quarter of 2006. "As the share price rose by more than 50 percent in the fourth quarter, allocations to stock-option programmes increased. This has no burden on the company's cash flow," Izosimov said.
  • Without those expenses, Vimpelcom's OIBDA margin would have exceeded 50 percent, the company said.
  • Vimpelcom, owned by Russian Alfa Group and Norway's Telenor , said revenues were up 38 percent to $2.01 billion, but again missed the analysts' average forecast of $2.025 billion.
  • The average monthly revenues per user (ARPU), an indicator of client quality, rose in Russia to $13.50 from $10.90 in the fourth quarter of 2006 and was slightly higher than a poll figure of $13.40. In Kazakhstan, Vimpelcom's second-biggest market, the ARPU fell to $13 from $13.80, above a market view of $12.60.
  • In 2007 as a whole, Vimpelcom's total revenues rose by 47.3 percent to $7.17 billion, while OIBDA amounted to $3.6 billion.
  • "The main potential for growth is in broadband Internet. Growth will be rapid, similar to what we saw in the mobile phone market," Izosimov said.
Golden Telecom also appears to be quite a healthy company...
  • Russian fixed-line telecoms operator Golden Telecom, which has been recently acquired by Vimpelcom (VIP.N), said on Tuesday its full-year 2007 net profit rose by 78 percent to $152.6 million.
  • The company said in a regulatory filing its 2007 revenues, to U.S. GAAP, rose 51 percent to $1.29 billion from $854.62 million in 2006.
These are just not the type of numbers you see in US based telecom.... or Western Europe. And the Crackberry is coming to Russia through Vimpel as well...
  • Subscriber growth has slowed in Russia, where most people already use cell phones. But users there are burning up more minutes on mobile phones and sending more text messages, boosting the company's revenue. Izosimov wants to keep moving in that direction.
  • And VimpelCom plans to start selling Research In Motion's (NasdaqGS:RIMM) BlackBerry devices in Russia in early 2008.
  • "At first, it looks like a luxury category to the population. Then, it becomes absolutely normal because disposable income reaches a certain level. There's a lot of intrinsic value in the communications (ability) we provide."
  • Izosimov says wireless usage has boomed even in Kazakhstan, where food inflation has roiled consumers. In 2008, he says, VimpelCom will focus on adding more high-spend customers in Kazakhstan, not just subscriber growth.
  • In Ukraine, though, VimpelCom will be focused on grabbing market share. VimpelCom has 2.2 million active subscribers in Ukraine and needs to double that, he says.
  • VimpelCom hopes to get a lift from entering its first market in Southeast Asia in 2008. It's in talks for a joint venture in Vietnam.

Technically, the chart is at an interesting place. The stock has pulled back all the way to its 200 day moving average which is a key technical support/resistance level. A break through this level and the stock could break down much further - a bounce off this level, and we should be in good shape. $29 is also the area the stock sold off to in the January panic, so it is again - simply a key technical level to hold. If we do get a rebound here the $34s provide some resistance as the 50 day moving average is there (and falling sharply by the day).

In terms of profits, we are looking $2.00 in 2008 EPS and $2.50 for 2009 - I would anticipate a 18-22% type of growth rate for the next few years as mobile (and land line) slow down to saturation but broadband starts to take off in mother Russia. So we have a forward P/E ratio of 14.5 compared to Mobile Telesystems (NYSE:MBT) sub 12, but Vimpel has (in general) the better operational metrics.I will be watching Vimpel

for a reversal off of these levels, and will be interested in buying north of $30-$31 or if there is a break of this support level (from which the stock could drop quite a bit to reach any new support). But from a fundamental point of view, while saturation always overhangs any telecom player, the macro trends of natural rich Russia will probably lend to an easier time on the middle class of that country relative to the US in the next few years - despite the dysfunctional governments of both.

Disclosure: Long Research in Motion in fund; no personal positions

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