Mobile TeleSystems: Financially Stable But Lacks Clarity On Its Listing Strategy

About: Mobile TeleSystems Public Joint Stock Company. (MBT)
by: Danil Kolyako

The company showed sustainable revenue growth in 1Q 2019.

However, the possible delisting from the NYSE is still a concern. The final decision about the company's listing strategy is expected to be made in the end of summer.

Cautious investors still can receive a dividend this July and then sell the stock.

Mobile TeleSystems' (or MTS) (NYSE:MBT) results for the first quarter of 2019 are mostly positive, though the company's investment case is pretty tricky. On the one hand, the company consistently pays very decent dividends, which is the core of my bullish view on the company. On the other hand, MTS still has nothing to say about its listing strategy, and the company's delisting from the NYSE is a huge risk for American investors. That said, a risk-free way to deal with the situation is to hold the stock, get the upcoming dividend payment and then sell the stock. In this case, you'll get more than a 7% dividend yield. However, those investors who will continue to hold the stock until the end of the year will be rewarded with more than 10% dividend yield under the best of circumstances.

Earnings Analysis

The company's revenue in the first quarter of 2019 increased by 9.4% compared to the first quarter of 2018 and amounted to 118 billion rubles.

Source: Company data, author's spreadsheet

The adjusted OIBDA grew by 6.1% Y-o-Y to a level of 55.3 billion rubles. The adjusted OIBDA margin fell to 46.9% versus 48.3% a year earlier.

Source: Company data, author's spreadsheet

The net profit of MTS in the first quarter of 2019 amounted to 17.8 billion rubles, increasing by 15.7% compared to the first quarter of 2018.

Source: Company data, author's spreadsheet

Net debt of the company at the end of the first quarter amounted to 292.4 billion rubles, increasing by 25.6% compared to the end of 2018. Net debt/OIBDA ratio rose to 1.3x. Despite the significant 25% increase in net debt compared to the end of 2018, the debt load is still at a comfortable level. In addition, the company is able to generate stable cash flows, which will allow reducing its debt without much difficulty, while maintaining dividends at a decent level.

Source: Company data, author's spreadsheet

Capex remained virtually unchanged compared to Q1 2018 and amounted to 16.6 billion rubles.

Source: Company data, author's spreadsheet

Free cash flow in the first quarter was negative and amounted to -31.4 billion rubles. In the fourth quarter of 2018, MTS reserved $55.8 billion for paying a fine to US regulators for bribes in Uzbekistan. In March 2019, MTS paid the fine. Without taking into account this fact, the free cash flow of MTS increased by 74% compared to last year and reached $24.2 billion.

Source: Company data, author's spreadsheet

Overall, the company’s financials have improved, despite the subscriber base decline by 0.5%. For MTS it means that its subscriber base will no longer be able to grow due to the saturation of the Russian telecom market. However, the company noted that it was able to get more revenue from subscribers who spend a lot on mobile services. In such conditions, the key sources of revenue growth will be a further increase in average revenue per user and success of the company's non-mobile business, for example, MTS Bank.

The company has no plans for a new share repurchase program, it said during the conference call following the results of the first quarter. In April, MTS completed the buyback program, buying shares worth 1 billion rubles from AFK Sistema.

MTS management maintained its forecast for revenue growth in 2019 at 3%. For comparison, the company's revenues increased by 8.9% in 2018. The forecast is so modest due to intense competition in the Russian telecom market. The OIBDA forecast was raised from negative to stable: the figure is expected to remain at the 2018 level. Capital expenditures in 2019 are planned to amount to 90 billion rubles, including the cost of implementing the Yarovaya law requirements.

As for dividends, this July the company is going to make a dividend payment of $614 million for 2018, or around $0.3 per ordinary share ($0,6 per ADR traded on the NYSE as one ADR equals to two ordinary shares). As I said earlier, investors have a great opportunity to get a 7% dividend yield very soon. The last day to buy the stock with upcoming dividends will be July 5, 2019. If the company remains on the New York Stock Exchange, investors will be able to receive more than 10% dividend yield by the end of 2019.

Delisting Is Still A Big Risk For American Investors

In late May, Vedomosti newspaper interviewed Andrei Dubovskov, President of AFK Sistema. Regarding the possible delisting from the NYSE, Dubovskov said that the company is discussing this possibility, but no decision has yet been made - either intermediate or final. At the same time, he noted that in the existing economic and geopolitical conditions, listing in New York now doesn't provide any additional advantages in terms of the capitalization of the company. Dubovskov also confirmed that the delisting is not related to any possible sanctions and MTS will remain a public company.

Thus, I see three scenarios around the company's listing strategy:

1. MTS stays on NYSE. Obviously, this is the most positive scenario for American investors. Unfortunately, the management doesn't see any significant advantages from NYSE listing for the company, and recently initiated class-action lawsuits around the Uzbekistan case eliminate any practical meaning for the listing. However, interestingly, the costs associated with the delisting can significantly exceed any listing costs. The share of ADRs in the shareholder structure is 37.7%. With a stock price of $8.3, MTS will have to buy back shares for more than $6.2 billion, which will more than double the company's debt. But most likely the company will not have to buy back ADRs. MTS can offer investors to exchange their ADRs for GDRs (in line with scenario №2) or ordinary shares (in line with scenario №3).

2. MTS leaves NYSE, moves to LSE or any other European stock exchange. I think this is a compromise option, as it allows the company to keep its presence outside Russia without having to carry the regulatory burden of US authorities. Nonetheless, I don't see any opinions in favor of this scenario from the management team.

3. MTS leaves NYSE and the stock trades only in Russia. Such a scenario can be considered as the worst for many reasons. Firstly, American investors will be able to trade the stock in virtually the only way - on the OTC market. Secondly, due to the fact that NYSE listing implies to meet certain requirements regarding minority shareholders, the question arises whether MTS will take into account the interests of minority shareholders after the delisting to the same extent. And thirdly, there are fewer listing requirements on the Moscow Stock Exchange, so the company may disclose less information that could be potentially valuable for investors.

Overall, there's too much uncertainty around this situation at the moment, so investors will have to wait until the end of the summer before the company announces its new listing strategy.

A Well-Known Russian Business Peacemaker Can Join The Board

The company's board of directors approved the list of candidates for voting on the election at the annual general meeting of shareholders of the company to be held on June 27, 2019. The most interesting candidate is Valentin Yumashev, the former head of the Russian Presidential Administration under Yeltsin in 1997-1998. Currently, Yumashev is a volunteer advisor to Russian President Vladimir Putin.

Valentin Yumashev / Source: TASS Russian News Agency

Yumashev is known as a person who is able to reconcile conflicting parties in a business dispute and as a “rescuer” of arrested influential persons. It was Yumashev who helped to resolve the shareholder conflict in Norilsk Nickel in 2012. Yumashev called Potanin to inform that Roman Abramovich was ready to reconcile him with Deripaska. After that phone call, negotiations began which put an end to the conflict.

According to Russian newspapers, Yumashev helped get out of the detention center such people as Yevgeny Olkhovik and Boris Vainzikher, who are close friends and managers of billionaire Viktor Vekselberg; Yumashev also helped the former CEO of Rosnano Leonid Melamed in a similar way.

Therefore, Yumashev’s participation in the board of directors will definitely remove some domestic political risks. After the conflict of AFK Sistema's owner Vladimir Yevtushenkov with Rosneft CEO Igor Sechin, such an addition to MTS' board of directors as Yumashev would be especially relevant.

Consensus Estimates

Analysts remain positive about MTS, with 8 Buy recommendations, an average price target of RUB 324.68 in the Moscow Stock Exchange, and upside potential of +20.27%.


Final thoughts

Those investors who are afraid of the company's delisting can still count on dividends this July. Apart from the risk of delisting, I continue to consider MTS as a good dividend stock at least for a few years to come.

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.