Good Q2 Results, Svyazinvest Moved Telecoms in September

Tibor Bokor
Analyst
OTKRITIE Financial Corporation

Telecom stocks in September advanced on average by 10 percent with the best performers being South Telecom (up by 34 percent), VimpelCom and Sibirtelecom (both up by 21 percent). The telecom sector has been lagging behind the overall Russian stock market; the RTS index advanced by 17.6 percent in September.

The biggest driver for Russian telecom stocks has been improving macro and especially the strengthening ruble. Besides the macro driver, VimpelCom second quarter results and the Svyazinvest restructuring plan were the most important drivers behind the stock moves.

VimpelCom posted better than expected results on Aug. 27. The company showed an improvement in sales compared to its distressed first quarter. Also, the focus on cost cutting and cash generation was impressive and the consolidated EBITDA margin reached 50.6 percent in the second quarter of 2009, which was even higher than a year ago. However, the mobile telecoms are still far from posting pre-crisis double-digit growth, although recovery in the second quarter is a bit earlier than the market anticipated. Looking ahead, mobile telecoms are likely to continue improving their financial results and therefore their shares continue to be an attractive way to play the Russian domestic economy recovery.

Svyazinvest has finalized its restructuring plan for the end of October and it is clear now that the holding will try to do a full merger of its subsidiaries under Rostelecom. The plan needs to be supported by the minority shareholders in the regional telecoms. This has prompted expectations of favorable swap ratios to be offered to shareholders in companies like Sibirtelecom and South Telecom that advanced the most in September. We believe that demand for the shares of regional telecoms is likely to stay high until the beginning of 2010 when the valuation and swap ratios are going to be announced.

In October we expect Sistema’s subsidiaries to be the center of attention. We expect a positive decision by MTS about buying out the Comstar minorities to be made prior to these events, and this is likely to have a positive impact on Comstar shares in October. Besides these events, macroeconomic development and especially the ruble will be the main drivers impacting the stocks of the most liquid telecom names such as MTS and VimpelCom.