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. Last Updated: 07/27/2016

Rostelecom Seeks to Win Back Investors

Will investors love Rostelecom, former darling of the emerging Russian stock market, ever again?

Shares in national long-distance carrier Rostelecom have fallen 80 percent over the last 18 months, substantially underperforming the benchmark Russian index, which has climbed 20 percent over the same period.

Rostelecom was once preferred among the few Russian companies seen worthy of foreign investment and surged 460 percent in a year to a record high of $4.90 in March 2000.

It's now plagued by uncertainty over its role in a sector-wide restructuring and concern about its lack of strategic direction.

Analysts say the state-controlled carrier's new management is talking a good game, promising to seek fresh cash flows and halt the erosion of its core long-distance business.

But words must now become action.

Rostelecom needs to be less dependent on declining long-distance operations, focus on high-margin investments and diversify services to save revenues in a highly competitive sector, analysts said.

Unless this happens, money will continue to be spent on safer bets in other emerging-markets' telecoms stocks.

Rostelecom last year made a 1.8 billion ruble ($61.69 million) loss, according to international accounting standards, which analysts blamed in part on the growing market share of alternative carriers like Golden Telecom.

Add in this year's global telecoms malaise, and Rostelecom's share price has fallen almost 80 percent from $4 at the beginning of last year, draining liquidity from the paper.

"The interest of Western clients is negligible. The percentage of holdings is low, probably at a historic low level," said Brunswick UBS Warburg director Martin Diggle.

Rostelecom should focus on operations that are highly profitable while diversifying into areas like the Internet.

Troika Dialog analyst Yevgeny Golosnoi said he asked investors to compare Rostelecom with an emerging-market peer, Brazilian carrier Embratel.

"They liked Embratel better because Embratel is trying to move away from the long-distance service, which is on the decline," Golosnoi said. Also hit by waning interest in emerging markets and a pull-out from telecoms, Embratel has only lost half the ground Rostelecom has in the same 18 months.

Rostelecom has said it wants to expand into Internet and data transfer, which they say will drive business in future. "But what they do is not consistent with changes in strategy," Golosnoi said.

Sergei Kuznetsov, newly appointed general director of Rostelecom, last week spelled out a new strategy for the company, saying improving investment potential was his top priority.

He said the company would take a break from capex-heavy projects, work to pay debt and sell loss-making assets.

But Golosnoi downgraded Rostelecom shares to "Hold" from "Buy" after news that Rostelecom is seeking to sell its stakes in profitable local exchange carriers — Telmos and Sovintel — to shore up its earnings in the short term.

"If your business is not growing, you should stick to investments like Sovintel and Telmos," he said. "This is where you get high margins. You should buy them, not sell them."