fbpx
MBT A Solid Bet On The Recovery Of The Russian Economy www.christopherleesusanto.com

MBT A Solid Bet On The Recovery Of The Russian Economy

For all my article involving stocks that are in my portfolio, I have taken into account the psychology theory that affects how people behave in the financial markets.

Particularly the

  1. Overconfidence theory that found that there is a human tendency to overestimate their ability.
  2. Cognitive dissonance theory which is a judgemental biased people tend to make because they don’t want to admit they are wrong.

Hence, whenever I am in doubt on whether to sell, hold or buy more of my current stock that is in my portfolio, I always go back to my original investment thesis of why I bought that stock in the first place- and see if that thesis still holds.

Only if I had found new facts that proved that my original thesis no longer hold- then I will sell the stock.

My Investment Thesis On Mobile TeleSystems:

  • Mobile TeleSystems (NYSE: MBT) is a more profitable and well-managed Telecommunications company when comparing it to its fiercest competitor in Russia – VimpelCom (NYSE: VIP)
  • I am confident on the recovery of the Russian economy and it is an important factor for the future returns of this stock because almost all of its earnings is in Rubles and the stock is listed on NYSE which is denominated in USD – dividends from Ruble earnings will be converted to USD
  • Overall, Mobile TeleSystems is a safe bet for the recovery of Russian economy – due to the more stable nature of the telecommunications industry and the lack of good company to bet in Russia via The United States Stock Exchange (NYSE and NASDAQ) for the overall Russian economic recovery
Mobile Telesystems www.christopherleesusanto.com

Mobile TeleSystems

Picture source: Google

With more than 100,000,000 subscribers, Mobile TeleSystems (NYSE: MBT) is Russia’s largest mobile operator as well as the largest in Eastern and Central Europe.

It provides mobile network not only to Russia but also to other countries of the Commonwealth of Independent States. MBT soon became one of the best-selling handset brands in Russia with LG, Samsung, SonyEricsson and Nokia.

MBT soon became one of the best-selling handset brands in Russia with LG, Samsung, SonyEricsson and Nokia.

Overview and Analysis of Russia’s Mobile Market and The Catalyst for Growth

RUSSIA www.christopherleesusanto.com

RUSSIA

Picture source: Google

Russia has the largest mobile market in Europe with more than 241 million subscriptions. It is widely dominated by three major operators (Mobile TeleSystems, VimpelCom (NYSE: VIP) and MegaFon).

It is widely dominated by three major operators (Mobile TeleSystems, VimpelCom (NYSE: VIP) and MegaFon).

Russia’s recent economic misfortune has impacted growth in the telecom sector although I think it will pick up in line with the overall economy.

Mobile Sim card penetration is at 170%, the actual mobile user penetration is lower because most people like to have multiple SIM card use.  The deployment of high-speed packet access (HSPA) networks and rapidly evolving LTE sector represents new growth opportunities – moving forward from the old General packet radio service (GPRS) and Enhanced data for GSM evolution (EDGE).

The deployment of high-speed packet access (HSPA) networks and rapidly evolving LTE sector represents new growth opportunities – moving forward from the old General packet radio service (GPRS) and Enhanced data for GSM evolution (EDGE).

The number of smartphones users is expected to grow 11.85% in 2016, 10.45% in 2017 and 6.25% in 2018 based on the forecast by a research company emarketer.com- Russia is the world’s 5th based on the most number of smartphones user and it will take over Japan as 4th in 2016.

Inexpensive smartphones are opening new opportunities for marketing and commerce in emerging markets like Russia where many consumers previously had no access to the internet.

Russia is one of the leading countries for internet use in Eastern Europe; it is still ranked fairly low compared to some of the world’s most developed economies (France. Japan, Germany, and Canada) – Russia still has a long way to go for millions of more users to start using the internet daily.

In the future, mobile internet audience will also grow more rapidly as more Russians will start using more mobile devices to access the internet.

Regulatory issues

Mobile Number Portability

Telecom is a highly regulated sector in many countries around the world – including Russia. It is regulated because the potential for a single company to dominate the market is huge – due to the network effect because as a telecom network’s size increases significantly, customers may prefer the larger network over smaller players.

It is regulated because the potential for a single company to dominate the market is huge – due to the network effect because as a telecom network’s size increases significantly, customers may prefer the larger network over smaller players.

In Russia, the telecommunications services are governed by the federal legislation.

From December 2013, the Russian government enacted the law that allows cell phone customers to change mobile service provider and keep their number.

This will increase churn rate (customers switching telephone operators)  as it becomes easier for customers to switch to a better telecom provider as and when they want without having to change their existing mobile phone number.

Frequency Spectrums

Cell Towers www.christopherleesusanto.com

Cell Towers

Picture source: Google

Wireless phones communicate with cell towers on frequency spectrums – it is the most valuable resource for a wireless company – since spectrums are a finite resource, they’re allocated by the government.

Low-frequency spectrums (also known as coverage spectrums) let wireless signals travel long distances while high-frequency spectrums travel shorter distances – commonly known as capacity spectrums as it helps telecom companies cope with increasing network traffic.

In coverage spectrums, the telecom companies cost is lower – it require fewer cell towers to set up the network than in higher frequency capacity spectrums.

As spectrums are allocated by the government, the company’s ability to bid and secure lower frequency spectrums is very important- in order to provide better network coverage to their users- and ensure users loyalty due to the consistently good network coverage provided by the telecommunications company.

Calling Party Pays (CPP) legislation

From July 1, 2006, the law that prohibits mobile users from being charged for incoming calls was put in place – except if the calls were received outside of a subscriber’s home area.

With this law in place, the revenue that telecommunications company receive per user decreases again- because they cannot charge users for incoming calls received from their home area.

For a telecommunication company to earn as much as possible on a per user basis is by charging as much as they can- on as many services as they can from the user.

However, due to the regulations measures implemented by governments over the years, telecommunications company is becoming less profitable. This does not help taking into account that telecommunications itself is a very price competitive business.

This means that they would have to be more creative in adding more value to users in order to increase the amount of revenue they can earn per user basis.

Infrastructure sharing

The cost of deploying networks in certain areas can be deemed unattractive from a commercial standpoint of a telecommunication company in Russia.

As a result, some companies could jointly roll out and utilize networks in certain regions under partnerships agreement. Such as the recent example of 1) MBT partnering up with VIP to share mobile spectrum in 20 Russian regions and 2) VIP partnering up with MegaFon to jointly build mobile towers in 10 Russian regions

MBT Company Culture

Mobile Telesystems www.christopherleesusanto.com

Mobile TeleSystems

Picture source: Google

Let’s look at MBT history and how it got to where it is today. Mobile Telesystems PSJC was established back in 1993 as a joint venture between German and Russian companies.

MBT has been listed in New York Stock Exchange since 2000 with the principal shareholder being Sistema, a Russian holding company. Sistema has close 52% share of the company and the remaining 48% are the free float.

It was the first company in Moscow to offer service on the GSM (global system for mobile telecommunications) standard. Its major competitors were VimpelCom and Megafon.

Due to intensive acquisitions of companies, MBT adds to their subscribers base and is currently at 100 million users.

MBT VS VIP

Vimpelcom www.christopherleesusanto.com

Vimpelcom

Picture source: Google

Vimpelcom competitive threat grew in 1998 when the government broke its one operator per frequency policy and issued VimpelCom a GSM-900 license.

The lower frequency was more feasible operationally than the 1800 frequency.

In that year itself, MBT acquired Rosico, a company with a license for the GSM 1800 frequency that solidifies MBT’s ability to offer better GSM service.

Early 1999, MBT surpassed VimpelCom for the first time in terms of market share – MBT had cultivated a rich subscriber base and a reputation for better coverage in Moscow.

VimpelCom brought the price war in 1999 by offering at a loss a $49 handphone that comes along with a $10 prepaid phone card with connection fee waived – that transformed cell phones from a luxury item to a mass market product.

However, MBT was not concerned as they said that they are interested in real subscribers and not inflated figures. The director of marketing of MBT, Igor Timofeyev also said that most of the people who bought the cheap phones cannot afford the monthly upkeep and will stop using them in a couple of months. Nevertheless, MBT responded by making its package more attractive.

In 2001, due to aggressive expansions by VimpelCom, MBT is starting to lose market share for the first time in two years. Net revenues at MBT continue to rise, but the average revenue per user was dropping.

MBT strategy has never been to rely on lowering price – even back then it stated that it would rely on superior technology rather than a price war to gain a foothold in the market.

MBT’s Initial Public Offering (IPO)

NYSE www.christopherleesusanto.com

NYSE

Picture source: Google

After MBT’s IPO backed in 2000, their main goal was to increase profits using the IPO proceeds.

Their strategy was to and I quote by President Smirnov, “Our strategy is to become the first truly cellular operator in Russia by integrating our regional networks into a single unified network, developing standardized tariffs, and deploying integrated nationwide customer service and billing systems”.

Regional expansions were definitely needed because the market grew crowded in Moscow.

On top of increasing their profits by using IPO proceeds to expand, I believe that they too, find it beneficial to have funding from sources outside of Russia.

This gives them diversification in terms of their of their financing sources.

Unfortunately,  MBT is not able to raise additional equity financing anymore through newly issued depositary receipts such as the ADR, due to Russia securities regulations providing that no more than 25% of a Russian company’s shares may be circulated abroad through sponsored depositary receipt programs.

Fortunately and hopefully, with this limitation, MBT shares will not be diluted easily through the issuance of additional equity to the public- instead they will take on debt.

Fortunately and hopefully, with this limitation, MBT shares will not be diluted easily through the issuance of additional equity to the public- instead they will take on debt for expansion.

Sistema as the parent company

Sistema is the parent company of MBT and they may require capital to be injected into their other businesses – they will exercise control over MBT – approving of dividends etc in order to meet their capital obligations.

On July 17, 2015, MBT agreed to buy a billing software provider from Sistema, its parent company.

The company they are acquiring is called Nvision Group is a deal valued as much as 15 billion rubles including debt.

MBT said the deal can help them to cut costs, manage billing systems and enter the technology consulting market. That unit reported a loss of about 800 million rubles in 2014 and sales that declined 28 percent.

At first glance, this deal seems bad for MBT minorities as Sistema is taking away MBT’s cash and making it buy a loss-making asset from the parent company. Most people do not see a clear strategic rationale for the acquisition.

However, NVision is the owner of Sistema’s billings solution and billing is one of the most important function for a mobile telecom. This deal might see a strategic rationale in the long run if it can help to reduce MBT costs when introducing products into the market. This is because in selling any products in the market, billing is a central function.

There is, of course, the risk of the potential conflict of interest between Sistema and MBT – however, this risk has been around since 1996 when Sistema acquired control of MBT and since it is nothing new, this fact has already been priced in.

Ruble as the Main Source of Income

Their dividend policy is to make annual dividend payments of at least 75% of free cash flow but not less than RUB 40 billion – valid up till 2017.

dividends paid in ruble MBT www.christopherleesusanto.com

Dividends Paid In Ruble In MBT

Picture source: Author’s Work

Their main source of income is in Ruble but I am getting paid for dividend in USD. Hence, the better the exchange rate between RUBLE and USD, the higher my dividend will be when it is converted to SGD.

They have been consistent in paying out dividends and as we move on in this article, we will see if it is sustainable.

rubles to usd chart www.christopherleesusanto.com

Rubles To USD Chart

Picture source: Xe Chart

Ruble to USD exchange rate was pretty stable from 2006 to early 2014 – From late 2014 to late 2015, the Ruble has depreciated by close to 50%to that of USD – Even though their dividend payout using RUBLE has not depreciated, the amount that I am going to receive will be lesser due to the depreciation or RUBLE. To be exact, it is half of what I can get as compared to a year ago.

The value of dividends received by holders of ADR will be subject to fluctuations in the exchange rate between the ruble and the dollar.

The price of the oil has and always will be the main driver of Russia’s economy – Russia produce and exports large amount of oil.

The price of oil is in a horrible state right now and In December 2015, EU is set to extend Russian sanctions by another six months and the US sanctions are still in place – The Russia’s Ruble decreased in value rapidly and capital began to leave the country as citizens placed their money abroad.

An important catalyst for the growth of this stock is obviously the rise in the price of oil and the potential appreciation of Ruble.

This article is to be continued in part 2 of 3…

Disclosure: I am long on MBT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. 

Important: Please read my disclaimer.

Sign up for my premium investing newsletter

Further Reading:

Keryx Biopharmaceuticals could be an Interesting Biotech Stock Play

UPDATE: Sold Off All My Stocks In Mobile Telesystems (NYSE: MBT) And This Is What I Learnt From It