From Russia with love 2001-11-21
A troika of telecom stocks that are well-positioned for current trends and gaining analyst esteem.
by Ben Mattlin, equity research columnist
When shares of Russian-based telecom companies start earning a measure of analyst esteem, savvy investors owe it to themselves to take a further look.
To be sure, these three Russian telcos haven’t yet attained analysts’ highest rating, but quite surprisingly—and seemingly out of nowhere—each has an average rating better than a neutral 3, and one of them has moved up to an average rating of 2 ("buy"). What gives?
Of course, emerging markets like Russia may represent risky business for the unitiated. But for investors looking for rapid growth and willing to take volatility, they can also be terrific opportunities.
Companies mentioned in this article
Vimpel Communications (VIP)
Mobile TeleSystems (MBT)
Golden Telecom (GLDN)
The macro environment in Russia seems to be in genuine growth mode, and its apparent economic revival is being driven by a vast population (150 million) subscribing to wireless services at a staggering rate—some bulls forecast better than 50 percent growth per year for the next five years.
At the same time, there’s considerable consolidation, with Russian regional telecom carriers buying each other up and/or being taken over by larger, Moscow-based competitors. J.P. Morgan recently dubbed the land of borscht and blintzes a "telecoms heavyweight."
So far, the biggest beneficiary of these trends is Vimpel Communications (VIP), a Moscow-based wireless telecom provider which recently saw its average analyst rating move up to 2 ("buy"). In its home base of Moscow, the company has already grown from 2 percent of the mobile market in late-1998 to 13 percent a year ago—the most recent figure available—while its wireless subscriber base outside Moscow is expected to grow by 67 percent annually for the next five years.
Reports for further inquiry
ValuEngine Quantitative Report for VIP: Forecasts, valuations, ValuEngine ratings, comparables, quantitative summary and financials
Strong Turnaround In A Weak Market
Investment Review — Golden Telecom, Inc.
Encouraged by strong financial gains in the first half of this year, VimpelCom fans point to its highly regarded brand-name and proven management team.
In addition, analysts who follow VimpelCom expect a dramatic jump in earnings this year. A Nov. 17 Multex Investment Review found that the consensus estimate for 2001 is earnings of 59 cents per share; last year, the company posted a per-share loss of $1.93. Moreover, next year the company is expected to bring in $1.07 per share.
Close behind is wireless carrier Mobile TeleSystems (MBT), which has an average analyst rating of 2.5. Also based in Moscow, it has been expanding aggressively in other regions of Russia, largely through acquisitions.Like VimpelCom, Mobile TeleSystems posted a good first half of the year, especially because of stronger than expected subscriber growth, which in turn gives it better bargaining leverage when negotiating for lower connection rates. It currently holds licenses for 43 of the country’s 89 regions, and operates in 21 of them so far.
Buying up regional carriers takes cash, naturally, and though Mobile TeleSystems boasted nearly 50 percent sales growth last year, it is still struggling to maintain profitability. Nevertheless, Wall Street foresees an earnings-per-share (EPS) increase of 46 percent this year to $1.46, and another 45 percent jump next year to $2.11, according to a Multex Investment Review of Nov. 17.
The stock reached a new high of $32.40 on Nov. 13, but many observers argue that its true worth has not yet been fully appreciated by the market. They point out that it has stolen not just market share but market leadership from VimpelCom, growing from a 41-percent share of Moscow’s wireless customers in 1999 to a 56 percent share in the second quarter this year. What’s more, in many of the non-Moscow regions it has the first-mover advantage.
This enviable situation has given the company a sufficiently healthy balance sheet to fund future acquisitions. But critics argue that the company’s high churn rate makes it a risky investment. Mobile TeleSystems’ own figures show that the number of disconnections as a proportion of net new subscribers is rising.
Finally, another Russian consolidator is Golden Telecom (GLDN), a facilities-based competitive local exchange carrier (CLEC) offering domestic and international wireline and wireless services as well as data and Internet connectivity primarily to Russian businesses; it also operates a fiber-optic and satellite-based network.
Its third-quarter results show that it is very well positioned to benefit from broad-based telecom trends in Russia, even though it’s not yet profitable. Led by data and Internet proceeds, total revenue for the quarter surged by 26 percent over the corresponding period last year. Earnings before interest, taxation, depreciation and amortization (EBITDA) vaulted by 80 percent year-over-year and 45 percent sequentially.
Still, EPS was a net loss of 8 cents—but that was an improvement from the previous year’s deficit of 12 cents per share. Analysts now anticipate 2001 will show a loss of 20 cents per share, which is much better than last year’s per-share loss of 43 cents. The shortfall is expected to dwindle even further next year, to a loss of 13 cents per share.
Golden Telecom’s average analyst rating is currently 2.5, but some advocates insist that the shares are undervalued by some 65 percent—a discrepancy of which investors will eventually take note, analysts say, as management sharpens its focus on reducing costs and attaining profitability.
If that’s the case, smart investors should buy shares now, and take advantage of the first-mover advantage. |
