Moscow Journal: A Play on Moscow's 'Dollarized' Economy
thestreet.com
By Erin Arvelund
Staff Reporter
7/13/98 5:36 PM ET
Things are looking a lot brighter for Russia today. The
government cut a deal with the International Monetary
Fund for $22 billion over the next two years, which should
bring the cash-strapped government -- and the economy --
a respite from its recent financing woes. From 1998
through 1999, the IMF will provide $15.1 billion, the World
Bank $6 billion and -- surprise! -- Japan will kick in
another $1.5 billion.
But the agreement marks only the end of the beginning,
for Russia's economy still must be restructured in order to
grow. And what if it doesn't -- or doesn't grow quickly?
Whether Russia's macroeconomy chugs ahead or
contracts again, one sector that should hold up "relatively"
well (relative is not an easy word to use, as Russian
stocks dropped 65% year to date) is telecommunications.
In short, people tend to pay their telephone bills, whether
they be landline or cellular. And investors are hungry for
transparent, cash-rich companies which stand up solidly
under a Western audit.
In either scenario, Vimpelcom (VIP:NYSE ADR) is a safe
Russia play. Back in April, TSC questioned whether
Vimpelcom was worth the big bucks. At that time, with
the stock at 54, Vimpelcom was trading at a bit more than
8 times EBITDA cash flow; the stock then went on to hit
an all-time high of 59 in May. Now, back at 43,
Vimpelcom is still not a screaming bargain. But now
investors have taken a microscope to all emerging
markets -- especially Russian equities -- and found them
lacking in earnings, transparency and protecting
shareholders' rights. All the things that Vimpelcom, so far,
has to offer.
"I cover all the others, but Vimpelcom is the only
company I would buy in Russia," says Diana Zehetner,
telecommunications analyst for Robert Flemings
Securities in London. Her firm hasn't done any banking
for Vimpelcom.
The main reason is customer growth. Of course,
Vimpelcom would feel the pinch if Russia's economic
growth stayed flat, just like any other company. But
compare it to Rostelecom (ROS:NYSE ADR), Russia's
formerly state-owned long-distance monopoly, and answer
this: Which of them realistically is capable of doubling
sales over the next few years? The answer remains
Vimplecom.
Devaluation worries seem to be receding into history, but
let's say the government decides to pursue a "managed"
devaluation of 10%. Which company is covered? Even
though both Vimpelcom and Rostelecom buy their
equipment and bill in rubles, Vimpelcom bills at a dollar
rate. Rostelecom can't afford to do so. Plus, demand for
cellular is growing. Rostelecom's international traffic is
backing off, and its revenues for income calls will
decrease as the World Trade Organization's mandated
rates for global settlements come down.
Vimpelcom does have one potential achilles heel,
however, and that's competing cellular carriers. On Friday,
rumors were flying in Moscow that investment bank
MFK-Renaissance and Sistema, a telecommunications
holding company backed by the powerful Moscow Mayor
Yuri Luzhkov, could take Sistema public sometime in
the next year in an IPO. If so, Sistema Telecom, as it's
likely to be known, could team up with Russia's
Uneximbank, the fourth-largest bank in the country (by
assets), to bid for the remainder of the privatized state
telecommunications holding company, known as
Svyazinvest. Sistema Telecom could be a cellular
monster in the making.
Other rivals lurk on the horizon. Moscow Mobile
Telesystems (MTS), a GSM-900 cellular operator and the
principal competitor of Vimpelcom, is planning to do an
IPO by the end of 1998 if the market climate improves.
The very same Sistema holding company apparently
serves as MTS' financial advisor, according to a report by
Renaissance Capital. The IPO is likely to take the form
of a Level-3 ADR facility with an New York Stock
Exchange listing, similar to what Vimpelcom did in 1996.
So far, Vimpelcom still has the spectrum to stay in the
lead, says Jim Friedland, who follows Russian
telecommunications for Arnhold & S. Bleichroeder.
Sistema holds the 2.5 Mhz spot on Moscow's bandwidth,
MTS has 9 Mhz and Vimpelcom 30 Mhz. But Luzhkov
has a reputation as the Richard Daley of Russia. "He
could probably authorize his company Sistema more
space on the spectrum if he wanted," Friedland says
darkly.
Friedland is revising his 1999 price target to 70 from 61,
given that Vimpelcom just won licenses in Russian cities
aside from Moscow and its subscriber base can only
increase. At 43 right now, "it's a deal."
Is Vimpelcom safe? Yes, at least in the standard Western
sense. The company has a clear niche in Russia's
so-called "dollarized economy," where customers who
use cell phones are beneficiaries of, and participants in,
Russia's booming grey economy. Vimpelcom knows how
to manage expectations and deliver growth and earnings.
For now, investors must pay for safety of Vimpelcom, and,
in the Russia market, you get what you pay for. |
