FOCUS: MTS May Fire Sidorov Amid Poor Stock Performance
MOSCOW, April 11 (Prime-Tass) -- Russia's largest mobile operator Mobile TeleSystems (MTS) is rumored to be seeking to replace its president, a move that has been widely expected by the market for many months. MTS' President Vasily Sidorov did much to develop the company, but the most recently released financial results of MTS were disappointing to investors and the stock plummeted.
MTS may announce the resignation "very soon," a source in the company said, Biznes business daily reported last week. The source said that Sidorov has already "packed up his stuff in his office," the daily reported. The company did not comment. Sidorov has been MTS' president since October 25, 2003 and reportedly has a three-year contract. Analysts suggested that MTS is likely to appoint a marketing professional to the position of president. Grzegorz Esz is currently MTS' vice president for marketing.
"This development (the possible replacement of Sidorov) was expected by the market for a long time and the market should take it positively," Yelena Bazhenova, telecoms analyst from Aton Capital, said.
"The reason for the change is the poor performance of the company's stock in 2005 and the last conference call, during which the management was unable to give a precise development plan, which only aggravated the situation," Bazhenova added.
In late December 2005, Vladimir Yevtushenkov, chairman of AFK Sistema, MTS' parent company, publicly criticized MTS' management for the company's weak share price performance in 2005 and blamed it on poor marketing and public relations decisions. Analysts said then that Sidorov's days with the company were numbered.
MTS has been one of the poorest performers on the Russian stock market lately. MTS' ADRs have fallen 5.4% since January while with RTS benchmark index gained over 27%. As of April 6 MTS ADRs were down 3.4% on the year while the local shares gained 1.1%.
The release of MTS' fourth quarter 2005 and full-year 2005 financial results this month did not help the stock either.
MTS alarmed investors already in November 2005 when it released its results for the third quarter. Many investors rushed to sell the stock then pushing the stock down about 10% in just a couple of days. The latest release of financials caused the same reaction from investors, though the results were not that bad.
"MTS' results did not inspire investors. Overall, they were not too bad and were in line with analysts' expectations, which, however, were not optimistic," Mikhail Shipitsin, international sales trader at Alfa Bank, said.
MTS posted a net profit of U.S. $1.126 billion, up 14% on the year, a revenue of $5.011 billion, up 28.9% on the year, while monthly average revenue per user (ARPU) in Russia fell to $7.30 in the fourth quarter of 2005 from $8.90 in the third quarter and $11.20 in the fourth quarter of 2004.
MTS' results missed the consensus net profit forecast by as much as 11%, Bazhenova of Aton Capital said. "However, the results coincided with local brokerages' projections, while the consensus was high due to positive expectations of western investment banks," Bazhenova said.
Following the release of MTS' results, many brokerages downgraded their price targets and recommendations for the stock but some did this reluctantly.
UBS was among the first to announce the change in recommendations. UBS cut MTS' end-2006 target price to $40 from $45 and downgraded its rating to Neutral from Buy. UBS attributed the downgrade to "the revenue growth slowing down on the back of a weakening subscriber mix (particularly in Russia), deteriorating profitability, stubbornly high capex and falling rates of return."
Bear Stearns cut its year-end price target for MTS to $48 from $50. "Aggressive holiday promotions offered by the company to gain market share not only resulted in 18% and 16% ARPU reductions in Russia and Ukraine, respectively, but also increased marketing and operating costs," Bear Stern said.
Aton Capital cut MTS' target price by 15% to $40.60 and downgraded the stock to Hold. "We have downgraded our 2006 and 2007 forecasts for MTS to reflect the risk of greater than expected ARPU erosion, higher capex and negative changes in working capital," Aton Capital said in a research note last week.
Troika Dialog brokerage cut its price target for MTS by 18% to $42, keeping, however, its Buy rating on the stock. Alfa Bank also reiterated a Buy rating with a 12-month target price of $53. "We believe that MTS' stock is oversold and now provides a very attractive risk/reward ratio," Andrei Bogdanov with Alfa said.
The poor performance of the stock was due to a company policy aimed at keeping MTS' leadership on the Russian market in terms of subscribers, analysts said. "We believe that a failure to crystallize cash flows is the key problem for the stock at this stage. Given the rapidly deteriorating growth profile of the company, we think MTS should be focusing on maximizing cash flows and thinking about potentially returning cash to shareholders," analysts from UBS said.
"Instead, the company is still pursuing marginal subscribers in Russia, insisting that it has major short-term capex needs and mulling aggressive expansion plans. All of this is seems to be pushing the company's strong free cash flow story further out and, with value being the only attraction in MTS at this stage in our opinion, it is depressing share price performance," Vladimir Postolovsky, research director at UBS, said in a research note.
Analysts said that MTS' management should urgently start re-branding campaign and improve the company's management in the regions. "MTS has given up the right time for its re-branding campaign. Now it should strive to do it better than VimpelCom did," Bazhenova from Aton Capital said, adding that the practice of constant management changes, including of regional managers, should also be abolished.
May be somebody at MTS or AFK Sistema heard the analysts. On April 7 Kommersant business daily reported that AFK Sistema is expected to officially present a single logo for its telecommunication subsidiaries on May 10 at Svyazexpocomm telecom exhibition, Kommersant described the new logo as three interlaced different-sized orange circles, while Vedomosti business daily said that it is likely to be an egg in a circle, the color of which would depend on the company.
For example, MTS' color would be red, while MGTS' color would be blue. "We have considered several hundreds of logos and there are many final versions," Sistema's PR department director Irina Potekhina told Kommersant.
However, re-branding would take some time and analysts expect that the stock will show weakness throughout the first half of the year and may improve performance in the second half, if MTS results for the second quarter of 2006 are good. They are expected to be released in August.
"If in the second and third quarters MTS shows growth in ARPU, it would support the stock, but until August the stock will be under pressure," Bazhenova of Aton Capital said, adding that the second and third quarters are seasonally more impressive in terms of ARPUs, compared with the first and fourth quarters.
"The shares will likely see short-term pressure, but we would use this as a buying opportunity. Indeed, MTS' long-term fundamentals remain strong and its financial profile should improve in 2006 through a cost-cutting program," analysts from UralSib said.
The cost-cutting program, as well as a number of other measures taken by MTS' management, is another reason for MTS' expected better performance in the future. Among other measures, which should be taken positively by the market if successful, are the reduction of dealers' commissions and the change in management.
"Who MTS chooses as the new CEO and that person's policy is much more important (than Sidorov's resignation)," Shipitsin of Alfa said. "So the market will wait for the name of the successor and then decide what to do. Why should anything change before then?"
Analysts warn that expected changes on the Russian cellular market may be negative for MTS' share valuation. "The introduction of the calling party pays principle (CPP) in Russia from July 1, as well as number portability and the mobile virtual network operator (MVNO) concept, will potentially have a negative impact on revenues (in case mobile operators are not fully compensated by wireline companies for fixed-to-mobile calls) as well as margins (in case the company needs to proceed with additional advertising expenses to secure its customer base after the introduction of number portability)," Bogdanov of Alfa Bank said.
End"
Posted to the site on 11th April 2006
