FOCUS: VimpelCom May Reignite Investor Interest in Russian Mobiles

MOSCOW, April 20 (Prime-Tass) -- Following the uninspiring financial results posted earlier by Russia?s largest mobile operator Mobile TeleSystems (MTS), Russia?s second largest mobile operator VimpelCom impressed investors with strong fourth quarter and full-year 2005 financials. Some analysts now recommend that investors reconsider their bearish attitude toward Russian mobile stocks and start buying them again.

"Russian mobile companies have not delivered any surprises on the upside for a while. Now, however, VimpelCom has broken the trend, delivering a more resilient Russian ARPU in the fourth quarter (7% higher than we projected) and, as a result, exceeding our revenue and EBITDA forecasts by 5% and 3%, respectively," Alexei Yakovitsky, analyst at Deutsche UFG, said in a research note Wednesday.

The company?s net profit increased 75.6% on the year to U.S. $615.131 million in 2005 as calculated under U.S. GAAP. The company's net profit in October-December 2005 soared 81.2% on the year to $151.748 million. The monthly average revenue per user (ARPU) fell 25.7% on the year in 2005 to $7.50, VimpelCom said. ARPU stood at $7.10 in October-December, down 21.1% on the year.

"We believe that the key takeaways from VimpelCom's fourth quarter results and management conference call (Tuesday) reinforce our expectations of long-term ARPU growth in Russia and, most importantly, suggest that ARPU stabilization may well be just around the corner. We remain bullish on both VimpelCom and MTS. The two operators' ARPUs have almost converged and we believe that it a matter of months before MTS starts showing trends similar to those already revealed by VimpelCom," he added.

Deutsche UFG has a Buy recommendation on VimpelCom with a target price of $65.03 and the same recommendation on MTS with a target price of $57.27.

VimpelCom attributed thee impressive financials to "continued subscriber growth combined with the effects of economies of scale, stable ARPU in the course of 2005 and efficient cost control."

"A positive effect also came from the company's continued efforts to enhance the quality of its subscriber base. In the fourth quarter of 2005 we recorded a 2.3% increase in total operating revenues compared with the third quarter of 2005 in spite of the seasonal decline in usage and roaming revenue," VimpelCom said.

VimpelCom's total subscriber base rose 70.9% in 2005 to 45.430 million people as of December 31, 2005. Of the total, the subscriber base in Russia rose 67.5% on the year to 43.097 million people, the company said.

"I can say that the results are positive, especially for the fourth quarter, the most difficult quarter (for mobile operators), as subscriber activity decreases and companies often get involved in a race to sign up new subscribers ahead of the New Year, which negatively affects financials," Boris Ovchinnikov, telecoms analyst at J'son&Partners, said. "VimpelCom now looks like it has the upper hand against MTS (in terms of fourth quarter results)," he added.

VimpelCom's overall results for the fourth quarter were mostly in line with many brokerages' projections. Both revenue and EBITDA beat the consensus by 1%, while net profit and average revenue per user (ARPU) were 3% and 4% lower than the consensus, respectively.

In general, the results look very positive, especially compared to its key rival MTS, analysts said.

"VimpelCom's revenue is growing twice as fast as MTS', while the decline in its ARPU has almost stopped and (VimpelCom?s ARPU) is now almost equal to MTS'. In one or two quarters VimpelCom may even overtake MTS in this gauge," Ovchinnikov said. MTS' ARPU in Russia fell to $7.30 in the fourth quarter from $8.90 in the third quarter.

"We certainly expected lower ARPU erosion (for VimpelCom) than MTS? 18% due to the smaller number of net additions (4.2 million vs MTS? 7.9 million), but a mere 9% blended ARPU sequential erosion to the level of $7.10 came as a surprise," Andrei Bogdanov, telecoms analyst at Alfa Bank, said in a research note.

"VimpelCom?s ARPU has gotten quite close to MTS? $7.30, despite the fact that MTS still holds a large share of the premium subscribers in Moscow and some selected regions, such as southern Russia, reflecting a more 'selective' subscriber acquisition approach," Bogdanov said.

The market's reaction to VimpelCom's results was also sweetened by statements from VimpelCom's management during a conference call that ARPU might start to rise beginning in the second quarter of 2006. In Moscow, the key market for all mobile operators, VimpelCom's ARPU rose about 8% between the first and fourth quarters of 2005, the company's CEO Alexander Izosimov said.

"The timing of the ARPU trend reversal has been among key investor concerns recently, and we expect a positive market reaction to the guidance," analysts from Aton Capital said in a research note.

Though nominal ARPU is still falling and needs to stabilize, real ARPU, calculated by dividing revenue by the real number of users (not by the number of valid SIM cards), has already stabilized at about $12-$12.50 in 2005 and was the same in the first quarter of 2006, Ovchinnikov from J'son&Partners noted. Ovchinnikov expects that the nominal ARPU is likely to start growing only in 2007.

ARPU growth may be also supported by monetary factors. "The company plans to start launching ruble tariffs this week and gradually migrate its subscribers to these. Given the robust ruble outlook, we believe the move will eliminate the natural tariff decline due to dollar depreciation against the Russian currency," Aton Capital said.

Deutsche UFG expects the ruble to fall to 26.80 by the year-end against Wednesday's official ruble/$ rate of 27.57, suggesting a potential 2.9% dollar-denominated ARPU gain.

VimpelCom's outlook is also positive in light of customers' growing usage of mobile services, analysts said. "VimpelCom's minutes of usage (MoU) is growing, which is very important, as amid the deceleration of subscriber base growth the increase in MoU will move revenue higher, given that tariffs remain flat," Ovchinnikov from J'son&Partners said.

VimpelCom's monthly MoU rose 9.5% on the year to 106.5 minutes in the fourth quarter of 2005.

VimpelCom's upbeat financial results gave support to the company's stock, which rose 1.3% on the day on Tuesday. VimpelCom's ADRs have risen 3.1% since the beginning of the year to $45.60 as of Tuesday.

Some analysts believe that the positive financial results will attract investors to the stock, while MTS, whose ADRs have fallen 3.9% since the beginning of the year, will continue to be the market?s laggard.

"The financials reveal that Russian cellular revenue growth remains solid and that the market?s value is being noticeably redistributed in VimpelCom?s favor at MTS? expense. As a result, we expect VimpelCom shares to continue to rally and MTS? to stagnate or ease back," Aton Capital said Tuesday in a note to investors.

UralSib reiterated its Speculative Buy recommendation for VimpelCom, saying that the unresolved conflict between core VimpelCom shareholders still remains a problem.

Alfa Bank?s parent company Alfa Group, which holds 24.5% of common shares in VimpelCom, is at odds with Norwegian telecommunication company Telenor, which controls 29.9%, over the company?s expansion in Ukraine. The remaining 44.2% of VimpelCom?s common shares is free floated.

Analysts said that VimpelCom?s results should inspire more investors to buy Russian mobile stocks.

?Our recommendation is to reconsider the bearish view towards mobile telecoms in Russia, perhaps starting with VimpelCom,? Bogdanov of Alfa Bank, said. ?VimpelCom?s management clearly outperformed MTS in terms of the execution of its strategy in 2005. The company?s market share of revenues in Russia in 2005 grew 36% on the back of a good job of ARPU preservation and concentration on revenues and cash flows rather than SIM cards acquisition. We would argue that VimpelCom will continue to be more efficient than MTS at least until we see the record of the new MTS management,? he added.

The bank has a Buy recommendation on VimpelCom ADRs with a twelve-month target price of $57 per share.

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Posted to the site on 20th April 2006