Despite Challenges, Mobile Telesystems Sees Growth

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Spend a couple days following the goings-on at Russian telecomMobile Telesystems ( MBT ), and you'll get a good education in government regulation and geography.

Mobile Telesystems, or MTS, is Russia's top mobile operator. It provides traditional landline, mobile and data services to customers in Russia, Ukraine and countries in Eastern Europe and Central Asia. The company also sells telecom accessories and gear.

The vast majority of its revenue -- 86% in 2011 -- comes from Russia. Most of the rest comes from Ukraine, though MTS has tried to make inroads into other former Soviet republics, with mixed results.

In July, anti-monopoly authorities in Uzbekistan accused MTS' Uzdunrobita subsidiary of violating anti-monopoly laws as well as laws on consumer protection and advertising.

Uzdunrobita's mobile license was suspended for 10 working days beginning July 17.

About two weeks later, the suspension was extended for three months. Uzdunrobita also has been charged with $80 million in fines.

License Reissued

That news came around the same time MTS announced it is resuming operations in Turkmenistan after the Central Asian state reissued a license that was revoked in 2010.

The license was suspended in December 2010 for reasons MTS officials said "were never fully justified," according to a Reuters report. Before the suspension, MTS had an 85% share of Turkmenistan's mobile market. The suspension reportedly led to $140 million in losses for MTS.

Such events put into greater focus the sometimes rocky nature of operating in the region.

"The latest development in Uzbekistan highlights the risk of doing business in Central Asia for Russian companies," Konstantin Chernyshev, head of research at Uralsib Capital, noted in a recent report.

MTS entered the Uzbekistan market in 2004 and has invested about $1 billion there, Chernyshev says. By this year's first quarter, the company had acquired 9.5 million customers and obtained a market share of 41%.

Last year, MTS' operations in Uzbekistan generated sales of $441 million, or about 3.6% of the total.

"The further increase in regulatory pressure (in Uzbekistan) indicates that MTS is unlikely to see a quick resolution to this problem," Chernyshev noted. "The chances are high that it will be forced to leave the market in Uzbekistan."

In statements, MTS officials have called the seizure of documents and assets and the investigation "a gross violation" of local and international laws.

"Nevertheless, this has not resulted in any easing of the conflict," Chernyshev noted.

The bad news in Uzbekistan has been counterbalanced somewhat by the recent positive developments in Turkmenistan.

According to news reports, MTS has been granted GSM and 3G licences for a three-year term there, and is working to restore its network and relaunch operations.

Analysts expect MTS to get most of its clients back in Turkmenistan. According to one estimate, the company's Turkmenistan operation should boost 2013 revenue by 3% to 4%.

While the recent developments in Uzbekistan and Turkmenistan have generated most of the headlines for MTS, they haven't had much impact on MTS' stock price. Shares have been trending higher for three months and neared a 12-month high on July 30. The stock trades near 19.

Analysts expect solid earnings growth over the next few years, thanks partly to positive trends in Russia.

With 69.38 million subscribers in Russia at the end of the first quarter, MTS held on to its top position in the country's mobile phone market.

MTS' total subscriber base across all markets comprises more than 106 million mobile customers, according to Sistema JSFC, Russia's largest publicly listed investment company and MTS' parent company.

"Over the course of the last few years, MTS has made significant investments in its 3G network, which now includes 23,000 3G base stations and covers over 2,000 population centers in Russia," a Sistema report said.

The Russian telecom market is maturing, which means major telecoms such as MTS andVimpelcom ( VIP ) have less room to grow market share. But there are opportunities to ramp up earnings growth through greater efficiency and fewer government constraints.

Currency Gain

MTS reported first-quarter net profit of $512 million, helped by a $174 million currency gain. That was up from $322 million the prior year and well above analyst consensus.

EBITDA margin grew to 41.8% from 38.4% a year earlier. Revenue eked ahead 3% to $3.01 billion vs. forecasts for $2.97 billion.

Mobile Telesystems is due to report Q2 earnings later this month. Analysts polled by Thomson Reuters expect profit to grow 22% from the prior year. They see full-year earnings rising 39% this year and 13% in 2013.

Meanwhile, the recent appointment of Nikolai Nokiforov as Russia's new telecom minister should be good for the market as a whole, notes Citigroup analyst Dalibor Vavruska.

Vavruska points out that Nokiforov is only 30 years old and appears to be part of a drive in Russia to appoint "young dynamic people" into the Cabinet.

"We think that a combination of the status quo at the very top of the government, together with the appointment of an ambitious expert as telco minister, may be positive for the mobile industry," Vavruska noted. "(But) questions remain about where the real regulatory powers will lie."

Although Vavruska sees pro-investment policies as likely under Nokiforov, "reassurances from the new government would help to reduce risks."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: MBT , VIP

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