Russia : Mobile Telesystems – the long case

Although in Q4 2008, Mobile Telesystems (MTS) suffered a disastrous $794.8 million foreign exchange loss to reflect  book value of the company’s foreign-denominated debt due to the weak ruble, there are plenty of signs Russia’s largest mobile operator is worth investing in now.  With revenue growing 4.0% to $2.42 billion from $2.33 billion a year ago, which is healthy in the current economic climate. Taking into account that the rouble declined by 16% against the dollar in the last three months of 2008, this is a signal the Mobile Telesystems is a very robust play indeed.

MTS operates GSM based mobile services across six countries within the CIS (Commonwealth of Independent States); Russia, Ukraine, Uzbekistan, Armenia, Turkmenistan & Belarus. It also has interests in foreign mobile operations in Daghestan & India, of which more later. Within Russia, it has the highest number of post paid customers, as it looks to serve the higher end user.

In mid-April the company released subscriber figures for the 12 months ending Q1 2009 & they show some impressive growth in all markets served : Russia-8.7%, Ukraine-8.5%, Uzbekistan-67.9%, Turkmenistan-141.4%, Armenia-44.8% & Belarus-11.9%. This brings the total subscriber number for MTS up to just short of 93 million end users of which 65 million are in Russia. In comparison, the next largest operator Beeline (Vimpelcom) has 49 million subscribers, out of a total addressable base of 190 million .

With a current market cap of $13.1Bn & sale of more than $10.2Bn  in the last year, MTS looks set to be able to service its $2.9 billion in debt. With net income of $1.9Bn, MTS would not seem to be overly burdened with debt.

Looking at MTS strategy going forward, it is plain that its is working on two distinct areas; cost reduction & ARPU growth through the introduction of VAS (Value Added Services). A good example of both can be seen in the partnership with Vodafone last year, which should bring some interesting synergies; CAPEx optimizations on the introduction of the Vodafone Live! platform, advice on network deployment, retail network insight to develop distribution & the introduction of CRM services based on Vodafone Globals platform will hopefully enhance subscriber loyalty & have a positive impact on churn.

Meanwhile, MTS is also introducing a number of new 3G based services, looking to capitalise in the low internet penetration in Russia. Chief Commercial Officer Mikhail Gerchuk said the company would double the number of large Russian cities in which it has third-generation mobile networks to 50 by the end of the year, and is looking for opportunities to enter the fixed-line market. MTS hopes to use its dominant position in post-paid to attract users to a slate of new services & has recently launched a new mobile internet platform, Omlet,  to provide entertainment services to content hungry young Russians.

“We want to become what iTunes is for America,” Gerchuk told Reuters in an interview, referring to Apple’s online music store, from which more than 6 billion songs have been bought and downloaded since it launched in 2001.

Gerchuk said the relatively low presence in Russia of global brands such as Apple, Google or Amazon would help MTS. With less than 27% of Russians currently enjoying internet access & less than 4M broadband users, MTS has a good case of sucking up new users with all you can eat data plans via a mobile broadband USB offering. The company is also looking at the potential of entering the fixed line market, MTS plans to invest $1.5 billion in capital expenditures this year, including $450 million to develop infrastructure.

“We have the opportunity to give many people the chance to access the Internet for the first time,” Gerchuk said. “Acquisition is faster than building for fixed networks, but it has to be profitable”

As previously commented, MTS is actively looking for further overseas expansion, further expansion into ex-Soviet CIS countries is obvious & the company has a track record of being able to manage these sorts of deals & partnerships. Of more interest is it’s position further afield, namely India. MTS franchised it’s brand to Shyam TeleServices last year in what is becoming one of the fastest growing global mobile markets.

Shyam which currently has operations in 3 states in India, currently serves 5 million users & has ambitions to double that in the next three months. Shyam has also stated that it will be in a position to serve all 22 Indian states by the third quarter of 2010. MTS’s parent company, Sistema, owns a 74% stake in Shyam TeleServices. Gerchuk said MBT would have to monitor the situation in India before deciding whether to enter the market in earnest, and would probably do through acquisition if at all.

“India is a very competitive market, with eight operators,” he said. “There’s also the possibility of entering the market by acquisition — probably the better option in a crowded market.”

Taking all of the above factors into consideration, it points to strong growth & some very interesting potential both through new services at home & new network operations abroad. For me this is a good long term investment & I initiated a buy last week. Looking at the chart shows that MTS has returned 62% steady growth, which is pretty formidable. I’m just kicking myself that I didn’t move sooner. Mobile Telesystems (NYSE: MBT) closed on Friday at $35.15. So far the stock has hit a 52-week low of $18.36 and 52-week high of $89.24