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This Telecom Leader Surfs Geopolitical Risks on Its Gigantic Growth Wave

April 07, 2014 | About:

In a world where telecommunications play an essential role in business as well as in every-day life, the telecom industry moves at an impressive pace. Apart from a strong focus on innovation, companies’ efforts to boost market share and profitability have also translated into a growing number of them offering bundled services. In this scenario, being an only-one -service provider has become a significant competitive disadvantage.

Understanding service bundling was a must to drive future growth, in 2007 Vimpelcom Ltd. (VIP) turned into the first fully integrated telecom operator in Russia through the acquisition of broadband and fixed-line operator Golden Telecom.

As the leading mobile operator in Russia and the Commonwealth of Independent States, Mobile Telesystems OJSC (MBT) realized its competitor’s great move strongly implied it was time for a change. Thus, the company diversified its operating profile through the acquisition of a controlling stake of broadband, fixed-line and cable TV operator Comstar United Telesystems, which generated over 200 million in synergies and cost savings.

Competitive Upsides

Mobile Telesystems boasts a huge customer base of over 100 million subscribers, which allows the company great economies of scale. Moreover, its network is superior in quality to that of Vimpelcom, providing faster uplink and download data speeds, which results in lower churn rates. Together with its financial flexibility, these competitive advantages have garnered the company a narrow economic moat.

Successful Strategies

With its transformation into a fully integrated telecom provider, MBT is pushing its growth prospects much higher. The main reason is that while mobile penetration in Russia is over 170% because of multiple SIM cards, broadband penetration in the country is less than 60%.

In addition, over the last years the company countered aggressive competition from Megafon OJSC (MFOYY) and Vimpelcom through a greater focus on economic efficiency and cost consciousness. Consequently, while rivals have seen their margins erode, in 2012 MBT’s continued to expand. Thus, its most aggressive competitors in terms of market share have shifted focus towards earnings, leaving the firm plenty of space for subscriber gains.

A Risky Region

Despite being a solid company, with strong growth potential, and a healthy cash flow that has grown from 40,451 million in 2011 to as much as 77,802 in 2013, J.P. Morgan recently lowered MBT’s target price from $26 to $21.The reason was a higher perceived risk premium and weaker Russian ruble and Ukraine hryvnia due to recent events in Ukraine.

In addition, the firm is now being investigated by the U.S. Department of Justice and the SEC over its former operations in Uzbekistan. Along these lines, it said it intends to fully cooperate in both investigations. The company stopped operating in Uzbekistan around a year ago and filed for bankruptcy in the country, among analysts alerts on the increasing risks of conducting business in that nation.

Recognizably, political uncertainty in the region is the most significant risk the company faces. So far, however, it has successfully managed to achieve consistent growth despite geopolitical turbulence.

A Worthy Stock

An efficient management and a sustained growth trajectory have earned this company a leading position which it will most likely keep in the long run.

Mobile Telesystem’s stocks trade at 9.10 its trailing earnings, a compelling multiple compared to its competitors’ average of 16.70. Its return on equity is also attractive, showcasing an outstanding 52.55% against an industry median of 12.49%.

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Its revenue also delivered higher than the average with a growth rate of 6.40% compared to its rivals’ 3.70%. Investment Guru David Dreman (Trades, Portfolio) recently incorporated the company to its portfolio, following my bullish feeling about its sturdy growth potential.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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