When Russia's MTS flagged healthy growth in sales, profits and subscriber numbers during its July-to-September quarter, the operator's executives seemed as taken aback as anyone.
Buffeted by economic and political headwinds, Mobile TeleSystems OJSC (MTS) (NYSE: MBT) had in August lowered its full-year revenue growth target from 3–5% to just 1%. But after revenues grew by 3.6% in the third quarter, compared with the same period in 2013, and operating profit (before depreciation and amortization) rose by 4.1%, the operator was sufficiently emboldened to chalk up new guidance of 2% revenue growth.
Nevertheless, the insinuation was that conditions would become much tougher during the final quarter. If full-year revenues are revealed to have grown by exactly 2% when MTS reports annual results on March 17, fourth-quarter sales will have slumped by precisely 9.4%. That would mark the operator's first revenue decline since the final quarter of 2011.
MTS has yet to provide any 2015 guidance but the prognosis seems relatively bleak. Forecasters expect economic conditions to worsen in both Russia and Ukraine, which together accounted for almost all of the operator's revenues in 2013.
Despite this, MTS expects to pay out as much as 90.2 billion Russian rubles ($1.4 billion) in dividends during 2014 and 2015, up from just RUB41 billion ($620 million) in 2013 and RUB30.4 billion ($460 million) in 2012. Under a dividend policy unveiled in April 2013, the operator has promised to return at least 75% of free cash flow to shareholders, and not less than RUB40 billion ($600 million) per year.
This dividend policy could obviously put the operator in a tight corner. MTS has been investing heavily in the rollout of both mobile and fixed networks, and free cash flow fell by 11.7% over the first nine months of the year, to RUB64.4 billion ($970 million), compared with the same part of 2013.
Even so, all of that network spending last year may have been prudent. During an exclusive interview with Light Reading, Vasyl Latsanych, the chief marketing officer of MTS, said the operator managed to pay for a substantial amount of equipment before the depreciation of the ruble became "dramatic". (See MTS's Russian Resolution.)
That should help the operator to slash its bill this year. Having already bought most of what it will need during the next few months, MTS expects capital expenditure to fall from RUB90 billion ($1.4 billion) in 2014 to RUB80–85 billion ($1.25–1.33 billion) in 2015. Further weakening of the ruble would probably have driven the 2015 figure to much more than RUB90 billion ($1.4 billion) had MTS not paid for equipment orders when it did.
Investors can also take some encouragement from the operator's debt profile. At RUB163.9 billion ($2.47 billion) in September, net debt was just 0.9 times operating income (before depreciation and amortization) over the preceding 12 months, a ratio that must look enviable to most of Europe's big players -- Telefónica SA (NYSE: TEF)'s comparable ratio is about 2.5, while Deutsche Telekom AG (NYSE: DT)'s net debt is about 2.4 times annualized earnings before interest, taxation, depreciation and amortization. Moreover, most of MTS's debt is now denominated in rubles, lessening the risks associated with currency volatility.
No doubt, persuading customers to buy costlier 4G smartphones and sign up to higher-speed broadband plans will be tough in a recessionary climate, but MTS seems braced for the challenges ahead. With its growing base of fixed and mobile assets, the operator could find itself in a strong position when the good times return.
— Iain Morris, , News Editor, Light Reading