22 December 2008
Russian telecoms
Another revision of estimates;
let's think about 2010
Igor Semenov
Research Analyst
(7) 495 933-9238
igor.semenov@db.com
Cuts in commodities and macro assumptions lead us to cut our TPs
We cut our estimates and TPs for Russian telcos again due to lower oil price and
macro forecasts, partially offset by a lower profit tax. What we previously
considered a pessimistic scenario is now our base case. We maintain our Buy
ratings, but our sensitivity analysis shows that if the ruble falls 25% more than our
forecasts, Russian telcos would become overvalued.
Deutsche Bank AG/London
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LOCATED IN APPENDIX 1.
Forecast change
Top picks
MTS ADR (MBT.N),USD27.23 Buy
Companies featured
MTS ADR (MBT.N),USD27.23 Buy
2007A 2008E 2009E
EV/EBITDA (x) 6.7 2.7 3.3
P/E (x) 12.5 5.2 7.6
DB EPS (USD) 5.22 5.20 3.56
VimpelCom ADR (VIP.N),USD7.56 Buy
2007A 2008E 2009E
EV/EBITDA (x) 7.3 3.2 3.5
P/E (x) 16.5 6.5 13.4
DB EPS (USD) 1.43 1.17 0.56
Comstar UTS (CMSTq.L),USD3.30 Buy
2007A 2008E 2009E
EV/EBITDA (x) 5.7 2.6 2.8
P/E (x) 95.1 12.6 31.3
DB EPS (USD) 0.11 0.26 0.11
Global Markets Research Company
Despite little visibility, management should think about mid-term strategies
We believe 2009 is going to be a tough year for all. Operators, vendors,
distributors, regulators and customers all have to quickly adjust to the new reality.
Obviously, the focus in 2009 is going to be on cash flows. But however little
visibility there is right now, we think operators already have to consider scenarios
for 2010-11 as there might be a chance for significant market share redistribution.
This is because if credit markets do not recover, VimpelCom might find itself
stretched to repay about USD2bn in 2010. In contrast, MTS’ 2010 repayments
now stand at about USD0.75bn, while Russia’s third largest player, Megafon, was
in a net cash position as of 1H08, and its entire debt was only USD1.5bn.
MTS is our top pick
We prefer MTS going into 2009: its balance sheet remains solid, which means that
its capex and consequently mid-term growth are not in danger. We think a tie-up
between MTS and Comstar is likely, but only after Comstar exits from Svyazinvest.
Comstar remains a safe stock, but the main catalyst may see delays
We included Stream-TV in our model. This boosts regional revenues and mitigates
FX-related revisions of revenue estimates. We view regional expansion as a
positive development. Furthermore, Comstar’s debts are almost entirely in rubles.
However, the main catalyst for the stock remains the exit from Svyazinvest. This
depends on the government, which means delays are possible.
VimpelCom looks overstretched after the eventful 2008
VimpelCom’s strategy to create an integrated player with strong distribution
should help it go through the challenges reasonably well. However, we think that
VimpelCom stretched itself a bit too thin in 2008 (Golden Telecom, Vietnam and
Evroset). In case of a further deep ruble devaluation, it would either have to cut
capex dramatically or its debts would have to increase even more, which might be
expensive (but we do not doubt its financial stability). We also are not fond of the
prospect of the state-owned Vnesheconombank (VEB) taking over Altimo’s 44.4%
voting stake in VimpelCom if Altimo fails to repay its loan to VEB next year.
Our TPs are based on DCF; we raise CoE, look out for governance risks
Our 12-month price targets for MTS, VIP and Comstar are based on DCF analysis.
Our models for MTS and VIP are in USD, while our Comstar model is in RUR. We
use variable WACC with RFR of 8.7% for MTS and VIP and 11% for Comstar,
projected capital structures, and TGR of 1% for all three stocks. Our CoE is 16.1%
for MTS, 17.8% for VIP and 19.1% for Comstar. Downside risks include a deeper
macroeconomic slowdown (including steeper devaluation), changes in the
regulatory regime, more severe competition (including new technologies), and
growing corporate governance risks. See p. 5-10 for more on valuation and risks.

Table of Contents
Cutting price targets on lower macro forecasts ............................. 6
Impact on valuation...................................................................................................................6
Relative valuation – attractive relative to peers .........................................................................9
Risks ......................................................................................................................................11
Let’s think about 2010..................................................................... 12
2009 is going to be tough for all, but 2010 might be exciting.................................................12
Why the status quo may remain intact ...................................................................................13
Reducing estimates ................................................................................................................14
Sensitivity – at RUR/USD over 37, Russian telcos would be overvalued ................................17
DB vs. consensus estimates...................................................................................................18
Macroeconomic forecasts............................................................... 20
These are excerpts from the Emerging Markets Monthly published on 12 December 2008 .20
Russia – another downward revision on oil.............................................................................20
CIS and beyond.......................................................................................................................20
Financial statements ....................................................................... 22
MTS .......................................................................................................................................22
VimpelCom .............................................................................................................................25
Comstar UTS ..........................................................................................................................28