Telecoms and Internet

Transcription

1 INTERN ET JULY 6, 2016 FLASH NOTE: TELECOMS AND INTERNET SECTOR UPDATE Telecoms and Internet New data regulation: potential impact and sector update RUS SIA Sergey Vasin The new anti-terrorism law, which obliges telecom operators to store data on user calls, has been approved by the State Duma and Federation Council. Before the law is signed by the President and enters into force, we evaluate the law s potential impact on public telecom and internet companies. The law looks drastic, but smoothing options are quite possible Once the law is signed, operators and internet companies would have to build the necessary infrastructure, and prepare to store all the recordings of user calls and all content passed via networks for up to six months by July Investments needed for the telecoms sector are estimated by different experts and state bodies within a range of RUB trln. We use figures provided by the operators up to RUB 2.3 trln for the whole sector. The new law is essentially a framework without detailed requirements, with the latter to be determined by the government at an unspecified later date. Taking into account the pro-operators position of the Telecommunications Ministry, we believe that major players have an opportunity to smooth the conditions for implementation of the new law. Scenario analysis: MTS and Yandex look better positioned under the new law We describe four potential scenarios for the effect on public telecom and internet companies in Russia. We consider a status quo scenario as possible and do not change our estimates pending additional clarifications regarding capex, time horizon and source of funding. Other scenarios are theoretical and provided for illustrative purposes only. Our analysis suggests that MTS is best-positioned among operators in our coverage universe to cope with the new law under most scenarios. While internet companies are generally well-prepared for the new environment, we would highlight Yandex as more resilient than Mail.ru. Target price updates under the status quo scenario: lowered on MegaFon and raised on Yandex, unchanged for others With this note we also incorporate some changes and updates to our models following recent talks with the companies, as well as the most recent financial results and management guidance for We left our target prices for MTS, Rostelecom and Mail.ru unchanged under our status quo scenario and now recommend to OVERWEIGHT these three stocks. We lowered our target price for MegaFon from $16.0 to $11.6 per GDR and changed our recommendation from overweight to NEUTRAL, mainly due to the company s reduced long-term EBITDA margin and revenue growth forecasts, as well as increased incremental capex program. MTS TICKER MBT US Current price, $ per ADR 8.4 Old target price, $ per ADR 12.0 New target price, $ per ADR UNCHANGED Upside/Downside 42% Updated recommendation OVERWEIGHT MegaFon TICKER MFON LI Current price, $ per GDR 10.9 Old target price, $ per GDR 16.0 New target price, $ per GDR 11.6 Upside/Downside 6% Updated recommendation NEUTRAL Rostelecom TICKER RTKM RX Current price, RUB per share 92.0 Old target price, RUB per share New target price, RUB per share UNCHANGED Upside/Downside 22% Updated recommendation OVERWEIGHT Yandex TICKER YNDX US Current price, $ per GDR 21.7 Old target price, $ per GDR 15.3 New Target price, $ per GDR 19.9 Upside/Downside -8% Updated recommendation NEUTRAL Mail.ru TICKER MAIL LI Current price, $ per GDR 19.1 Old target price, $ per GDR 22.0 New target price, $ per GDR UNCHANGED Upside/Downside 16% Updated recommendation OVERWEIGHT On the other hand, we raised our target price for Yandex from $15.3 to $19.9 per ADR due to better than expected 1Q16 results, an improved management outlook for 2016 and a stronger ruble. In addition, we see signs of recovery in the media advert market and expect Yandex to be one of the core beneficiaries of this process. We still assign a NEUTRAL recommendation to Yandex. Research Department 1 Copyright Gazprombank (Joint Stock Company)

2 How much might the law cost? Industry estimates for investment required under the new law vary considerably. These figures depend on the period of data storage, the level of IT security for storage facilities, and the requirements for big data analysis. The law defines none of these variables, which instead should be determined by the government at some unspecified later date. We came across total sector investment estimates in a wide range of $31-75 bln or RUB trln at the current FX rate. The most commonly announced estimate, however, stands at RUB 2.3 trln (estimated by mobile operators). At the same time, MegaFon expected its own spending at about RUB 230 bln, while VimpelCom puts its figure at a level of at least RUB 200 bln. We use these estimates in our scenarios. We note that in 2015, total revenues of telecom services (including TV, radio and satellite broadcasting, and postal services) reached RUB 1.67 trln (+1.3% YoY). Revenues from services covered by the new law s requirements reached RUB 1.44 trln. Thus, the required capex over two years is comparable with the turnover of the entire industry over the same period. This makes our alternative high-spending scenarios less likely to be realized, in our view. The Big Four operators (MTS, MegaFon, VimpelCom and Rostelecom/Tele2) accounted for 90% of total telecom service revenues in 2015 (excluding postal and TV services), and thus the bulk of the investment program should fall on their shoulders. Russian telecommunication service revenue breakdown* by major companies, % 10% 24% Estimated investments associated with new law s requirements, RUB bln SCENARIO SCENARIO WORST-CASE SCENARIO MTS MegaFon % RUB 1.44 TRLN VimpelCom Rostelecom/Tele Mail.ru Yandex % 19% MTS ROSTELECOM MEGAFON VIMPELCOM TELE2 OTHERS * industry and operators revenues exclude postal, TV and radio broadcasting services Source: company data, Telecommunications Ministry, Gazprombank estimates Google/Facebook Government/others 618 1, Total 1,150 2,300 2,300 Source: Gazprombank estimates We do not exclude that the government might create a special fund, similar to the Universal Services Fund, to be filled by telecom operator fees and direct state subsidies for the purpose of the new law s implementation. The amount of funds required from the state under our scenarios varies in a wide range of RUB trln and depends on many conditions that are currently undefined. We might expect long-term funding from VEB or RDIF to be required. What scenarios do we see as possible? We have defined one current ( status quo ) scenario and three alternative scenarios for implementation of the new law and consequences for telecom and internet operators. Under all possible scenarios, we do not expect operators to raise tariffs, as we see this as hardly possible in the current environment of high competition and market maturity. For the sake of model simplicity, we assume that any additional capex should be funded by extra debt. 2

3 Scenario 1: Status quo. The law is either vetoed by the President and passed back to the State Duma for further elaboration, or smoothed by the operators so they can use existing data storage capacities or undertake only a moderate expansion. Additional capex is relatively small and could be easily funded by redistribution of existing investment programs of operators and internet companies. The state can help build the necessary storage infrastructure using sources available in the already existing Universal Services Fund, consisting of annual fees from all telecom operators (~1% of revenues p.a. currently). EBITDA margins and debt levels are in line with our current models. Dividend policies of all payers remain unchanged. Scenario 2: Smoothed. The law is signed into force, but the government eases requirements and extends the timeframe for the law s implementation by an additional year. Additional capex required for the whole sector is RUB 1.15 trln over three years half the level currently estimated by operators. At the same time, only about RUB 512 bln should be funded by public companies. Additional operating expenses associated with the new program total ~2% of the annual revenues of telecom operators and ~1% among internet companies. The state can help build the necessary storage infrastructure using sources available in the already existing Universal Services Fund or a new special fund, created for these purposes and supported by VEB or RDIF. Dividend policies of all payers remain unchanged. Scenario 3: Burdensome. The law is signed into force in full measure, but the government assumes nearly half of the program s necessary funding (from a specially created fund). Additional capex required for the whole sector is RUB 2.3 trln over two years. We assume that each large operator will spend in a range of RUB bln, in line with their own guidance provided in the media. The exception could be Rostelecom, which is already the largest owner of data storage facilities in Russia. We estimate its additional capex program at about RUB 150 bln (which also includes storage facilities to be built for Tele2). We expect Mail.ru to spend about RUB 77 bln (its own estimate), while Yandex would spend RUB 64 bln. Additional operating expenses associated with the new program total approximately 4-7% of annual revenues of telecom operators and internet companies. This figure includes 2% of annual revenues passed to the government via a special fund each year. The state can help build the necessary storage infrastructure via the creation of a special fund similar to the already existing Universal Services Fund. In addition, the government should attract funds from VEB, RDIF etc. Only select operators should be capable of paying dividends under this scenario, without overstretching their balance sheets (MTS and Rostelecom). Scenario 4: Worst case. The law is signed into force in full measure, with the bulk of expenses being funded by the operators. Additional capex required for the whole sector is RUB 2.3 trln over two years. We assume that each large operator will spend in a range of RUB bln, i.e. double the amount contained in their guidance provided in the media. 3

4 Additional operating expenses associated with implementation of the new program total around 5-8% of the annual revenues of telecom operators and internet companies. Under this scenario, we expect all operators to avoid the payment of dividends to shareholders. Scenario comparisons We provide summary tables showing the impact of different scenarios on the companies long-term EBITDA margins, debt leverage, dividends and DCF-based valuations (core inputs for determining a target price). Margins and debt EBITDA margin and debt leverage development of telecom operators and internet companies under various scenarios EBITDA MARGIN 2019 STATUS QUO SCENARIO SCENARIO WORST-CASE SCENARIO NET DEBT/ EBITDA 2019 EBITDA MARGIN 2019 NET DEBT/ EBITDA 2019 EBITDA MARGIN 2019 NET DEBT/ EBITDA 2019 EBITDA MARGIN 2019 NET DEBT/ EBITDA 2019 MTS 39% 0.9x 37% 1.7x 34% 2.9x 34% 3.6x MegaFon 39% 1.6x 37% 3.0x 33% 3.7x 33% 5.7x VimpelCom* 38% 1.8x 38% 1.4x 35% 2.0x 35% 2.9x Rostelecom 34% 1.1x 32% 1.7x 31% 2.1x 31% 3.5x Mail.ru 51% -2.2x 50% -2.3x 45% -2.6x 39% -3.0x Yandex 35% -2.3x 35% -2.8x 32% -1.9x 30% 0.0x * VimpelCom s debt assumes the merger in Italy is not canceled Telecom operators EBITDA margins decline by 2-6 pps under different scenarios (see the table above). The least affected operator, in our view, would be Rostelecom, which already has the largest data storage capacities in the sector and thus can operate new capacities at relatively lower costs. Mail.ru s EBITDA margin could fall by up to 12 pps under the worst-case scenario, while Yandex could lose up to 5 pps. Mail.ru is the owner of Russia s two largest and most popular social networks, so its exposure to the new law s requirements is much greater compared with Yandex. Telecom operators in Russia currently show only moderate levels of debt, with VimpelCom and MegaFon having the highest net debt/ebitda ratios of 1.8x and 1.6x, respectively. Internet companies hold net cash positions. Under most of our scenarios, telecoms can survive without overstretching their balance sheets and pushing net debt/ebitda above 3.0x. The exception is MegaFon, which will likely face a ratio of around 3.7x under our burdensome scenario. The worst-case scenario indicates a heavy debt level for all operators, which makes this scenario unlikely to occur, in our view. We believe that internet companies can survive in net cash territory under any of our scenarios on the back of strong growth prospects in the sector. 4

5 Dividends Dividends due to be paid in 2017 under various scenarios by company STATUS QUO SCENARIO SCENARIO WORST-CASE SCENARIO DIVIDENDS PER ADR/SHARE IN 2017E DIVIDEND YIELD DIVIDENDS PER ADR/SHARE IN 2017E DIVIDEND YIELD DIVIDENDS PER ADR/SHARE IN 2017E DIVIDEND YIELD DIVIDENDS PER ADR/SHARE IN 2017E DIVIDEND YIELD MTS, USD % % % % MegaFon, USD % % % % VimpelCom, USD % % % % Rostelecom, RUB % % % % Mail.ru % % % % Yandex % % % % We reiterate our view that MTS is best-positioned among the operators to cope with the new law. Our estimates suggest that the company can still pay dividends to shareholders under three out of four scenarios. MegaFon should stop paying dividends beyond the smoothed scenario. Rostelecom can afford to pay dividends only in 2017 under most scenarios, while VimpelCom should continue to pay immaterial dividends in most cases. Valuations DCF based valuation of telecom operators and Internet companies under various scenarios STATUS QUO SCENARIO SCENARIO WORST-CASE SCENARIO TARGET PRICE UPSIDE/ DOWNSIDE TARGET PRICE UPSIDE/ DOWNSIDE TARGET PRICE UPSIDE/ DOWNSIDE TARGET PRICE UPSIDE/ DOWNSIDE MTS, USD % % % % MegaFon, USD % % % % VimpelCom*, USD % % 4.1 5% % Rostelecom, RUB % % % % Mail.ru, RUB % % % % Yandex, RUB % % % % *VimpelCom s valuation is unofficial and indicative, and assumes the merger in Italy is not canceled Except for the status quo scenario, all other scenarios are value-destructive for the companies, according to our estimates. The smoothed scenario suggests that MTS and VimpelCom would be the least affected companies, while MegaFon and Rostelecom would suffer the most. Internet companies, however, are affected only moderately by this scenario, with Mail.ru looking relatively more attractive. The burdensome scenario makes most of the companies unattractive, with downside potential in a range of 14-56%. The exception is VimpelCom, whose exposure to Russia is only about 45% of revenues. Thus, potential weakness in Russia would be mitigated by the holding s other EM assets. (Please note, however, that we do not provide an official valuation or recommendation on VimpelCom shares at the moment, and our estimates are indicative.) Under the worst-case scenario, all companies suggest downside in a range of 21-92%. MegaFon would be the most heavily impacted due to its relatively high leverage and high share of mobile data in revenues. 5

6 Model updates: what have we changed? As we mentioned earlier, we have updated our models and valuations of MegaFon and Yandex. The following are the main changes to our models: MegaFon MegaFon reported rather weak results for 2015, with EBITDA down 4.4% YoY to RUB bln vs. our expectation of RUB bln. Moreover, the company gave pessimistic guidance for 2016 both in terms of revenues and EBITDA. We were looking for some recovery and upgrade of FY16 guidance in 1Q16, but were disappointed. As a result, we cut our 2016 EBITDA estimate from RUB 137 bln to RUB 123 bln, in line with the management s guidance. We also reduced our long-term EBITDA margin estimate from 42% to 39% and lowered our revenues CAGR from 5.8% to 3.6%. Overall, we cut our target price for MegaFon from $16.0 to $11.6 per GDR and downgraded our recommendation from overweight to NEUTRAL. Yandex On the other hand, Yandex reported strong results for 2015 and 1Q16 that were ahead of our expectations. Revenues grew 18% YoY in 2015 to RUB 59.8 bln vs. our estimate of RUB 58.3 bln. The EBITDA margin came in particularly strong at 35% in 2015 vs. our forecast of 30.6%. We increased our revenue CAGR for from 14% to 18%, while lowering our long-term EBITDA margin from 38.5% to 37%. To remind, we reduced our target price for Yandex in February, mainly due to sharp ruble devaluation at that time (RUB/USD 77.1). The RUB/USD rate has since strengthened to 64 and we do not foresee any sharp moves at the moment. Overall, we raised our target price for Yandex from $15.3 to $19.9 per ADR. Nevertheless, we assign a NEUTRAL recommendation to the stock, which in our view has already played out all of its fundamental upside potential through end

7 APPENDIX DCF valuation summary by company and type of shares (status quo scenario), RUB mln CURRENT CASE MTS ADR MTS SHARES* MEGAFON SHARES MEGAFON GDR ROSTELECOM SHARES VIMPELCOM GDR** YANDEX GDR MAIL.RU GDR PV of FCF 574, , , , , , , ,495 Terminal value 442, , , , , , , ,895 Estimated EV 1,016,983 1,016, , , , , , ,390 Net debt (2016E) 220, , , , , ,744-34,580-5,138 Add fair value of JVs , , Total fair value of Equity 796, , , , , , , ,528 Shares/GDR out, mln 1,033 2, ,717 1, Target price, RUB per share/usd per GDR Current price, RUB share, USD per GDR Upside %, share/gdr 42% 48% 5% 6% 22% 47% -8% 16% Recommendation OVERWEIGHT OVERWEIGHT NEUTRAL NEUTRAL OVERWEIGHT NOT RATED NEUTRAL OVERWEIGHT FX rate Perpetual growth rate 3.5% 3.5% 3.5% 3.5% 3.5% 1.0% 5.0% 5.0% WACC*** 14.3% 14.3% 14.4% 14.4% 14.6% 11.3% 15.1% 15.1% * We use a 10% discount to our MTS ADR target price to arrive at a target price for MTS local shares ** VimpelCom s valuation is unofficial and indicative, and assumes the merger in Italy is not canceled *** WACC is estimated for RUB based models, except VimpelCom, which is USD-based MTS DCF valuation model (status quo scenario), RUB mln E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenues 410, , , , , , , , , , , ,565 EBITDA 179, , , , , , , , , , , ,130 EBITDA margin 43,6% 40,7% 39,0% 38,5% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% Less profit tax -15,985-13,269-15,564-16,686-18,289-19,716-20,989-17,431-18,128-18,853-19,607-20,392 Change in working capital -6,488-7,734-11,242-4,762-5,067-5,278 5,503 5,723 5,952 6,191 6,438 6,696 Capex -90,000-95,500-85,100-90,478-91,203-95,012-93,557-93,293-95,238-94,715-93,353-93,739 Free cash flow 66,654 59,043 63,789 71,411 83,047 85, , , , , , ,695 % growth YoY -11% 8% 12% 16% 3% 23% 12% 6% 7% 8% 6% % of revenues 16% 14% 14% 15% 16% 16% 19% 21% 21% 22% 22% 23% MegaFon DCF valuation model (status quo scenario), RUB mln E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenues 314, , , , , , , , , , , ,935 EBITDA 138, , , , , , , , , , , ,035 EBITDA margin 44,0% 42,2% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% 39,0% Less profit tax -13,368-12,334-10,757-13,798-14,423-15,034-15,670-16,297-16,949-17,627-18,332-19,065 Change in working capital -4,483-7,154-7,154-7,154-7,154 7,159 7,462 7,761 8,071 8,394 8,730 9,079 Capex -57,607-65,810-69,398-65,703-65,248-64,430-63,427-65,964-64,568-65,052-65,471-65,367 Free cash flow 63,062 47,059 35,715 41,467 47,105 67,293 73,874 76,829 83,938 89,394 95, ,682 % growth YoY -25% -24% 16% 14% 43% 10% 4% 9% 6% 6% 7% % of revenues 20% 15% 11% 13% 14% 19% 20% 20% 21% 21% 22% 22% 7

8 Rostelecom DCF valuation model (status quo scenario), RUB mln E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenues 298, , , , , , , , , , , ,696 EBITDA 102, ,800 99, , , , , , , , , ,970 EBITDA margin 34,3% 33,9% 33,3% 33,7% 33,8% 33,9% 33,4% 33,0% 33,0% 33,0% 33,0% 33,0% Less profit tax -9,947-4,464-4,805-5,342-5,625-5,935-5,902-7,976-8,334-8,740-8,913-9,087 Change in working capital -6,256 1,408-5,003-3,090-2,992-3,055-2,882 3,979 4,099 4,242 4,391 4,544 Capex -53,800-62,700-57,071-57,927-57,249-56,816-56,342-53,058-52,942-53,027-54,883-56,804 % of revenues -18,0% -21,1% -19,0% -19,0% -18,5% -18,0% -17,5% -16,0% -15,5% -15,0% -15,0% -15,0% Free cash flows 32,497 35,044 33,066 36,328 38,691 41,082 42,485 52,377 55,538 59,135 61,338 63,623 % growth YoY 8% -6% 10% 7% 6% 3% 23% 6% 6% 4% 4% % of revenues 11% 12% 11% 12% 13% 13% 13% 16% 16% 17% 17% 17% VimpelCom DCF valuation model (status quo scenario)*, USD mln E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenues 13,517 9,625 8,470 7,877 7,838 7,916 7,995 8,075 8,156 8,238 8,320 8,403 EBITDA 5,560 2,857 3,303 3,072 2,978 3,008 2,958 2,988 3,018 3,048 3,078 3,109 EBITDA margin 41,1% 29,7% 39,0% 39,0% 38,0% 38,0% 37,0% 37,0% 37,0% 37,0% 37,0% 37,0% Less profit tax Change in working capital Capex -3,501-2,207-1,694-1,497-1,489-1,504-1,519-1,534-1,550-1,565-1,581-1,597 Free cash flow 1, ,373 1, ,234 1, ,284 1,297 % growth YoY -86% 434% -1% -29% 1% 26% 1% -25% 1% 36% 1% % of revenues 13% 3% 16% 17% 12% 12% 15% 15% 11% 11% 15% 15% * VimpelCom s valuation is unofficial and indicative, and assumes the merger in Italy is not canceled Yandex DCF valuation model (status quo scenario), RUB mln E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenues 50,767 59,792 70,624 83,686 99, , , , , , , ,263 EBITDA 21,052 20,969 22,844 28,686 34,342 41,199 48,045 55,740 65,949 78,040 89, ,208 EBITDA margin 41,5% 35,1% 32,3% 34,3% 34,4% 35,1% 35,1% 35,0% 36,0% 37,1% 37,1% 37,1% Less profit tax -5,455-3,917-3,428-4,539-5,791-6,659-8,027-9,615-11,442-13,616-15,658-18,007 Change in working capital -1, ,175 1,370 1,591 1,830 2,104 2,420 2,783 Capex -7,615-13,154-14,125-14,227-14,662-14,103-13,695-12,728-10,978-12,624-12,098-13,913 Free cash flow 6,251 4,227 5,366 10,501 14,887 21,612 27,692 34,988 45,359 53,904 64,409 74,070 % growth YoY -32% 27% 96% 42% 45% 28% 26% 30% 19% 19% 15% % of revenues 12% 7% 8% 13% 15% 18% 20% 22% 25% 26% 27% 27% 8

9 Mail.ru DCF valuation model (status quo scenario), RUB mln E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenues 32,327 37,986 40,018 45,549 51,918 58,807 66,440 75,138 82,652 89,264 96, ,118 EBITDA 16,741 14,541 19,483 22,807 25,883 30,240 34,444 38,927 43,113 46,418 50,131 54,141 EBITDA margin 51,8% 38,3% 48,7% 50,1% 49,9% 51,4% 51,8% 51,8% 52,2% 52,0% 52,0% 52,0% Less profit tax -2,322-1, ,095-1,221-1,331-1,437-1,624 Change in working capital 1,254 2,260 1,000 1,139 1,298 1,470 1,661 1,878 2,066 2,232 2,410-1,041 Capex -2,650-2,672-2,801-3,188-3,634-4,116-4,119-4,133-4,133-4,195-4,242-4,165 Free cash flow 13,023 12,393 17,213 20,167 22,850 26,745 31,017 35,578 39,826 43,123 46,862 47,311 % growth YoY, -5% 39% 17% 13% 17% 16% 15% 12% 8% 9% 1% % of revenues 40% 33% 43% 44% 44% 45% 47% 47% 48% 48% 49% 45% MTS key model assumptions, RUB mln 2016E 2017E 2018E 2019E 2020E Revenues 450, , , , ,333 STATUS QUO EBITDA 175, , , , ,860 EBITDA margin 39.0% 36.9% 36.2% 37.4% 37.4% Capex -85,100-90,478-91,203-95,012-93,557 Capex as % of revenues -18.9% -19.0% -18.0% -18.0% -17.0% FCF 45,459 54,029 64,430 69,461 90,451 FCF after dividends -6,541 2,029 12,430 17,461 38,451 Net debt 220, , , , ,393 Net debt/ebitda 1.3x 1.3x 1.1x 1.0x 0.8x EBITDA 175, , , , ,317 EBITDA margin 39.0% 36.5% 37.2% 37.2% 37.3% Capex -85, , , ,577-93,557 Capex as % of revenues -18.9% -28.8% -27.2% -26.8% -17.0% FCF 45,459-1,848 8,553 13,583 81,138 FCF after dividends -6,541-53,848-43,447-38,417 29,138 Net debt 220, , , , ,966 Net debt/ebitda 1.3x 1.7x 1.6x 1.7x 1.3x EBITDA 175, , , , ,691 EBITDA margin 39.0% 32.6% 33.5% 33.7% 33.9% Capex -85, , ,895-95,012-93,557 Capex as % of revenue -18.9% -48.3% -45.6% -18.0% -17.0% FCF 45, , ,201 41,522 62,512 FCF after dividends -6, , ,201-10,478 10,512 Net debt 220, , , , ,393 Net debt/ebitda 1.3x 1.5x 1.2x 1.1x 0.8x WORST CASE EBITDA 175, , , , ,691 EBITDA margin 39.0% 32.6% 33.5% 33.7% 33.9% Capex -85, , ,588-95,012-93,557 Capex as % of revenue -18.9% -77.7% -73.1% -18.0% -17.0% FCF 45, , ,894 41,522 62,512 FCF after dividends -6, , ,894 41,522 62,512 Net debt 220, , , , ,547 Net debt/ebitda 1.3x 3.1x 4.2x 3.6x 2.9x MegaFon key model assumptions, RUB mln 2016E 2017E 2018E 2019E 2020E Revenues 315, , , , ,102 STATUS QUO EBITDA 123, , , , ,510 EBITDA margin 39.0% 39.0% 39.0% 39.0% 39.0% Capex -69,398-65,703-65,248-64,430-63,427 Capex as % of revenues -22.0% -20.0% -19.0% -18.0% -17.0% FCF 18,726 26,288 31,059 35,492 40,307 FCF after dividends -23,682-8,944-12,214-12,563-12,848 Net debt 195, , , , ,554 Net debt/ebitda 1.6x 1.6x 1.6x 1.6x 1.7x EBITDA 123, , , , ,853 EBITDA margin 39.0% 36.7% 36.8% 36.9% 36.9% Capex -69, , , ,711-63,427 Capex as % of revenues -22.0% -31.7% -30.1% -28.7% -17.0% FCF 18,726-19,650-14,879-10,445 32,650 FCF after dividends -23,682-54,882-58,151-53,501-10,504 Net debt 195, , , , ,592 Net debt/ebitda 1.6x 2.1x 2.6x 3.0x 3.0x EBITDA 123, , , , ,541 EBITDA margin 39.0% 32.0% 32.3% 32.6% 32.8% Capex -69, , ,093-64,430-63,427 Capex as % of revenue -22.0% -55.0% -52.4% -18.0% -17.0% FCF 18, , ,755 12,524 17,338 FCF after dividends -23, , ,755 12,524-35,817 Net debt 195, , , , ,554 Net debt/ebitda 1.6x 1.9x 1.9x 2.0x 2.0x WORST CASE EBITDA 123, , , , ,541 EBITDA margin 39.0% 32.0% 32.3% 32.6% 32.8% Capex -69, , ,937-64,430-63,427 Capex as % of revenue -22.0% -89.9% -85.9% -18.0% -17.0% FCF 18, , ,599 12,524 17,338 FCF after dividends -23, , ,599 12,524 17,338 Net debt 195, , , , ,662 Net debt/ebitda 1.6x 4.1x 6.0x 5.7x 5.4x 9

10 Rostelecom key model assumptions, RUB mln 2016E 2017E 2018E 2019E 2020E Revenues 300, , , , ,955 STATUS QUO EBITDA 99, , , , ,611 EBITDA margin 33.3% 33.7% 33.8% 33.9% 33.4% Capex -57,071-57,927-57,249-56,816-56,342 Capex as % of revenues -19.0% -19.0% -18.5% -18.0% -17.5% FCF 18,936 25,158 29,778 34,330 39,792 FCF after dividends 2,464 10,957 10,909 11,997 14,045 Net debt 162, , , ,900 91,872 Net debt/ebitda 1.6x 1.4x 1.3x 1.1x 0.9x EBITDA 99,945 97,666 99, , ,589 EBITDA margin 33.3% 32.0% 32.2% 32.3% 31.9% Capex -57,071-83,035-82,357-81,924-56,342 Capex as % of revenue -19.0% -27.2% -26.6% -26.0% -17.5% FCF 18,936-4, ,200 34,771 FCF after dividends 2,464-19,173-19,221-18,133 9,023 Net debt 162, , , , ,377 Net debt/ebitda 1.6x 1.7x 1.7x 1.7x 1.4x EBITDA 99,945 95,155 97,025 99, ,078 EBITDA margin 33.3% 31.2% 31.4% 31.5% 31.1% Capex -57, , ,574-56,816-56,342 Capex as % of revenue -19.0% -43.7% -42.8% -18.0% -17.5% FCF 18,936-57,699-53,080 26,798 32,260 FCF after dividends 2,464-71,901-53,080 26,798 6,512 Net debt 162, , , ,900 91,872 Net debt/ebitda 1.6x 1.5x 1.3x 1.1x 0.9x WORST CASE EBITDA 99,945 95,155 97,025 99, ,078 EBITDA margin 33.3% 31.2% 31.4% 31.5% 31.1% Capex -57, , ,899-56,816-56,342 Capex as % of revenues -19.0% -68.4% -67.2% -18.0% -17.5% FCF 18, , ,405 26,798 32,260 FCF after dividends 2, , ,405 26,798 32,260 Net debt 162, , , , ,244 Net debt/ebitda 1.6x 2.9x 4.0x 3.5x 2.9x VimpelCom key model assumptions, USD mln 2016E 2017E 2018E 2019E 2020E Revenues 8,470 7,877 7,838 7,916 7,995 STATUS QUO EBITDA 3,303 3,072 2,978 3,008 2,958 EBITDA margin 39.0% 39.0% 38.0% 38.0% 37.0% Capex -1,694-1,497-1,489-1,504-1,519 Capex as % of revenues -20.0% -19.0% -19.0% -19.0% -19.0% FCF 1,098 1, FCF after dividends 1,037 1, Net debt 6,607 6,144 5,361 5,415 5,325 Net debt/ebitda 2.0x 2.0x 1.8x 1.8x 1.8x EBITDA 3,303 2,956 2,940 2,971 3,002 EBITDA margin 39.0% 37.5% 37.5% 37.5% 37.5% Capex -1,694-2,078-2,071-2,086-1,519 Capex as % of revenue -20.0% -26.4% -26.4% -26.3% -19.0% FCF 1, ,096 FCF after dividends 1, ,035 Net debt 6,607 5,404 4,512 4,261 3,282 Net debt/ebitda 2.0x 1.8x 1.5x 1.4x 1.1x EBITDA 3,303 2,723 2,708 2,738 2,769 EBITDA margin 39.0% 34.6% 34.5% 34.6% 34.6% Capex -1,694-3,242-3,234-1,504-1,519 Capex as % of revenue -20.0% -41.2% -41.3% -19.0% -19.0% FCF 1, ,017 FCF after dividends 1, Net debt 6,607 6,144 5,361 5,415 5,325 Net debt/ebitda 2.0x 2.3x 2.0x 2.0x 1.9x WORST CASE EBITDA 3,303 2,723 2,708 2,738 2,769 EBITDA margin 39.0% 34.6% 34.5% 34.6% 34.6% Capex -1,694-4,987-4,979-1,504-1,519 Capex as % of revenues -20.0% -63.3% -63.5% -19.0% -19.0% FCF 1,098-1,791-1, ,096 FCF after dividends 1,037-1,852-2, ,035 Net debt 6,607 7,298 8,761 8,048 7,069 Net debt/ebitda 2.0x 2.7x 3.2x 2.9x 2.6x 10

11 Yandex key model assumptions, RUB mln 2016E 2017E 2018E 2019E 2020E Revenues 70,624 83,686 99, , ,950 STATUS QUO EBITDA 22,844 28,686 34,342 41,199 48,045 EBITDA margin 32.3% 34.3% 34.4% 35.1% 35.1% Capex -14,125-14,227-14,662-14,103-13,695 Capex as % of revenues -20.0% -17.0% -14.7% -12.0% -10.0% FCF 4,833 12,048 16,233 23,016 29,080 FCF after dividends 4,831 12,045 16,229 23,011 29,074 Net debt -35,409-49,895-68,638-94, ,985 Net debt/ebitda -1.6x -1.7x -2.0x -2.3x -2.6x EBITDA 22,844 28,152 33,809 40,665 47,512 EBITDA margin 32.3% 33.6% 33.9% 34.6% 34.7% Capex -14,125-24,893-25,329-24,770-13,695 Capex as % of revenues -20.0% -29.7% -25.4% -21.1% -10.0% FCF 4, ,033 11,816 28,547 FCF after dividends 4, ,033 11,816 28,547 Net debt -35,409-50,743-74, , ,229 Net debt/ebitda -1.6x -1.8x -2.2x -2.8x -3.6x EBITDA 22,844 25,486 31,142 37,999 44,845 EBITDA margin 32.3% 30.5% 31.2% 32.3% 32.7% Capex -14,125-46,227-46,662-14,103-13,695 Capex as % of revenues -20.0% -55.2% -46.8% -12.0% -10.0% FCF 4,833-23,152-18,967 19,816 25,880 FCF after dividends 4,833-23,152-18,967 19,816 25,880 Net debt -35,409-49,895-68,638-94, ,985 Net debt/ebitda -1.6x -2.0x -2.2x -2.5x -2.8x WORST CASE EBITDA 22,844 22,286 27,942 34,799 41,645 EBITDA margin 32.3% 26.6% 28.0% 29.6% 30.4% Capex -14,125-78,227-78,662-14,103-13,695 Capex as % of revenues -20.0% -93.5% -78.9% -12.0% -10.0% FCF 4,833-58,352-54,167 16,616 22,680 FCF after dividends 4,833-58,352-54,167 16,616 22,680 Net debt -35,409 8,457 43,881 1,662-52,762 Net debt/ebitda -1.6x 0.4x 1.6x 0.0x -1.3x Mail.ru key model assumptions, RUB mln 2016E 2017E 2018E 2019E 2020E Revenues 40,018 45,549 51,918 58,807 66,440 STATUS QUO EBITDA 19,483 22,807 25,883 30,240 34,444 EBITDA margin 48.7% 50.1% 49.9% 51.4% 51.8% Capex -2,801-3,188-3,634-4,116-4,119 Capex as % of revenues -7.0% -7.0% -7.0% -7.0% -6.2% FCF 11,668 17,325 20,641 24,652 28,833 FCF after dividends 11,668 17,325 20,641 24,652 28,833 Net debt -5,138-22,463-43,103-67,756-96,588 Net debt/ebitda -0.3x -1.0x -1.7x -2.2x -2.8x EBITDA 19,483 22,167 25,243 29,600 33,804 EBITDA margin 48.7% 48.7% 48.6% 50.3% 50.9% Capex -2,801-15,988-16,434-16,916-4,119 Capex as % of revenues -7.0% -35.1% -31.7% -28.8% -6.2% FCF 11,668 3,885 7,201 11,212 28,193 FCF after dividends 11,668 3,885 7,201 11,212 28,193 Net debt -5,138-22,463-43,103-67,756-96,588 Net debt/ebitda -0.3x -1.0x -1.7x -2.3x -2.9x EBITDA 19,483 18,967 22,043 26,400 30,604 EBITDA margin 48.7% 41.6% 42.5% 44.9% 46.1% Capex -2,801-41,588-42,034-4,116-4,119 Capex as % of revenues -7.0% -91.3% -81.0% -7.0% -6.2% FCF 11,668-24,915-21,599 20,812 24,993 FCF after dividends 11,668-24,915-21,599 20,812 24,993 Net debt -5,138-22,463-43,103-67,756-96,588 Net debt/ebitda -0.3x -1.2x -2.0x -2.6x -3.2x WORST CASE EBITDA 19,483 15,307 18,383 22,740 26,944 EBITDA margin 48.7% 33.6% 35.4% 38.7% 40.6% Capex -2,801-78,188-78,634-4,116-4,119 Capex as % of revenues -7.0% % % -7.0% -6.2% FCF 11,668-65,175-61,859 17,152 21,333 FCF after dividends 11,668-65,175-61,859 17,152 21,333 Net debt -5,138-22,463-43,103-67,756-96,588 Net debt/ebitda -0.3x -1.5x -2.3x -3.0x -3.6x 11

12 HQ: 16/1 Nametkina St., Moscow , Russia. Office: 7 Koroviy val St. Research Department +7 (495) EQUITY SALES FIXED INCOME SALES +7 (495) (495) EQUITY TRADING FIXED INCOME TRADING +7 (495) (499) Copyright Gazprombank (Joint Stock Company). All rights reserved This report has been prepared by the analysts of Gazprombank (Joint Stock Company) (hereinafter Gazprombank) and is based on information obtained from public sources believed to be reliable, but is not guaranteed as necessarily being accurate. With the exception of information directly pertaining to Gazprombank, Gazprombank shall not be liable for the accuracy or completeness of any information shown herein. All opinions and judgments herein represent solely analysts personal opinion regarding the events and situations described and analyzed in this report. They should not be regarded as Gazprombank s position and are subject to change without notice, also in connection with new corporate or market events that may transpire. Gazprombank shall be under no obligation to update, amend this report or otherwise notify anyone of any such changes. The financial instruments mentioned herein may be unsuitable for certain categories of investors. This report should not be the only basis used when ad opting an investment decision. Investors should make investment decisions at their own discretion, inviting independent consultants, if necessary, for their specific interests and objectives. The authors shall not be liable for any consequences or loss that might result from the use of this report. Any information contained herein or in the appendices hereto shall not be construed as a solicitation or an offer to buy or sell any securities or as any investment advertisement, unless otherwise expressly stated herein or in the appendices hereto. Redistribution or reproduction of this report, wholly or in part, is prohibited without prior written permission from Gazprombank. For residents of Hong Kong: Research which relates to securities (as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong )) is issued in Hong Kong by, or on behalf of, GPB Financial Services Hong Kong Limited (GPBFSHK), which takes responsibility for that content. Information in this report shall not be construed to imply any relationship, advisory or otherwise, between GPBFSHK and the recipient or user of the report unless expressly agreed by GPBFSHK. GPBFSHK is not acting nor should it be deemed to be acting, as a fiduciary or as an investment manager or investment advisor to any recipient or user of this information unless expressly agreed by GPBFSHK. GPBFSHK is regulated by Hong Kong Securities and Futures Commission. Please contact [Mr. Michael Hammond ( ) or Mr. Joseph Chu ( )] at GPBFSHK if you have any queries on or any matters arising from or in connection with this report. For GPB- Financial Services Ltd: The content of this documents has been prepared with in the meaning of Markets in Financial Instruments Directive 2004/39 EC (MiFID). The information contained here in is provided for information purposes only and it is not a marketing communication, investment advice or personal recommendation within the meaning of MiFID. The information must not be used or considered as an offer or solicitation of an offer to sell or buy or subscribe for nay securities or financial instruments. GPB-Financial Services Ltd is regulated by the Cyprus Securities and Exchange Commission under license number 113/10.