Steven Hartley
MTS: Not to be ignored
Yesterday, Russia's largest mobile operator, MTS, announced its 2007 financial results. Group revenues across its Russian and Commonwealth of Independent States (CIS) operations grew 29% year on year to US$8.25bn, with OIBDA up 31% to US$4.2bn - an OIBDA margin of 51%. Total connections for the group grew 13% to 85 million.Comment: The growth of MTS is undoubtedly impressive, particularly as connections in its domestic market grew 12% last year, despite mobile penetration reaching 119% by the end of the year. Usage was also stimulated across all its operations with minutes of usage per user growing by 40% between Q4 2006 and Q4 2007 in Russia.We've recently had several discussions with MTS for our forthcoming company analysis 'MTS: A regional powerhouse goes shopping' and it is clear that the operator feels slightly aggrieved that its phenomenal growth has been somewhat ignored by investors and the wider mobile community. With double digit year on year growth for an $8bn company and the eighth largest customer base in the world, it is easy to feel sympathy for the Russian giant. Even more so when the guidance for 2008 is looking to 25% revenue growth and maintaining margins at 50%.Nonetheless, although MTS clearly operates in high growth markets, even at home, we can't escape the feeling that it is not fully realising its potential by applying so much focus on the CIS. Despite high growth these markets contribute very low revenues to Group performance (just 25% in 2007, down from 27% in 2006). Furthermore, its Russian rival, Vimpelcom, grew even more quickly than MTS in 2007 and operates in almost exactly the same CIS markets. If Vimpelcom's growth is sustained this year, then its revenues will be almost on a par with MTS. MTS does have global ambitions. On the back of its massive domestic success its primary expansion goal is to expand its presence across the CIS (it currently operates in the Ukraine, Uzbekistan, Turkmenistan, Armenia and has a minority stake in Belarus). A third priority is non-neighbouring markets, particularly Africa, Asia and the Middle East. Given the opportunities it is our view that MTS should be even more ambitious in its global expansion plans, despite the risks associated with operating overseas. As the domestic economies of the most geographically diverse mobile operators slow, so it is likely that the global operators will increase focus on their home markets and seek integration synergies rather than new investment opportunities. Therefore, the competition for assets, and prices, is likely to decrease. Of course, this is not only an excellent opportunity for MTS, but also for the new order of expansionist telcos from Vimpelcom to China Mobile to Orascom. MTS must therefore be more ambitious if it wants to realise its huge potential and not get left behind - or ignored.
