VimpelCom Ltd., Russia’s third-largest mobile provider, is trading at the cheapest-ever level versus rival OAO MegaFon on concern expansion abroad is hobbling the company’s ability to compete in its biggest market.
American depositary receipts of VimpelCom, based in Amsterdam, dropped 1.4 percent March 8 in New York to trade at 9.4 times estimated profit, 19 percent below the valuation for MegaFon, the widest discount since the Moscow-based company’s initial public offering in November. The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. climbed 2.5 percent last week, the first jump since the beginning of February. CTC Media Inc. surged 24 percent.
VimpelCom, which got 42 percent of sales from Russia in 2011, operates in 18 countries and is seeking control of its Canadian unit, Chief Executive Officer Jo Lunder said March 6. While both companies won fourth-generation wireless licenses in July, MegaFon overtook VimpelCom as Russia’s No. 2 mobile provider by subscribers in 2010 and offers 4G services in cities including Moscow and St. Petersburg. VimpelCom will roll out 4G by June, according to its website.
“I prefer MegaFon over VimpelCom,” Luis Saenz, head of equity sales at BCS Financial Group in London, said by phone March 8. “MegaFon is very good in Russia and is better prepared for 4G than its competitors, including VimpelCom. I have yet to see a Russian company successfully expanding abroad.”
BCS analyst Anna Kurbatova rates VimpelCom a buy with a price target at $14.18 and MegaFon a hold with a price target at $28.55. Saenz, who has been trading Russian assets for a decade, said he expressed his own opinion on the stocks.
VimpelCom began its global expansion, favored by Russian billionaire shareholder Mikhail Fridman, in 2011 when its Moscow-based unit merged with Italy’s Wind Telecom SpA to create the world’s sixth-biggest mobile phone company by subscribers.
The company had 56.1 million customers in Russia in the fourth quarter of 2012, compared with 71.2 million for OAO Mobile TeleSystems, or MTS, the country’s biggest mobile phone operator, and 62.6 million for MegaFon, data by Moscow-based researcher Advanced Communications & Media show.
VimpelCom is going to “catch up in 2013 as we are behind MTS and MegaFon,” CEO Lunder said on the March 6 conference call. The company reported a profit in the fourth quarter, compared with a loss a year earlier.
“2013 will be a tougher year, with the company committing to necessary reinvestment in Russia,” JP Davids and Roman Arbuzov, analysts at Barclays Plc in London who rate the stock sell, wrote in an e-mailed report on March 8. “Despite this reinvestment, we do not see the network gap to peers closed. We prefer MegaFon and see it as the market share taker in 2013.”
MegaFon focused its expansion strategy on Russia, conducting first 4G network tests in 2010, according to the company’s website. MegaFon provides 4G services in Russian regions including Khabarovskiy Krai and Sochi, where the nation will host 2014 Winter Olympic Games. Fourth-quarter profit surged 28 percent, the company said last month, beating the average estimate of five analysts surveyed by Bloomberg.
ADRs of VimpelCom fell to $12.24 in New York on March 8, paring their gain last week to 2.4 percent. MegaFon rose 1.2 percent to $30 in London to cap a 5.6 percent weekly gain.
CTC Media, a Russian television company, rallied to $11.99 to post the biggest weekly gain since 2009.
The Market Vectors Russia ETF, the largest dedicated Russian exchange-traded fund, rose 1.5 percent to $29.48 on March 8 for a weekly increase of 2.3 percent. Russian markets reopen today after a national holiday on March 8.
BNP Paribas recommended shorting the ruble versus dollar-euro basket in a report on March 8. The currency was flat against the dollar last week, settling at 30.6975 on March 7. It lost 0.3 percent against the basket to 34.9770.
Oil futures capped the biggest weekly gain in a month last week after U.S. employers added more jobs than planned. Crude oil for April delivery gained 0.4 percent to $91.95 on the New York Mercantile Exchange on March 8.
Brent oil for February delivery fell 0.3 percent to $110.85 a barrel on the London-based ICE Futures Europe on March 8. Urals crude, Russia’s chief export oil blend, decreased 0.2 percent to $107.66.