Gazprombank Sees MegaFon-MTS Gap Fading: Russia Overnight

OAO MegaFon, Russia’s second-largest wireless carrier, will reduce its valuation premium to OAO Mobile TeleSystems as its purchase of Scartel shrinks profit margins, OAO Gazprombank said.

American depositary receipts of MTS, Russia’s largest wireless carrier, trimmed its discount to MegaFon’s London-traded shares to 17 percent on Nov. 1 from 27 percent in July. The Bloomberg-Russia-US Equity Index of the most-traded Russian stocks in the U.S. dropped for a second week, led by OAO Mechel. RTS stock-index futures fell in U.S. hours.

MTS, controlled by billionaire Vladimir Evtushenkov, boosted its annual profitability forecast in August after the company reported earnings that beat estimates. While the acquisition of mobile-data operator Scartel gives MegaFon a faster network, it will also drive margins lower at the Moscow-based carrier, according to Gazprombank.

“The company has been spending aggressively and margins will start showing that,” Sergey Vasin, analyst at Gazprombank, said by phone from Moscow Nov. 1. “It’s unfair for MTS, with its sound spending and well diversified revenue sources, to trade at a discount to MegaFon. MTS will gain and MegaFon decrease.”

Five out of 24 analysts covering MegaFon’s London-listed stock recommend selling the shares, a record ratio, data compiled by Bloomberg show. Eleven analysts have a hold rating, while eight say buy.

Buy Ratings

MegaFon may have paid almost twice the actual price for Scartel, Gazprombank’s Vasin said, estimating the transaction at about $1.8 billion, including Scartel’s debt. That would mean that MegaFon overpaid $800 million for Scartel, he said.

None of 24 analysts covering MTS recommend selling the ADR, while 17 analysts have a buy rating, according to data collected by Bloomberg.

MTS rose 1.8 percent to $23.20 in New York on Nov. 1, extending this year’s rally to 24 percent and trading at almost 10.5 times estimated earnings. MegaFon slipped 0.7 percent to a four-week low of $36.06 in London, trimming a 52 percent advance this year. MegaFon trades at 12.3 times projected profit.

MTS traded at an 11 percent premium to its Moscow-listed shares, the widest in two weeks, while MegaFon’s depositary receipts in London traded at 0.5 percent discount to its Moscow-listed stock.

Mechel Falls

The Bloomberg-Russia-US Equity gauge rose 0.1 percent to 103.32 on Nov. 1, trimming last week’s drop to 1.3 percent. The Market Vectors Russia ETF, the largest exchange-traded fund dedicated to Russian equities, retreated 1.2 percent to $29.35 in the week. Futures contracts on the dollar-denominated RTS gauge fell 0.1 percent to 147,190. The RTS Volatility Index, which measures expected swings in stock futures, climbed 0.9 percent to 20.73.

Mechel, Russia’s biggest supplier of steel-making coal, sank 5.2 percent last week to $3.11 in New York, the lowest level in eight weeks. Mechel settled at a 2.1 percent discount to its Moscow-listed shares.

United Co. Rusal, a Moscow-based aluminum producer, rose 0.4 percent to HK$2.38 in Hong Kong trading as of 10:34 a.m. local time. The MSCI Asia Pacific Index gained 0.1 percent.

Before it's here, it's on the Bloomberg Terminal.