Ukraine Weighs on Russia’s MTS as Stock Buy Ratings Fade

OAO Mobile TeleSystems, Russia's biggest mobile operator, is losing the support of analysts as the conflict in Ukraine dims the outlook for the company’s most profitable foreign market.

Firms from Morningstar Inc. to IFC Metropol have cut their recommendations on shares of MTS, as the company is known, reducing the number of buy ratings to 13, the least since April 2013. Analysts have pushed the average 12-month price estimate on the shares to near a four-year low, according to data compiled by Bloomberg. MTS rose 0.2 percent to $18.86 yesterday, paring its 2014 slide to 13 percent, while an index of the most-traded Russian stocks in the U.S. gained 1 percent to a three-week high.

Ukraine represented 9.6 percent of MTS’s sales and 29 percent of its net income as of March 31. The country’s economy shrank 4.7 percent in the second quarter, the most since 2009, and the hryvnia is the second-worst performer among global currencies this year as the government battles pro-Russian separatists in the nation’s easternmost regions. MTS is scheduled to report second-quarter results tomorrow.

“If it wasn’t for the Ukraine conflict, MTS’s results would be much better,” Konstantin Belov, a senior analyst at UralSib Financial Corp. in Moscow, said by phone yesterday. “The scale of declines in many Ukrainian economic indicators is breathtaking. MTS is hurt by the unpredictability of the Ukraine crisis and the poor outlook of the economy.”

Hryvnia’s Plunge

UralSib cut its recommendation on the stock to hold from buy in June, Belov said. A deep devaluation of the hryvnia is “particularly negative,” he said. The Ukrainian currency has tumbled 37 percent this year, data compiled by Bloomberg show. It strengthened 0.7 percent yesterday to 13.03 per dollar.

The Market Vectors Russia ETF, the largest dedicated Russian exchange-traded fund, gained 2.3 percent to $24.97, the highest since July 24. RTS index futures expiring next month increased 0.2 percent to 124,250 in U.S. hours. The RTS Volatility Index, which measures expected swings in the stock futures, declined 1.3 percent to 30.98. Moscow-based United Co. Rusal added 0.3 percent to HK$4.04 at 10:38 a.m. in Hong Kong.

U.S. and European leaders are pushing to halt the conflict that’s killed more than 2,000 people since Russia annexed Crimea in March. The war, which Ukraine and its allies say is being fueled by Russia’s support for the insurgents, has also triggered international sanctions that have hurt Russia’s $2 trillion economy. Russia denies helping the separatists.

Economic Contraction

MTS, based in Moscow, will say second-quarter revenue rose 2.8 percent to 100.2 billion rubles ($2.78 billion), faster than the 0.4 percent pace a year earlier, according to the mean estimate of five analysts surveyed by Bloomberg. Net income probably rose about 9 percent, analysts’ projections show.

The Ukrainian economy will contract by 6.5 percent this year, according to International Monetary Fund forecasts. Retail sales rose 0.8 percent in the first six months, compared with growth of 11.1 percent in the same period last year, according to the state statistics office.

While revenue from Ukraine will remain flat in hryvnia terms, total sales at MTS will grow 6 percent in the second quarter, faster than competitors, Ivan Kim, analyst at VTB Capital, said in an Aug. 14 report. He reiterated a buy recommendation on the stock.

License revocation “looks too hostile and unlikely at this point (albeit this risk exists),” Kim wrote in the report. “Over time, the government might opt not to nominate MTS for a 3G license, but the hunger for cash could prevail.”

Civilian Deaths

Ukrainian President Petro Poroshenko said 1,200 trained mercenaries from Russia arrived in eastern Ukraine, according to a statement on his website yesterday. Ukraine accused the insurgents of shelling vehicles carrying civilians being evacuated in Luhansk. “Many” people, including women and children, were killed, though there’s no precise information on casualties, military spokesman Andriy Lysenko said in Kiev.

“The market has been driven by the Ukraine conflict and while there seems to be no quick solution to the crisis, we don’t expect it to deteriorate as the parties are actually willing to talk and meet for further negotiations,” Ilya Balakirev, a senior analyst at UFS Finance Investment Co., which has a buy recommendation on the stock, said by phone from Moscow yesterday. “MTS is currently suffering from its exposure to Ukraine.”

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