Rostelecom (MCX: RTKM, RTKMP) — a large technology holding in the field of telecommunications and digital services. The company is one of the leaders in the Russian market of high-speed Internet access, pay tv, cloud technologies, mobile and home telephony, cybersecurity, data centers and e-government.
9 November Rostelecom released financial results based on the results of the first 9 months of 2021. Despite the slow growth of the subscriber base, the company demonstrated an increase in revenues in all key business segments and showed record revenues and profits. Against the backdrop of strong financial results, management promises to increase dividends for this year to 6 R, which would also prove to be a record payout in the company's history.
In April, Rostelecom presented an updated strategy until 2025. Management plans, that the holding's revenue in 2025 will exceed 700 billion rubles, and net profit will double compared to 2020. I propose to consider the dynamics of the main indicators of the business, to understand, how achievable the goals are.
Disclaimer: if we write, that something went up or down by X%, then by default we mean a comparison with the report data for the same period last year, unless otherwise stated.
Revenue and profit
Rostelecom's revenue grew by 7% - up to 411.7 billion rubles, - which was a record result for this period. This was facilitated by an increase in revenue for mobile services by 11% - up to 143.6 billion rubles, fixed internet - on 9%, up to 72.7 billion rubles, and digital services - on 8%, up to 50.5 billion rubles. The worst result was shown by the home telephony segment, where, due to a reduction in the subscriber base, revenue continued to fall by 10% - up to 37 billion rubles.
The subscriber base in the key segments of Rostelecom has generally shown weak dynamics lately. The number of Internet subscribers increased by less than 1% for the year, the number of Pay TV users grew by only 2%, and in the cellular segment there was even a quarterly outflow of subscribers in the amount of 8%. This may indicate the saturation of the classical telecommunications business market and limited growth potential in the Internet access segments., pay TV and mobile services.
Judging by the priorities and the new strategy, management understands this.. In the coming years, the company expects the outstripping growth of such promising areas, as cloud services and data centers, cyber security, telemedicine, development of digital services and services for the state and the population. In the classical areas, however, the management plans to more quickly maintain its leading positions and increase the effectiveness of the existing base..
Structure of revenue by types of services
| Mobile communication | 34,9% |
| Fixed broadband internet access | 17,7% |
| Wholesale services | 13,8% |
| Digital Services | 12,2% |
| Telephony | 9,0% |
| A television | 7,2% |
| Other services | 5,2% |
34,9%
Dynamics of Rostelecom's subscriber base by 30 September, million people
| 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|
| Private Internet users | 11,9 | 12,0 | 12,0 | 12,3 | 12,4 |
| Corporate clients - Internet users | 0,9 | 1,0 | 1,0 | 1,1 | 1,1 |
| Pay TV | 9,7 | 10,1 | 10,3 | 10,7 | 10,9 |
| Home telephony | 19,5 | 17,8 | 16,0 | 14,5 | 12,9 |
The company's operating expenses increased by 7% - to 346,1 billion rubles, which is mainly due to the increase in depreciation deductions, deployment of projects within the framework of the federal program "Digital Region", increased spending on advertising and marketing, and repair and maintenance of infrastructure.
As a result, Rostelecom's operating profit increased by 7% and reached a record RUB 65.7 billion.
Net financial expenses of the business remained almost at the level of the previous year and amounted to 26.3 billion rubles. Income tax expense increased from 7,9 up to 10.1 billion rubles. As a result, the holding's net profit increased by 17% and amounted to 31.4 billion rubles, what has become a new all-time high for business.
Financial performance of Rostelecom for 9 Months, billion rubles
| Revenue | Operating profit | Net profit | |
|---|---|---|---|
| 2017 | 221,2 | 28,6 | 9,881 |
| 2018 | 233,0 | 27,6 | 12,7 |
| 2019 | 242,6 | 29,9 | 16,4 |
| 2020 | 383,9 | 61,7 | 26,9 |
| 2021 | 411,8 | 65,7 | 31,4 |
Investments
Rostelecom operates in one of the most technologically advanced and rapidly developing sectors of the economy. To stay competitive and adapt quickly, management has to invest significant amounts in acquiring new assets and improving infrastructure. Therefore, the size of capital investments in the last 5 years growing annually.
Following the first 9 months of 2021, it increased by 7% - up to a record 76.2 billion rubles. The total amount of investments for the current year is planned in the range of 110-115 billion rubles, including the development of fast-growing digital areas.
It is worth noting, that in November, Rostelecom acquired a leading developer in the field of digitalization of public administration - BFT-Holding LLC for 1.65 billion rubles. This will strengthen the position in the digital services and software market..
Capital investments excluding state programs for 9 Months, billion rubles
| 2017 | 42,3 |
| 2018 | 45,9 |
| 2019 | 62,8 |
| 2020 | 71,0 |
| 2021 | 76,2 |
Debts
For 9 months, Rostelecom's net debt grew by 39% - up to 502.5 billion rubles - against the backdrop of an increase in long-term loans and borrowings, as well as lease liabilities.
The level of debt burden is calculated by the management using the “net debt / 12mOIBDA” ratio, where OIBDA is operating income before depreciation, adjusted for non-monetary expenses under the long-term incentive program and non-state pension provision.
For 9 months OIBDA increased by 13% - up to 169.7 billion rubles, - and the ratio "net debt / 12mOIBDA" from the beginning of the year increased from 1,9 up to 2.3 ×.
Dynamics of the debt burden at the end of the period, billion rubles
| net debt | net debt / OIBDA | |
|---|---|---|
| 2017 | 181,6 | 1,9× |
| 2018 | 186,7 | 1,9× |
| 2019 | 333,0 | 2,0× |
| 2020 | 362,2 | 1,9× |
| 9м2021 | 502,5 | 2,3× |
Dividends
In April this year, Rostelecom approved a new dividend policy, where changed the basis for calculating dividend payments. In the period from 2021 to 2023, the company will not rely on free cash flow when determining the amount of dividends, but on net profit. The total amount of dividends must be at least 50% from net profit, as it is spelled out in the new government regulation for state-owned companies.
At the same time, the company seeks to pay at least 5 Р per ordinary share and annually increase the amount of payments by at least 5% given that, that nothing threatens the financial stability of the business, and the level of debt burden in terms of the “net debt / OIBDA” ratio on an annualized basis does not exceed 3×.
In recent years, Rostelecom has paid 5 P per share of each type, but in a press release following 3 quarter of 2021, the President of PJSC "Rostelecom" Mikhail Oseevsky said, that strong financial results of the business will allow increasing dividend payments for 2021 to 6 R.
Amount of dividends per one ordinary and preferred share in rubles
| 2016 | 5,39 R |
| 2017 | 5,05 R |
| 2018 | 5 R |
| 2019 | 5 R |
| 2020 | 5 R |
| 2021 | 6 R |
What's the bottom line?
In recent 5 years, Rostelecom has significantly reduced its dependence on the home telephony market. If in 2016 the segment brought the largest income to the company, then according to the results 9 months of 2021, it accounts for only 9% proceeds.
The company managed to compensate for the outflow of subscribers from wired telephony by attracting customers to the Internet, pay TV and mobile telephony. But the weak dynamics of the subscriber base suggests that, that these markets have saturated and the potential for further growth is limited by high competition among telecommunications companies.
In part, revenue growth in classic telecommunications services will support the upcoming tariff growth against the backdrop of rising inflation, but management needs to look for new promising areas of development, to maintain the same business growth rate. The most promising areas in terms of the potential to increase revenue in the coming years include cloud computing and data centers, cyber security, digital services, services in the field of housing and communal services and public administration, as well as telemedicine.
