According to ACRA estimates for 2017, the volume of the Russian telecommunications market amounted to RUB 1.58 tln. Over a half of the volume falls on the mobile telecommunications segment (58%, and this share has remained almost unchanged in the last seven years). The share of landline telephony has been steadily declining: from 2011 to 2017, the share has shrunk twice to 8%, while the shares of broadband Internet and pay TV services have grown from 10% to 12% and from 1% to 4%, respectively.
M2M means Machine-to-Machine.
IoT means Internet of Things.
The only segment that has demonstrated a decline in its subscriber base is landline telephony. ACRA projects that, in the next five years, the number of subscribers in this segment will decline on average by 7% annually. The remaining segments of the telecommunications market have already reached the saturation point or are close to it. Therefore, we see no grounds for a significant increase in the number of subscribers. It is worth noting a certain change in the subscriber base structure in the mobile segment. According to ACRA estimates, at the end of 2017, the number of subscribers of Russian mobile operators amounted to 259 million, with about 14 million SIM cards in the M2M and IoT segment. We expect that in the next five years, the classic subscriber base will decline at an average annual rate of 0.3%, while the M2M and IoT segments, on the contrary, will grow by 10% per year on average. After 2020, the growth of the IoT subscriber base may accelerate, along with a gradual transition to 5G communication standards. In addition, with the growing average speed of mobile Internet access, we allow for the possibility of a certain flow of subscribers from fixed broadband segment to mobile segment.
ACRA expects that in 2018, the volume of the telecommunications market could grow by 3.7%, to RUB 1.64 tln. Amid a stable subscriber base, ARPU dynamics and the ability of providers to pass additional capital expenses onto subscribers will have a decisive influence on the market volume.
The forecast is made in compliance with General Principles of Socioeconomic Indicators Forecasting.
In 2H2018, cellular companies started to reintroduce unlimited mobile data tariff plans. But this decision should not lead to such negative consequences as a drop in FFO margin before net interest and taxes to the minimum value (34%) observed during the intensification of competition several years ago. A more cautious pricing policy in respect of such tariffs will be able to support the ARPU growth in the segment.
In the next two or three years, the entire market's ARPU will be affected by the need to cover expenses for building-up data storage infrastructure. However, in view of the strong competition, operators may encounter difficulties trying to pass such expenses onto consumers. In ACRA's opinion, the operators will be able to do so only in part of the increased operating costs for servicing new infrastructure. As a result, we expect that in this period, ARPU will grow by 3% in the mobile segment, 1% in broadband segment, and 7% in the pay TV segment, while in the fixed telephony segment, ARPU is expected to decline by 3% (all figures are annual averages).
ACRA projects that, thanks to the above-mentioned ARPU and subscriber base dynamics, the trend of restoring FFO margin before net interest and taxes will remain, but ACRA does not expect a significant increase in this indicator: in 2018, it will increase from 35 to 36%, and in the next four years, it may grow by another 1-2 pps.
Network Neutrality is the principle that Internet service providers treat all data on the Internet equally, and not discriminate or charge differently by user, content, website, platform, application, type of attached equipment, or method of communication.
In their run for higher margins, sector companies may try to eliminate network neutrality. However, currently, ACRA does not include this factor in its baseline scenario in view of high uncertainty in its implementation strategy.
In the next five years, telecommunications operators will face two waves of heavy capital expenditures. The first one, which is actually already starting, is connected with changes in the Russian legislation that require the sector companies to store user data traffic. To comply with the new law, companies will have to build an appropriate infrastructure. The situation is complicated by the fact that the operators still have no clear understanding of the requirements for such infrastructure. Nevertheless, many companies have already taken first steps in this direction, and according to ACRA estimates, their extra capital expenditures will amount to RUB 15–20 bln by late 2018. CAPEX will peak in 2019–2020, and in the next five years, according to ACRA forecast, the aggregate capital expenditures of all Russian telecommunications companies for data storage infrastructure may reach RUB 250 bln (the amount may vary depending on the ruble exchange rate).
As CAPEX for data storage infrastructure declines, we expect a second wave of capital expenditures, which will be associated with investments in 5G networks. The progress on 5G projects will depend on the market demand. On the one hand, at present, we see no urgent need for new generation systems, either by retail consumers or by corporates. On the other hand, the state program for digital economy may accelerate 5G penetration. It should be noted that there is no consensus on the 5G network development model so far: one option is that each operator builds its own network, partially cooperating with other players; the other option is a single-operator infrastructure.
In 2015–2017, FCF demonstrated by telecom operators was under pressure from declining operating margins, and starting from 2018, the restraining effect has been caused by growing capital expenses. Historically, the telecommunications sector is one of the largest dividend generators in Russia, showing a noticeable outflow of funds. According to ACRA estimates, a certain decrease in dividend payments will be observed in the sector in 2018–2022, but the total annual dividends will not fall below RUB 90 bln.
ACRA expects that in 2019–2022, the above factors will push down the sector's FCF after dividend into the negative zone, while FCF margin will range from -0.5% to -1.5%.
To cover their negative FCF, telecommunications companies will likely have to borrow more. On the other hand, due to the higher growth rates of FFO before net interest and taxes, the sector's leverage may remain low or even decrease slightly. We are of the opinion that the ratio of debt to FFO before net interest and taxes may decline from the current level of 2.15x to 2.01x by 2022.
Our forecast includes an outflow of funds spent to repurchase shares by PJSC MegaFon and PJSC MTS. However, we note that in the future, such events as M&A, increased dividend payments, and share repurchase may increase the leverage, which, in turn, may adversely affect the solvency of certain companies in the sector.
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