Mail.ru & The Internet Equity Story
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In this story we look at the rise of social networks globally and in particular focus on Russia's leading community,...
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MAIL.RU GROUP VALUATION MATERIALS
Table of Contents • Executive Summary • Internet Industry Overview • Company Considerations – – – –
Share price performance Recent Corporate Actions Operating Performance Valuation
• Trade Idea • Appendix
EXECUTIVE SUMMARY •
This presentation evaluates the internet services industry in which Mail.ru Group operates
•
In this analysis, I have identified the fundamental drivers of the industry and company to evaluate the intrinsic price of Mail.ru Group’s shares. I developed a fully integrated 5-Year financial statements model and discounted cash flow valuation
•
I have observed the following key drivers with respect to the Russian internet sector and the company’s operating performance: – – – – –
In 2011 Russia became the largest internet market in Europe and has solidified its leadership ever since As the number of mobile users is rising, Mail.ru group is encouraging their users to spent more time in online, by making their services more mobile-friendly Community IVAS sales has consistently grown since 2010. Mail.ru group is continuing to improve its value added products, in addition to attracting a bigger pool of Online gamers and social network users Mail.ru Group is expanding their business overseas to locations such as Silicon Valley. A new brand was launched in 2013 “my.com” Revenue growth in MMO gaming is expected to remain strong and a key driver of long-term growth is focus on fewer, higher-quality titles
•
Mail.ru Group has continued to improve its financial position through operational and financial improvements – Over the last 12 months, Mail.ru significantly underperformed its US internet peers (Facebook: +50,4%) and (Zynga: +19,3%) due to political and macroeconomic headwinds – Mail.ru Group sold its stakes in Facebook, Zynga, Groupon and Qiwi in order to pay dividends and retain its shareholders base
•
On a DCF basis, the company is intrinsically valued at $32,7 Mail.ru shares are currently trading on the London & Moscow Exchanges: $35 per share – Applying different assumptions for terminal growth and WACC our valuation ranges from $30,5 – 35,4
INTERNET INDUSTRY OVERVIEW
Internet Industry Overview No. Internet Users in Europe (m) • • • • •
In 2011 Russia became the largest internet market in Europe and has solidified its leadership ever since By the end of 2013 the number of internet users in Russia had risen to 73.8m Significant scope for expansion remains: overall internet penetration is only 54% Further developments in technology expands internet penetration into users’ daily lives During 2013, time spent online rose by 29% to 33.6 hours/month – among the highest rates globally
No. internet users in Russia (m)
62
2011
67.9
2012
73.8
2013
78.8
82.7
86.3
76
68 55
36
2015
2016
34 25 16
15
11
Internet User Penetration in Russia (%) 64.2% 66.3% 50.0%
2014
54
2012
54.4%
2013
58.2%
2014
61.3%
2015
2016
2017
Social Networks - Market Snapshot •
The internet is becoming multi-device driven. Increases in mobile usage has not impacted desktop use Mobile monthly usage has increased to 43,5% in Russian cities with populations > 100k Mobile continues to be a key focus
• • •
Aggregate segment Community IVAS revenue increased by 29.1 % to reach RUR 8,697 million (2012: RUR 6,739 million) The growth was achieved primarily through increase in annual ARPU by c. 32% vs 2012 – catalysed by growth in user engagement
•
Mobile is mostly incremental to desktop (US 6me spent by pla7orm, bn minutes) 1200 1000
600 400 200
My world
Odnoklassniki
50%
11 131
442
401
429
2010
2013
Tablet Smartphone Desktop
0
Percentage of monthly active users accessing via mobile devices 60%
124
800
Community IVAS, thousands of average monthly paying users* 10000 8000
40%
6000
30%
# Users, thousands
4000
20%
2000
10% 0% Jun '12 Sep '12 Dec ' 12 Mar '13 Jun '13 Sep '13 Dec '13
0 H1 '10 H2 '10 H1 '11 H2 '11 H1 '12 H2 '12 H1 '13 H2 '13
MMO Games Market Overview •
•
Release of new high-quality titles bolstered results in this segment
•
MMO games are showing strong performance. Revenue growth of 39% in 1Q14 (vs 41% in 1Q13)
•
Revenue growth in MMO gaming is expected to remain strong and a key driver of long-term growth is focus on fewer, higher-quality titles
•
•
Average No. Paying Users in MMO segment (000s)
Strong growth in the number of paying users in gaming • Paying users in the MMO segment doubled to 565,000 in 2013
The launch of “ArcheAge” in 4Q13 was well received by gamers. “Lucky Fields”, launched in mid-2013, has also gained traction. “Warface” remains Mail.ru’s biggest revenue contributor in this segment: over 9 millions users registered within 12 month of release In 2014, Mail.ru expects to launch three high-quality games as part of its strategy
565
481
227
234
Jun-11
Dec-11
263
261
Jun-12
Dec-12
192
Dec-10
Jun-13
Dec-13
Competitive Landscape • Google • Yandex • Yahoo • Hotmail
• Baidu • Tencent • Google • Yandex • Ramble
• Vkontakte • Facebook
Email
Social Networking
ECommerce
Gaming • Zynga • King • Rovio • Electronic Arts • Valve • Nexon
COMPANY CONSIDERATIONS
Key Company Considerations • Over the last 12 months, Mail.ru significantly underperformed its US internet peers (Facebook: +50,4%) and (Zynga: +19,3%) due to political and macroeconomic headwinds • Sales growth will be driven by Online Games and Social Networking Websites through community IVAS • Since 2009, Mail.ru Group has been highly active in corporate acquisitions and disposals. It recently sold its 12% stake in Facebook and distributed a cash dividend to shareholders •
It’s likely Mail.ru group will struggle to increase market share and revenues within the highly competitive e-commerce and email portal segments
Share Price Performance vs Competitors (Last 12 Months) 160 150 140 130 120
Mail.ru
110
Facebook Yandex
100
Zynga
90 80 70 60 14/8/13
14/9/13 14/10/13 14/11/13 14/12/13 14/1/14
14/2/14 14/3/14
14/4/14 14/5/14
14/6/14 14/7/14
Mail.ru Group Financial Forecasts EBIT & Margin (‘14-’18) •
Sales growth will be driven by Online G ames and Social Networking Websites- through community IVAS
EBIT
26713
30000
•
FY14-17 profit margins are expected to decline vs 2012/13 as company has no plans to dispose of its equity holdings in VK or Qiwi
20000
13048
80000
10000
60000
33456
40610
40000 20000
21%
21% 2014E
2015E
2017E
2018E
38%
38%
36%
0
40%
40,000
30%
30,000
10% 0%
2016E
40%
34% 2015E
2016E
2017E
2018E
Profit & Margin (‘14-’18)
20%
29%
22%
0
40%
Profit
66782 80564
27%
15432
39%
Growth (%)
51578
42%
40%
Sales & Growth (‘14-’18) 100000
36254 46% 45% 44%
20631
2014E
Sales
Margin (%)
40000
20,000
Margin (%) 42% 32,700 41% 24,119 40% 18,633
13,953 11,76935%
38% 36%
36%
34%
34%
10,000
36% 32%
0
30% 2014E
2015E
2016E
2017E
2018E
Headline Operational Metrics •
Online games and social networks have exhibited huge potential. These two segments will be a long term source of revenues for Mail.ru – –
•
Online games is set to increase revenue share from current year 26% to 33% in FY18 Social networks will see +5% revenue share over 5-year forecast period
Within the highly competitive e-commerce and email portal segments, Mail.ru group will struggle to increase market share and revenues
Revenue Split - by division
Revenue Growth - by division 60.0%
E-commerce, Search and other
Email, Portal, and IM Social Networks Online Games E-commerce, Search and other
Online Games Social Networks
40.0%
Email, Portal, and IM
20.0%
2012
2013
2014
2015
2016
2017
2018
0.0% 2013
2014
2015
2016
2017
2018
Acquisitions & Disposals •
Since 2009, Mail.ru has acquired stakes in 5 global internet companies within gaming and social networks
•
Mail.ru has benefited from high IRR exits on disposal and have immediately distributed gains in the form of dividends to its existing shareholder base
Acquisitions
Disposals
Announced Date
Target
May 2009
FB
n.a.
Qiwi
Description
Finance driven decision
Deal Value
$200m
Strategic and finance driven decision
n.a.
n.a.
VK (51.99)
Strategic
n.a.
n.a.
Zynga (1.5%)
Finance
n.a.
n.a.
Groupon(5.1%)
Finance
n.a.
Announced Date
Target
Description
Deal Value
2012
FB
Finance driven decision
$750m
2013
FB
Finance driven decision
$525m
2013
Qiwi
Finance driven decision
10% Sold
TRADE IDEA
Valuation Considerations •
To evaluate the fundamental value of Mail.ru shares, I have developed a 5-year discounted cash flow forecast for FY14-18E, incorporating my key assumptions about the future potential of the company in the context of internet sector trends
•
Key • • • •
•
On a DCF basis, the company is intrinsically valued at $32,7 Mail.ru shares are currently trading on the London & Moscow Exchanges at a discount: $35 per share • This implies FY’15E EV/EBITDA multiple of 11,2x
•
Applying different assumptions for terminal growth and WACC 32,7 our valuation ranges from USD$30,5 – 35,4 12% WACC
assumptions used include: WACC: 14,5% Long-term growth rate: 3,0% Net Debt Position as at Dec 2013: RUB28,579m No. outstanding shares: 209m
13% 14% 15% 16% 17%
2,0% 38,8 35,2 32,2 29,7 27,6 25,7
LT Growth Rate 2,5% 3,0% 40,3 42,0 36,4 37,7 33,2 34,2 30,5 31,3 28,2 28,9 26,3 26,8
3,5% 43,8 39,1 35,4 32,3 29,7 27,5
Discounted Cash Flow Analysis Financial Year (Dec. Year end) Total Turnover growth (%) EBIT margin (%) Depreciation & Amortisation Tax @ 12,0% Capital Expenditure Capex/Sales (%) Working Capital Working Capital / Sales (%) Free Cash Flow Discount Factor Terminal Value Present Value Enterprise Value (m) Net Debt as at (Dec 2013) Market Capitalisation (m) No. Shares (m) Share Price (RUB) Share Price (USD)
2013 27 070
2014 33 456 23,6%
2015 40 610 21,4%
2016 51 578 27,0%
2017 66 782 29,5%
2018 80 564 20,6%
10 269 37,9%
13 048 39,0%
15 432 38,0%
20 631 40,0%
26 713 40,0%
36 254 45,0%
2 722,0
2 518,0
3 345,6
4 061,0
5 157,8
6 678,2
Terminal Period
(1232,3) 1582,0 -5,8%
(1565,8) 3345,6 -10,0%
(1851,8) 4061,0 -10,0%
(2475,8) 5157,8 -10,0%
(3205,5) 6678,2 -10,0%
(4350,5) 8056,4 -10,0%
0,0 0,0%
798,3 -2,4%
969,1 -2,4%
1485,9 -2,9%
2059,6 -3,1%
1867,0 -2,3%
10176,7
11452,9
13833,7
18544,6
24046,5
32392,2
32392,2
0,8732
0,7625
0,6658
0,5814
0,5077
0,5077 289 622
10000,79 210 359 -28579 238 938 209 1 143,2 32,7
10548,17
12347,38
13980,68
16445,10
147 037
APPENDIX
Operating Assumptions Sales
Actual
Email, Portal, and IM Social Networks Online Games E-commerce, Search and other Total
15215
Divisional Revenue Split Email, Portal, and IM Social Networks Online Games E-commerce, Search and other
Actual 2012 4052 7856 5329 3914
Actual 2011
Forecast 2015 5565 15715 11968 7362
Forecast 2016 5843 20744 16157 8835
Forecast 2017 6135 29041 21004 10602
Forecast 2018 6442 36301 25205 12616
27404
33456
40610
51578
66782
80564
19% 37% 25% 19%
17% 37% 26% 19%
15% 38% 28% 19%
14% 39% 29% 18%
11% 40% 31% 17%
9% 43% 31% 16%
8% 45% 31% 16%
13,5% 30,1% 36,0%
10,0% 23,0% 30,0%
10,0% 25,0% 27,0%
5,0% 32,0% 35,0%
5,0% 40,0% 30,0%
5,0% 25,0% 20,0%
36,3%
20,0%
15,0%
20,0%
20,0%
19,0%
Actual 2013 10269 37% 49%
Forecast 2014 13048 39% 27%
Forecast 2015 15432 38% 18%
Forecast 2016 20631 40% 34%
Forecast 2017 26713 40% 29%
Forecast 2018 36254 45% 36%
E-commerce, Search and other
EBIT EBIT Margin (%) EBIT Growth (%)
Forecast 2014 5059 12572 9424 6402
21151
Divisional Revenue Growth Email, Portal, and IM Social Networks Online Games
Operating Profit (EBIT)
Actual 2013 4599 10221 7249 5335
Actual 2012 6903 33%
Income Statement Mail.ru Income Statement Net Sales
Hist.
Hist.
Hist
Proj.
Proj.
Proj.
Proj.
Proj.
31.дек.11
31.дек.12
31.дек.13
31.дек.14
31.дек.15
31.дек.16
31.дек.17
31.дек.18
15 215,0
20 905,0
27 070,0
33 456,4
40 610,0
51 578,2
66 781,8
80 564,0
0,0
0,0
0,0
0,0
0,0
COGS SG&A
11 889,0
14 227,0
(20 408,4)
(25 178,2)
(30 946,9)
(40 069,1)
(44 310,2)
EBIT
6 903,0
10 269,0
13 048,0
15 431,8
20 631,3
26 712,7
36 253,8
Depreciation
2 703,0
2 722,0
2 518,0
3 345,6
4 061,0
5 157,8
6 678,2
0,0
0,0
0,0
0,0
0,0
15 566,0
18 777,4
24 692,3
31 870,6
42 932,0
Amortization EBITDA
9 606,0
12 991,0
Non-recurring items
0,0
0,0
0,0
0,0
0,0
Interest Income
356,6
460,3
590,8
757,6
989,6
Interest Expense
0,0
0,0
0,0
0,0
0,0
13 404,6
15 892,1
21 222,0
27 470,3
37 243,4
Profit before taxes
Taxes
41 289,0
29 778,0
3 013,0
3 189,0
1 635,4
1 938,8
2 589,1
3 351,4
4 543,7
Profit after tax
38 256,0
26 589,0
11 769,3
13 953,3
18 633,0
24 118,9
32 699,7
Net income
38 256,0
26 589,0
11 769,3
13 953,3
18 633,0
24 118,9
32 699,7
209,0
209,0
209,0
209,0
209,0
209,0
209,0
183,04
127,22
56,31
66,76
89,15
115,40
156,46
Shareholder information Diluted weighted average shares outstanding Diluted earnings per share Dividends per share
120,45
132,34
0,00
0,00
0,00
0,00
0,00
Dividends
25174,0
27 660,0
0,0
0,0
0,0
0,0
0,0
Balance Sheet Mail.ru Balance Sheet
Hist.
Hist.
Hist.
Proj.
Proj.
Proj.
Proj.
Proj.
31.дек.11
31.дек.12
31.дек.13
31.дек.14
31.дек.15
31.дек.16
31.дек.17
31.дек.18
Cash and cash equivalents
27 690
30 987
40 340
51 727
66 423
85 087
112 840
Accounts receivable
2 724
2 957
3 613
4 386
5 570
7 212
8 701
Income Tax refund
0
0
0
0
0
0
0
Other current assets
1 997
1 604
1 958
2 377
3 019
3 909
4 716
0
32 411
35 548
45 912
58 489
75 013
96 208
126 257
3 346 32 969 10 056 13 193 105 475
4 061 32 969 10 056 16 013 121 589
5 158 32 969 10 056 20 338 143 534
6 678 32 969 10 056 26 334 172 245
8 056 32 969 10 056 31 768 209 106
0 9 669 435 10 104
0 11 736 528 12 264
0 14 906 671 15 577
0 19 300 868 20 168
0 23 283 1 047 24 330
2 408 0 12 512
2 408 0 14 672
2 408 0 17 985
2 408 0 22 576
2 408 0 26 738
46 283 61 106 (472) 106 917 121 589
46 283 79 739 (472) 125 550 143 534
46 283 103 857 (472) 149 668 172 245
46 283 136 557 (472) 182 368 209 106
OK
OK
OK
OK
Assets Current assets
Total current assets Non-current assets Net PP&E
1 619
2 518
Goodwill
32 969
32 969
Other intangibles
10 567
10 056
Other assets
21 557
10 806
0
99 123
91 897
Total assets Liabilities Current liabilities Short term debt
0
0
Accounts payable and accruals
5 685
7 932
Accrued income taxes
348
363
0
6 033
8 295
Total long-term debt
2 975
2 408
Other long-term liabilities
0
0
0
9 008
10 703
Total current liabilities Non-current liabilities
Total liabilities Equity
Treasury stock
(611)
(472)
Total equity
0 0
90 115 99 123
81 194 91 897
46 283 47 152 (472) 92 963 105 475
OK
OK
OK
OK
Common stock
46 216
46 283
Retained earnings
44 510
35 383
Total Liab.& Equity Balance?
Cash Flow Statement Mail.ru Cash Flow Statement
Hist.
Hist.
Hist.
Proj.
Proj.
Proj.
Proj.
Proj.
31.дек.14
31.дек.15
31.дек.16
31.дек.17
31.дек.18
Net Income Depreciation Amortisation Change in OWC Change in other assets Change in other liabilities Cash from Operating Activities
11769 2518 0 798 -2387 0 12699
13953 3346 0 969 -2821 0 15447
18633 4061 0 1486 -4325 0 19855
24119 5158 0 2060 -5995 0 25341
32700 6678 0 1867 -5435 0 35810
Capex Cash from Investing Activities
3346 -3346
4061 -4061
5158 -5158
6678 -6678
8056 -8056
Change in Common Stock Change in Treasury Stock Dividends Long Term Debt Repayment Cash from Financing Activities
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
9353
11386
14697
18663
27754
30987 40340
40340 51727
51727 66423
66423 85087
85087 112840
31.дек.11 31.дек.12 31.дек.13
Net Cash Flow Beginning Cash Ending Cash
30987
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