MTS: Uzbek woes hit bottom line

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Pity MTS. On the eve of the Russian telecom group’s triumphant return to Turkmenistan – and on the day it reported an earnings margin of over 40 per cent – the company was forced to announce a $1.1bn write-off of its Uzbek telecoms business.

The write-off comes amid a fight between MTS and the Uzbek regulator, which has accused the telecoms group of owing the state over $900m in back tax payments.

The company’s license was canceled indefinitely earlier this month, and five local MTS employees have been in jail since June.

Asked about the write-off of the Uzbek business, Alexei Kornya, chief financial officer of MTS told beyondbrics: “It is, of course, not a pleasant development in any way… starting from taking our people as hostages and ending with the unwanted attack on our business.”

At the same time, Kornya argued that the recent events did not significantly affect other fundamentals at MTS, like the company’s liquidity or ability to generate cash.

The write-off includes a $579m asset and goodwill impairment charge and a $500m tax reserve. MTS reported a second quarter net profit of $357.5m, excluding the write-off, down 2.6 per cent from the year before.

“The reported net loss is very significant, but the total amount of the write-off / provisions was widely expected by the market to total around $1bn and did not surprise us,” wrote Alfa Bank’s telecoms analyst Iouli Matevossov in a note.

The only question was whether MTS would choose to take the write-off in the second or third quarter, wrote analysts at Deutsche Bank.

At around midday in the New York, shares in the US-listed MTS were up 0.8 per cent.

Kornya emphasised that investing in the CIS was “high risk” but that it also brought certain rewards, such as a relatively unsaturated market with few competitors. In Uzbekistan the company was posting 50 per cent margins.

“Of course,” he added, “there are lessons to be learned from this exact situation.”

Things are on the up at least in Turkmenistan, where MTS has managed to find footing again with the state, which suspended the group’s license in 2010. MTS is preparing to re-launch operations there on August 30.

“Of course we had some difficulties in this market some time ago. But the behavior of the authorities there – from an ethical point of view – was better. For some political reasons, or other reasons, they revoked our license but that’s it,” Kornya said.

“In Uzbekistan it’s a full scale attack on our business where people are being badly hurt in prison.”

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