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UPDATE 2-MegaFon muscles ahead in Russian mobile market

MegaFon has overtaken its main competitor in Russia's cut-throat mobile phone market, posting bumper earnings on Wednesday to help crown it leader by market value and put its other rival in the shade.

 

MegaFon, owned by Russia's richest man Alisher Usmanov, lags New-York listed MTS in terms of revenues and subscriber numbers, but as a result of an aggressive cost-cutting campaign launched last year, it was able to hike its margin forecast and announce a dividend of $1.3 billion, helping its shares rise.

Its results put Vimpelcom, Russia's third-biggest mobile phone provider with assets in emerging markets and Italy, firmly in its place. It failed to impress analysts by reporting a below-forecast 28 percent rise in net profit on Wednesday.

"MegaFon has probably shown the strongest results that any other operator is unlikely to match," said Anna Lepetukhina, analyst at Sberbank Investment Research.

Since its November initial public offering, shares in MegaFon have risen by 68 percent, valuing the company at $20.6 billion, above $19.9 billion for MTS and Vimpelcom.

"It used to have quite high expenses in the past because it was an aggressive player, focused on growing revenues rather than on efficiency," Lepetukhina said. "Now that it's focused on efficiency, it has room to cut (costs) and improve efficiency."

Russia's mobile operators have been focusing on cutting costs as the market has matured, meaning there is less need to spend on advertising revenues to lure new subscribers, although they have had to invest in rolling out next-generation networks.

MegaFon, which analysts say is best placed of all Russia's mobile phone firms for the 4G roll out, reported a 36.5 percent rise in first-quarter net income to 12.6 billion roubles, above the 10.6 billion rouble forecast by analysts in a Reuters poll.

It also boosted operating income before depreciation and amortisation (OIBDA) as a percentage of revenues to 47.8 percent - its best result in two years - from 40.6 percent a year ago.

HEALTHY COMPETITION

MegaFon, which raised $1.7 billion in its November flotation in London and Moscow, also raised its full-year guidance for that margin to 42.5-44.0 percent from 41.6-43.0 percent, while keeping its high single-digit revenue growth forecast.

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Vimpelcom, part of tycoon Mikhail Fridman's Alfa Group, increased its margin to 42 percent in the first quarter from 41.1 percent the year earlier, versus a 41.8 percent forecast.

"We have very healthy competition in Russia, you see it in churn numbers, in prices coming down, in willingness to invest in data networks," Jo Lunder, the chief executive officer of Vimpelcom, told Reuters by telephone.

"There has been a gradual movement to focusing on cashflows and profitability, and I think it is good for the market and for customers as it means that operators will have cashflow to reinvest," said Lunder.

Unlike many European peers, Russian mobile firms are still growing revenues thanks mainly to the increasing use of smartphones which leads to more internet traffic on mobile networks.

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Elsewhere in Europe, telecoms firms are struggling with an overcrowded market, regulations and recession.

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Russian companies are building out data-centred 4G networks after the distribution of LTE (Long Term Evolution) licences last summer. But they are also returning excess cash to shareholders, offering comparable dividend yields.

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MegaFon on Wednesday announced a long-expected dividend, set at 64.51 roubles per share, or a total of 40 billion roubles, for 2012 and the first quarter of 2013.

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Breaking down the figure gives a 2012 payout of 54.17 roubles, implying a 5.2 percent yield, while including the 10.34 roubles payable on first-quarter results, the yield would rise to 6.2 percent.

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Vimpelcom's dividend yield stands at 7.1 percent based on the 2012 payout, but taking into account a special, one-off dividend of nearly the same size, the yield comes to 14 percent.

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MTS' stock offers a dividend yield of 5.6 percent based on the payout of 30.2 billion roubles for 2012. The company also intends to pay an additional dividend in the autumn worth around 11 billion roubles.

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