May 29, 2014 / 8:11 AM / 4 years ago

UPDATE 2-Megafon keeps targets after profit miss on Scartel costs, weak rouble

* Q1 net profit falls 43 pct to 7.2 bln (poll: 10 bln)

* Bottom line eroded by Scartel D&A costs, weaker rouble

* Core profit margin, sales growth targets ahead of competitors

* Shares rise 4 pct in London (Adds analyst comment, details, share price)

By Maria Kiselyova

MOSCOW, May 29 (Reuters) - Russian mobile phone operator Megafon said a weaker rouble and depreciation costs related to last year’s acquisition of Scartel hurt first quarter earnings, but its core profit and sales growth targets remained intact.

The country’s economic downturn has so far not hurt telecoms operators because consumers are still spending. But the weakening of the rouble - resulting from the Ukraine crisis and prospect of recession - has prompted a revaluation of foreign-currency liabilities that translates into non-cash losses.

Megafon, the second-largest operator behind MTS, bought high-speed wireless Internet provider Scartel to get ahead of rivals in 4G infrastructure and boost its customer base and revenue.

But the acquisition brought depreciation and amortisation costs of around 14 billion roubles, which contributed a 43 percent drop in first quarter net profit to 7.2 billion roubles, along with a foreign exchange loss of around 5 billion roubles due to the revaluation of its foreign currency debt.

Analysts had forecast net profit of 10 billion roubles.

Megafon, which is cutting costs to counter the recent hit to its profits, said it expected to grow revenues by 6-8 percent this year and achieve a core profit margin of at least 44 percent despite the weaker economy.

Russia is now forecast to achieve growth of just 0.5 percent this year, hurt by Western sanctions and instability brought by the Ukraine crisis and wider emerging market uncertainty.


Analysts at JP Morgan said revenue guidance from Megafon, the last of the “Big Three” mobile operators to report first quarter results, seemed conservative given that it reported a 10.6 percent rise in first-quarter sales to 74.9 billion roubles ($2.2 billion), slightly above estimates. Mobile revenues rose 8.5 percent, driven by an increase in subscriber base and booming data revenues.

That compares to a forecast from rival MTS of 3-5 percent sales growth this year while Vimpelcom recently cut forecasts and now expects “low to mid single digit” declines in revenue.

Megafone also reported forecast-beating operating income before depreciation and amortisation (OIBDA), up 0.4 percent to 32.5 billion roubles versus the 32.3 billion forecast, and OIBDA margin at a slightly better-than expected 43.3 percent.

Its London-listed shares rose 4 percent by 1055 GMT.

In addition to Scartel, Megafon’s margins were hurt by an increase in international interconnect termination rates due to the rouble depreciation and additional sales and marketing expenses as part of its sponsorship of the Sochi Olympics.

A drive to offer cheap smartphones also hurt margins, though revenues from the sales of handsets rose 35 percent. Megafon, controlled by Russia’s richest man Alisher Usmanov, hopes high handset sales will ultimately drive data consumption. ($1 = 34.5882 Russian Roubles) (Reporting by Maria Kiselyova; Editing by Elizabeth Piper and Sophie Walker)

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