Rostelecom’s free cash flow fell by 1096% in the fourth quarter of 2023

Rostelecom free cash flow indicator (MOEX: RTKM) in the fourth quarter decreased by 1096%, to minus 27.4 billion rubles, at the same time, the company increased investments in non-current assets by 51%, to 69.9 billion rubles. The company explains the dynamics of investments by the reorientation of equipment purchases to domestic analogues, as well as the introduction of domestic IT solutions. Analysts attribute the dynamics to the company’s desire to maintain growth in operating and financial performance rather than increase capital distribution to shareholders.

Rostelecom’s free cash flow for the fourth quarter of 2023 fell by 1096%, to minus 27.4 billion rubles, compared to the same period in 2022, follows from the company’s reporting (.pdf). For 2023 as a whole, the same figure increased by 26%, to 56.8 billion rubles. At the end of the fourth quarter of 2023, Rostelecom’s capital investments increased by 51%, to RUB 69.9 billion, and amounted to 33.4% of revenue. In 2023, cash outflow from investments in non-current assets increased by 26%, to RUB 147.2 billion, amounting to 20.8% of revenue. “The dynamics reflect the recovery of investment activity, despite logistical restrictions. Support is provided by the reorientation of equipment purchases to domestic analogues, as well as the introduction of domestic IT solutions,” the report says.

Rostelecom’s revenue grew by 13% year on year, to RUB 707.8 billion. The share of mobile communications in the revenue structure did not change (32%), revenue growth in this category amounted to 13%, or RUB 234.9 billion. The share of fixed Internet in the revenue structure fell by 1.1% (revenue from fixed communications amounted to RUB 101.9 billion), while the share of digital services increased by 2.5%, to 22% (RUB 155.6 billion).

In general, for the year, the company explains the growth in revenue by an increase in income from digital services, mobile business and package offers, as well as from video services.

“The main contribution to revenue growth in the fourth quarter was provided by the mobile business, the digital data center cluster and cloud services, as well as the promotion of comprehensive digital products in the corporate and public sectors,” says Rostelecom’s report. The US Treasury included the company in the new sanctions list on February 23 (see “Kommersant” dated February 23).

The company’s net profit in the fourth quarter fell by 48.7%, to 1.9 billion rubles, compared to the same period in 2022. For 12 months of 2023, net profit amounted to 42.3 billion rubles. (20% increase). OIBDA increased by 13%, to 283.2 billion rubles, for 2023, for the fourth quarter – by 12%, to 74.0 billion rubles. It follows from the report that the total debt of the group of companies as of December 31, 2023 (including lease obligations) increased by 10% by the beginning of the year, to RUB 624.9 billion. The net debt of the group of companies as of December 31, 2023 (including JSC) amounted to 563.3 billion rubles, an increase of 12% by the beginning of the year.

The company’s operating expenses over the past year increased by 11%, to 558.4 billion rubles. In the fourth quarter, they grew by 7% year-on-year and amounted to RUB 182.8 billion.

The report states that this is due to an increase in personnel costs, an increase in depreciation charges, impairment losses on non-current assets and an increase in other operating expenses, including more intensive promotion of content on the Wink platform.

The subscriber base of Rostelecom’s mobile business (owns Tele2) amounted to 48.1 million people (an increase of 0.03%). The remaining mobile operators have not yet published reports for 2023. At the end of the third quarter of 2023, MTS’s subscriber base grew by 0.75% year-on-year, to 80.8 million connections; at MegaFon, according to the results of the first half of the year, it grew by 1.3%, to 75.8 million subscribers. VimpelCom’s subscriber base in the third quarter of 2023 decreased by 4%, to 44.1 million people (see “Kommersant” dated February 15).

“The dynamics of revenue and OIBDA profitability in relation to the fast-growing segments of mobile communications and data centers are of interest,” says Timur Nigmatullin, senior investment consultant at Finam. “The market believes that under certain circumstances Rostelecom can hold an IPO of these subsidiaries, which will reveal their value will make it possible to finance development using attracted capital, freeing up the operating flow for dividend payments.”

He adds that the sharp increase in capital expenditures in the fourth quarter and deeply negative free cash flow hint at the company’s desire to maintain operational and financial growth rather than to “intensify capital distribution to shareholders.”

Alexey Zhabin