Kcell released financial and operating results for the third quarter 2016 at the end of the previous week. In our analytical report released on 23 February 2016, we expressed the expectation that the decrease in service price would reduce the overall revenue of the Company. Thus, the Company’s EBITDA excluding non-recurring items decreased by 25.2% y/y and amounted to 14 238 mln. tenge in 3Q2016. The Company’s net income decreased by 60.6% based on 9M2016 results. Concerning the positive points, Kcell managed to restrain an active customer churn by increasing its customer base by 157 thousand users q/q in 3Q2016.
The most significant decrease in the revenue for the 3Q2016 is observed in the voice communications segment, which declined by 18% q/q and amounted to 21 756 million tenge. Data transfer services, on the other hand, demonstrated a positive trend and increased by 7.2% q/q up to 10 749 million tenge. Data traffic increased to significant 30,696,657 GB (16,159,953 GB q/q, or by 89.6% q/q). The growth of traffic, according to the Company’s quarterly report, partly attributed to the lower price per MB of the bundled services offered, which in turn led to a decrease in average revenue per MB (ARMB) to 0.3 tenge (0.6 y/y).
Company continued to show the negative trend of profitability since the reduction in revenue by 15.5% y/y, whilst the cost of sales remained approximately at the same level.
|Table 1. Financial Results for the 3Q2016|
|in mn of KZT||3Q2016||3Q2015||yoy||2Q2016||qoq|
|Cost of Sales||- 23456||- 24418||-3,9%||- 23 206||1,1%|
|Table 2. Financial Results for the 9M2016|
|in mn of KZT||9M2016||9M2015||yoy|
|Cost of Sales||- 67390||- 66989||0,6%|
Despite the abolition of the so-called "mobile slavery" at the beginning of the current year, Kcell not only managed to slow down active subscribers outflow during the 1H2016, but also partially offset the loss of subscriber base (inflow of 157 thousand users q/q in 3Q2016). At the end of 3Q2016 subscriber base was amounted to 9 905 thousand clients compared to 9 748 thousand in 2Q2016. In our opinion, the increase in the client base is a definitely positive factor for the Company driven by the Company’s adaptation to market condition through the expanding and applying more flexible tariff plans.
Major events in 3Q2016: in August, Kcell fully paid an annual dividend in the amount of 23.316 million tenge, or 116.58 tenge per one ordinary share. In the same month, the Company signed an agreement with Beeline on mutual use of networks for joint launch 4G/LTE services. In September, the extension of credit lines from Altyn Bank was approved by the BOD in the amount of 3 bln. tenge in order to serve current working capital of the Company. The credit line was extended by twelve months until 23 September 2017.
According to a press conference of the Company held on 21 October this year, the Company intends to pay dividends for 2016 for 70% of net profit in accordance with the dividend policy.
Despite the Company’s weak financial performance during 2016 in the light of the unstable economic condition and the significant outflow of client base, in general, the 3Q2016 indicators are in line with our expectations. In addition, it is worth to note that the some indicators’ dynamics improved markedly during 2016. In particular, it is manifested in the customer base increase for the first time since the 1H2016 and data traffic increased by 83% q/q due to lower rate. In our opinion, the Company's results confirm our opinion of the attaining the bottom line of price war among operators. In this connection, we remain our BUY recommendation with a twelve-month target price of 1 390 tenge per share ($ 4.1 per GDR).