As a result of weak financial results of Altel and Tele2, Kazakhtelecom's net profit from continuing operations decreased by T3,3 billion (13% y/y). In our view, uncertainty regarding Alltel is currently a key constraint growth factor. In this regard, we reiterate our "Hold" recommendation and estimate the fair value of Kazakhtelecom common share for T13412 per share.
On November 29, Kazakhtelecom published its consolidated financial statements for nine months of 2016. According to the published financial statements, Kazakhtelecom’s revenue increased by T12,2 billion (9% y/y), which is in line with our expectations, mainly due to the revenue from the data transmission, rent of link equipment and interconnection services. Revenue from telephone services, as we expected, continued to decline. Cost of services increased by T6,9 billion (8% y/y), mainly due to an increase in on base stations expenses and staff expenses. Net income from discontinued operations more than doubled up to T8,9 billion, almost entirely due to disposal of Altel for $ T42 billion. In connection with significant JV’s loss recognition in the amount of T8,9 billion, the net profit from the continuing operations decreased by T3,3 billion (13% y/y). Also due to the transfer of Altel’s Development Bank of Kazakhstan and Sberbank credit lines for a total amount of T30 billion, the total debt increased by the amount of T25 billion (81% y/y).
|Fig.1. Financial results for 9M2016 was|
|Revenue||147 895 095||135 666 272||9%|
|Cost od service||97 422 706||90 453 617||8%|
|Operating profit||39 982 370||34 321 457||16%|
|Net income from continuing operations||21 580 894||24 897 508||-13%|
|Discontinued operations||42 198 166||0||NA|
|Net income from discontinued operations||63 779 060||23 311 349||174%|
|Share of loss of associate company||8 999 950||5 214 816||73%|
|30.09.2016||31.12.2015||begiging of the year|
|Investment in joint venture||71 729 037||0||NA|
|Debt||56 844 814||31 438 314||81%|
|Source: Company data|
Altel and Tele2 continued to incur the losses, in which Kazakhtelecom’s share for the first nine months of 2016 amounted to T8,9 billion, whichi is 73% higher than in the first half of this year. Despite the build-up of the JV’s revenues by 80% in 3Q2016, the operating expenses also negated all the positive effects of a significant increase in revenue.
|Fig.2. Financial performance of Altel and Tele2 for 9M2016|
|Revenue||51 782 666||28 742 997||80%|
|Operating expenses||61 305 173||34 608 155||77%|
|Non-operating expenses||8 040 284||4 611 286||74%|
|Loss before tax||17 562 791||10 255 128||71%|
|Loss for the period||17 643 306||10 225 128||73%|
|The Group's share in the loss for the period||8 998 086||5 214 816||73%|
|Source: Company data|
Continued stagnation of Altel’s financial performance does not allow the Company to generate a profit from continuing operations and does not give the confidence in its improvement in the near future, given the high telecommunication market competition. In our view, uncertainty about Altel future is currently a key growth constraint factor. In this regard, we reiterate our "Hold" recommendation and estimate the fair value of Kazakhtelecom common share for T13412 per share.