We maintain our «Hold» recommendation with 12M TP T1184 per share or $3.7 per GDR.
The realities in Kazakhstan mobile market continue to put pressure on the Company's net income. At the same time, ARMU in 1Q2017 continued to decrease from 2.7 to 2.2 tenge. Given the insignificant growth in traffic volume, the revenue from voice services decreased by 9.6% y/y, fixing the indicator at the level of T19 630 million. Interconnect revenue increased by 11.1% y/y, reaching T5 252 million, mainly due to the increase of off-grid time included in package offers.
|Fig.1. Financial indicators|
|In million tenge||1Q2017||1Q2016||yoy|
|Revenue||35 517||35 470||0,1%|
|COS||22 579||20 728||9%|
|Sales and marketing||2 637||2 513||5%|
|G&A||2 977||3 122||-5%|
|EBITDA||13 126||14 928||-12%|
|Financial expenses, net||2 683||750||258%|
|Net profit||3 799||6 625||-43%|
Data transfer services continue to show a positive dynamics, increasing by 15.9% y/y to T10 999 million. At the same time, data traffic grew by 67.4% y/y, making 42.3 million GB. The growth of data traffic was partially offset by package offers with lower tariffs per MB, which led to a decrease in the average revenue per MB (ARMB) from 0.4 to 0.3 tenge.
The Company continues to expand the contract mobile devices segment, which resulted in increase of other revenue by 27.7% y/y, amounting to T2 497 million.
Cost of sales in 1Q2017 increased by 8.9% y/y to T22 579 million mainly due to an increase in network maintenance costs, as well as because of an increase in interconnect costs from T5 205 to T5 631 million. Due to a rise in the total number of employees in retail centers, the sales and marketing expenses increased by 5% y/y to T2 673 million. At the same time, the general administrative expenses decreased by 4.7% y/y to T2 977 million, according to the Company, mainly due to the optimization of the costs involved.
Due to a growth in production costs with a slight increase in revenue, EBITDA excluding non-recurring expenses decreased by 12.1% y/y. Net profit at the same time decreased by 42.7% y/y, amounting to T3 799 million. Earnings per share decreased from 33 to 19 tenge.
Significant increase in financial expenses in 1Q2017, according to the representative of the Company, is related to refinancing of a part of debt and increasing its terms and interest rate.
Capital expenditures in 1Q2017 decreased from T29 157 million to T5 928 million y/y, while the ratio of CAPEX to sales amounted to 16.7%, in contrast, in 1Q2016 this indicator was at 82.2%. The increase in capital expenditures last year was mainly related to the acquisition of a 4G government license for a total of T26 billion. At the same time, the Company's free cash flow in 1Q2017 came out of the negative zone of 1Q2016 in the amount of T13 464 million to T1 748 million.
|Fig. 2. Operational data|
|Subscribers, (thousand)||9 979||9 855||1%|
|MOU (min / month)||220||212||4%|
|APRU (tenge)||1 114||1 104||1%|
|Outflow level (%)||43,4||49,0||-11%|
Following the results of the AGM held on April 26, 2017, the Company decided to pay dividends in the amount of 70% of net profit. Thus, the total amount of dividends at the end of 2016 amounted to T11 678 million or T58.39 per share.
Despite the deterioration in financial performance, Kcell's quarterly results in general were within our expectations. Based on the results of the quarter, we see a tendency of the subscriber base increase and a significant rise in consumption of mobile internet services. At the same time, in a view of high competition in the telecommunications market and growth in operating costs, the recovery of the Company's key indicators, in our view is fairly slow. We maintain our «Hold» recommendation with 12M TP T1184 per share or $3.7 per GDR.