Kazakhtelecom presented 1H2017 financial results

Andrey KozhokaruAugust 23, 2017

Despite the decrease in operating profit for the reported period, the Company was able to increase its net income due to decrease in loss from associates, reduction in financing expenses and lower tax expenses.

The Company's revenue increased by 5.3% y/y in 1H2017 reaching T100.4bn. The cost of sales increased by 7% y/y amounting to T65.1bn. In 1H2017, the Company reduced general and administrative expenses by 4.6% y/y to T9.7bn, but increased selling expenses by 50% y/y to T1.1bn. Operating profit of Kazakhtelecom decreased by 8.6% y/y to T24.5bn. In 1H2017, the Company reduced financing expenses by 12% y/y to T2.8bn. During the same period, the Company recorded net foreign exchange loss amounting to T1.6bn. The Company’s share of loss in associates reached T3bn in 1H2017 against T5.2bn in 1H2016. The Company's net profit for the reporting period equaled to T16.2bn, which is 9.6% higher than in 1H2016.

In 1H2017, the Company increased its revenue mainly due to the growth in revenue from the rent of communication channels to T9.7bn (+ 106% y/y), an increase in revenues from data transfer services to T52.6bn (+ 4.5% y/y), and an increase in other revenues to T5.6bn (+ 55.9% y/y). Revenue from interconnect decreased by 18.5% y/y to T7.9bn. Revenue from provision of fixed line phone services decreased by 9% y/y to T24.7bn. The increase in the cost of sales was largely due to a sharp increase in the expenses on rent of base stations to T3.5bn in 1H2017 in contrast to T10.5mln in 1H2016. Expenses on repair and maintenance, on content and on materials increased to T3.1bn (+ 12.5% y/y), T2.6bn (+ 17.2% y/y) and T2.4bn (+ 20.7% y/y) respectively. Other expenses increased by 42.5% y/y reaching T3bn in 1H2017. For the reported period, the Company reduced expenses on interconnect by 21% y/y to T3.1bn and costs of rent of communication channels by 23% y/y to T3.6bn.

One of the reasons for the decline in operating profit in 1H2017 was the absence of compensation for the provision of services in rural areas (T3.2bn in 1H2016). Due to the introduction of amendments to the normative documents on subsidies, new rules for conducting a tender for determining the operator of universal services in rural areas were approved. Presumably, after the tender procedures, the agreement on subsidies will be signed in September 2017.

Despite the decrease in operating profit for the reported period, the Company was able to increase its net income due to decrease in loss from associates, reduction in financing expenses and lower tax expenses.

Our opinion:

In general, Kazakhtelecom's 1H2017 revenue was in line with our expectations. During the reporting period, the Company doubled its revenue from rent of communication channels, while significantly reducing associated costs (-23% y/y). In case such a dynamics continues, we do not exclude the possibility for this item to surpass our expectations. However, we do not expect a significant impact on the Company’s overall results due to the low weight of this item in the total revenue of the Company (9.7% of total revenue as of June 30, 2017). In 2H2017 we also expect an increase in the growth rate of revenue from data transfer services, which compensates for the reduction in revenue from the provision of fixed line phone services in 1H2017.

In the results for 1H2017, we note a decrease in the Company's share of losses from the Altel, Tele2 joint venture to T3.1bn against T5.2bn in 1H2016. In 1H2017 the revenues of the JV increased by 70.4% y/y to T49bn, while operating expenses increased by 44.5% y/y to T50bn, and non-operating expenses increased by 7.7% to T5bn. More rapid revenue growth led to a reduction in loss for the period.

According to the results of 1H2017, we observe some improvement in the financial performance of the JV, but we consider predicting its profitability in the medium term to be premature. The Company's operating results in 1H2017, overall, are in line with our forecasts. We maintain Hold recommendation.