Kcell presented results for 3Q2017

Andrey KozhokaruOctober 19, 2017

Net sales of Kcell for 3Q2017 amounted to KZT37 351m (+1.6% y/y). Operating income excluding non-recurring items equaled to KZT8 917m (+10.7% y/y). Quarterly net income amounted to KZT3 862m (-11.8% y/y) 

For 3Q2017, the Company’s net sales equaled to KZT37 531m (+1.6% y/y). EDITDA excluding non-recurring items increased by 2.5% y/y to KZT14 601m. EBITDA margin increased slightly to 38.9% in 3Q2017, versus 38.6% in 3Q2016. Operating income excluding non-recurring items increased to KZT8 917m (+10.7% y/y). The Company’s net income for reporting period equaled to KZT3 862m (-11.8% y/y).   

Results for 9M2017 look more modest. Net sales for January- September equaled to KZT109 075m increasing by 0.2% y/y. EBITDA excluding non-recurring items equaled to KZT41 211m, decreasing by 5.3% y/y. EBITDA margin equaled to 37.8% for 9M2017 versus 40% for 9M2016. Kcell’s operating income excluding non-recurring items decreased by 4.8% y/y to KZT24 160m. Net income for 9M2017 equaled KZT8 261m (-47.2% y/y).

According to Kcell’s financial statements, the main articles that put pressure on the Company's net income for 9M2017 in comparison to 9M2016 were: an increase in tax expenses by KZT2 078mn, an increase in financial expenses by KZT2 006m and an increase of KZT3,143m in general and administrative expenses. The latter was the result of the creation of tax provisions in connection with the claim brought by Kazakhstan's tax authorities. The total amount of the claim is KZT9 000m, including fines and penalties. The Company said that it is currently appealing this claim and will use all available opportunities to resolve this dispute.

Free cash flow of the Company for 9M2017 amounted to KZT8 189mln in comparison to -KZT992mln for 9M2016. The increase in cash flow is due to a corresponding decrease in capital expenditures from KZT42 187mn for 9M2016 to KZT13 599mln for 9M2017. Capital expenditures for 2016 reflect the cost of acquiring new frequencies for KZT26 000m. In June 2017, The Board of Directors of Kcell approved prolongation of the KZT10 000m loan from Alfa Bank for 12 months, and the Company also received a tranche of KZT22 000m under the Term Loan Facility Agreement with Halyk Bank, which was extended for 18 months. The net debt of Kcell as of September 30 2017 amounted to KZT60 366m versus KZT56 398m as of December 31 2016.

When considering the Company's 3Q2017 income in terms of contributors, revenues from voice services decreased by 5.3% y/y to KZT20 601m, revenue from data services increased by 11.5% y/y to KZT11 985m, revenue from additional services amounted to T2 440m (+1.8% y/y), the Company’s other revenue amounted to KZT2 505m (+23.5% y/y). The quarterly increase in other revenues is due to the growth in sales of handsets. Following the general trend of the telecommunications industry, data services will continue to displace classical voice services. The share of revenues from voice communication services decreased from 59.9% for 9M2016 to 55.3% for 9M2017, while the share of revenue of data transmission services increased from 28% for 9M2016 to 31.3% for 9M2017. This process is structural in nature, and the Company does not have full control over the redistribution of income between the two main revenue articles. Taking into account the new tariff plans introduced by Kcell in 2016, the decrease in revenue from voice communication services is more rapid than the growth of revenue from data transmission services.

In the short term, we consider as an optimistic scenario for Kcell, if the latter could show the financial results, excluding non-recurring items, similar to the results of 2016. Considering Q/Q results for 2017, the Company's total revenue increased by 4.2%, EBITDA excluding non-recurring items increased by 8.3%, EBITDA margin in 3Q2017 amounted to 38.9% against 37.4% in 2Q2017, operating income excluding non-recurring items increased by 15.1%, net income increased more than 6 times (from KZT600m to KZT3 862m). For the realization of our optimistic scenario, the Company should continue improving its results in 4Q2017.

Our opinion:

Based on the reporting for 3Q2017, it is likely that the Company's financial results have passed their lowest point in 1H2017. We consider the increase in sales of handsets, the growth in demand for corporate solutions and the offer of new digital services as perspective areas for organic growth of the business. Currently, Kcell generates main part of its cash flows from voice and data services. Despite the significant growth in data services traffic (+63.3% y/y in 9M2017) and stable volume of voice traffic, ARMU (revenue per minute) and ARMB (revenue per MB) declined to KZT2.2 (KZT2.6 for 9M2016) and KZT0.2 (KZT0.4 for 9M2016), respectively. These reductions are related to changes in the Company's tariff plans, which offer a greater volume of traffic at a fixed price. Offering a greater volume of its services through package offers, the Company is able to generate increased and more stable revenue per each customer. We believe that, given favorable economic conditions, which provide consumption growth, Kcell will improve its financial performance from the current levels in the medium term. In addition, the recent increase in prices for the Company's services has not yet been fully reflected in its financial results.

One of the reasons for the rapid growth of the Company's shares, observed since July, could be the plans of Kcell’s main shareholder, TeliaSonera, to sell its asset in Kazakhstan. The potential premium which could be offered by the new shareholder and the possible synergetic effect attract investors.

Considering Kcell’s fundamental expectations and the current value of its shares, we put our Hold recommendation and 12M TP of KZT1 184 per share under review.