According to the 1H2015 consolidated unaudited results, published yesterday, Kazakhstan Temir Zholy (KTZ)'s revenue dropped by 15.0% YoY to T354bn due to a decline of freight turnover by 14.2% YoY to 112bn tkm. Cost of sales declined by 1.5% due to cost optimization. As a result, gross profit margin deteriorated significantly by 12.0pp to 15.0%.
SG&A costs rose by 4.4% YoY due to higher property and other tax expenses. Share of results of associates and JVs rose by 63.0% YoY to T269mn. The company incurred a FX loss in the amount of T11.2bn against loss of T84.1bn in the 1H2014 and an impairment loss of T1.4bn (5 times higher YoY). The company's net loss amounted to T20.4bn, down 12.6% YoY.
KTZ's total debt rose by 3.3% to T887bn in the 1H2015, while net debt - by 10.3% to T809bn. Net debt to EBITDA ratio surged to 5.8x from 2.7x in the 1H2014 due to a twofold decline of EBITDA. The company reduced its capital expenditures to T84bn from T129bn a year earlier. Capex was partially financed with shareholder's capital injection of T36bn and borrowing, and in part with own funds, as cash and cash equivalents balance decreased by T46bn to T78bn as of end-June 2015.
Our view. We view declining revenue and rising leverage as credit negative. In response the company reduced its capital spending and optimized operating costs. The credit profile will be negatively affected by tenge devaluation, and we expect net leverage to rise further as most of debt is FX-denominated (about 70%). We view the capital injection by the shareholder as positive and expect the credit quality of KTZ to remain high thanks to the continuing government support.
Yields on Eurobonds rose by 37-153bp on the back of tenge devaluation.
We have KTZ under credit research coverage with a stable outlook on its credit profile and a Hold recommendation on its Eurobonds.