Kazakhtelecom reported mixed FY2015 results. We view the merger between Altel and Tele2 as positive, as well as the Company’s plan to sell its products in packages (internet, TV and phone). On the negative side, the stock is illiquid and there is significant uncertainty regarding the dividends. Our target price is T10727 per common share and T7193 per preferred share, with HOLD ratings.
Profitability rose due to one-off events. The gross margin widened by 1.4pp to 48.8%, operating margin rose by 3.5pp to 19.2% and EBITDA margin expanded by 2.0pp to 37.8%. However, we note that the improvement was due to non-cash and one-off decline in expenses, which raises questions if the positive trends going to continue. Disregarding these expenses, cost of sales rose by 0.6% yoy and SG&A grew by 9.3% yoy.
Moderate revenue growth. Kazakhtelecom’s sales declined in 2015, mostly because the Company stopped selling devices. Without taking the discontinued operations into account, the revenues grew by 2.2% yoy. In the medium term, we expect the annual growth of 4-5% mostly due to internet services sales.
Merger between Altel and Tele2 to end losses. The merger was the major event in the mobile communications market last year. The deal closed in the 1Q2016. The joint venture’s management sees significant synergies. We expect the cost reduction to allow the operator to start earning net income in 2018.
Dividends are uncertain. The company does not adhere to its dividend policy, and the parameters of the policy cannot be estimated or forecasted. Therefore, the investment should not be considered a dividend story, despite the past events of high special dividends.
Target price set at T10727, HOLD. Low liquidity, high uncertainty regarding dividends and Altel and risk of suboptimal decision making from the major shareholder are key factors restraining the share price growth. We estimate the fair value per share at T10727, 1.7% lower than the market price, with HOLD rating.
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