KEGOC: Review of 1H2016 financial results

Increase of 12M TP to KZT 883/share, "HOLD" recommendation is maintained.

Altynay IbraimovaSeptember 01, 2016

Two-times net profit rise for the 1H2016 due to revenue increase (+16 yoy) allows us to increase our 12M target price for KEGOC’s shares to T883/sh. Due to the strong half-year results, we estimate the probability of dividend payments in 1H2016 as high. However, given the overvalued shares, along with leverage in the foreign currency and the current tariff policy which does not reflect the rise in costs due to devaluation, we recommend to HOLD KEGOC’s shares.

Strong 1H2016 results. During the reporting period, the Company reported a 16% increase in revenues and a 3% increase in production costs (yoy). General and administrative expenses decreased by 53% due to the recovery of provision for doubtful debts. At the same time, excluding the provision for doubtful debts, general and administrative expenses, on the contrary, increased by 3% (yoy). The Company’s operating profit surged by 3 times (+194%), while, excluding the provision, EBIT increased only by 56%. KEGOC has achieved the 1H2016 growth in net profit of more than 2 times (yoy) to T16.2 billion. Given the semi-annual results for the current year, we expect the FY2016 net profit of T25.5 billion.

High probability of dividends for the 1H2016. In December 2015, the Company paid a dividend of T9.4/share, or 40.01% of net profit for the 1H2015. Given the strong results for 1H2016, we believe that KEGOC will pay a dividend for the respective period. According to the dividend policy of KEGOC, the minimum dividend payout ratio is 30%, which corresponds to T18.7/share. In our opinion, the Company may follow last year's scenario, and pay dividends of 40% of 1H2016 net profit, which corresponds to 24.9 tenge / share. According to recent data, KEGOC Board of Directors has made a decision (dated 26 August 2016) to propose to the General Meeting of shareholders to distribute 40% of net income to all holders of the KEGC KZ common shares.

Electricity tariffs need to be revised. Approved electricity tariffs do not take into account the deterioration of market conditions caused by weakening of tenge in 2015 which increases the cost of expenses. According to statements by the Company's management, a request for approval of the new tariffs is planned only in the medium term, around 2021. We are upbeat on rising costs in the range of inflation and we note the Company’s high ability to control costs. However, we expect that measures to limit the costs in line with inflation will be exhausted this year, and, therefore, we expect the growth of costs in 2017-2020 to average at 5.8%. Based on our forecasts, we assume the possibility of a revision of tariffs before the expiry of the agreed tariffs, which will take into account the rising costs of inflation (see Fig.3).

We increase our 12M TP to Т883/share, «Hold» recommendation. In our opinion, given the leverage in USD/EURO, which restrains the Company’s profitability, the current price of KEGC KZ seems to be overinflated. Given the high share price volatility accompanied by high trading volumes in the absence of triggers, we believe that the shares are rather supported by the largest investors. Significant growth in earnings due to the revenue increase and cost reductions allows the Company to consider the possibility of paying semi-annual dividend like in the previous year, due to which we recommend to "HOLD" the shares of KEGOC.

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