In the first half of 2016 Kazakhtelecom reported an increase in operating profit by 13,2% yoy mainly due to the less significant growth in costs and general and administrative expenses compared to our expectations. However, the positive effect of strong financial results of the Company, in our opinion, is still constrained by high uncertainty of Altel’s financial performance, strong competition in the telecommunications market and significant impact of the government on decision-making process. Our target price is 13412 tenge per ordinary share and 7094 tenge per preferred share, with HOLD ratings.
1H2016 results. The revenue of the Company increased by 4.6 bn tenge (4.9% yoy) mainly due to the increase in network equipment rent and interconnect services. The net income of the Company decreased by 2.3 bn tenge (13,7% yoy), as a result of Altel’s loss recognition.
Cost control. In 1H2016 general and administrative expenses totaled to 10.9 bn, which is 3.1 bn tenge or 28% below our expectations. According to our estimates, FY2016 general and administrative expenses will be equal to 23 bn (-11,5% yoy).
Dividends are uncertain. The Company does not always follow its dividend policy. Parameters of the policy is difficult to estimate or forecast. Thus, in 2013-2015 dividend payments were 150% (2603 tenge), 15% (102 tenge) and 15% (331 tenge) of the net profit, respectively. Therefore, such investment should not be considered as dividend story, despite the past events of high special dividends.
Target price set at 13412 tenge, HOLD. Negative financial results of Altel, strong competition on the telecommunication market and significant impact of the government’s share in equity, in our opinion, are the key factors hindering the true growth potential of the Company. We estimate the fair value per share at 13412 tenge, 7,3% above the market price, and maintain our HOLD rating.