On January 27 this year, Kcell has published its 2016 results. Contrary to our expectations on reducing the operating costs, Kcell demonstrated weaker operating and financial results. As operating and financial performance recovery process was below our expectations, we decided to change our recommendation from BUY to HOLD. At this point, we estimate the fair value of the Company as 1184 tenge per share ($3.6 per GDR).
2016 results. Revenue fell by 13% y/y to 147 billion tenge due to falling voice revenues and was generally in line with our expectations. The volume of voice traffic declined by 2.5% y/y and amounted to 22,948 million minutes, moreover, APRU rate also declined from 3.2 to 2.5. Revenues from data transmission, on the other hand, rose by 5.2% y/y to 41,339 million tenge. However, almost doubled revenue from data transmission was offset by package offers with lower tariff per MB, which led to a decrease in average revenue per MB (ARMB) to 0.3. Actual EBITDA was below our estimates by 4% as a result of higher than expected costs of sales, depreciation and operating expenses. In response to a significant outflow of subscriber base, and due to increased costs of sales, as well as, other operating expenses, the net profit of the Company decreased by 64.2% y/y, reaching 16,684 million tenge.
New reality. Last year was difficult for Kcell, mostly due to an outflow of client base and increased competition as a result of lower service prices. At the same time, the positive revenue dynamics for thethird quarter in a row demonstrates signals for a stabilization. The subscriber base in the 4th quarter increased again by 0.8% q/q. In our opinion, an increase in client base is certainly a positive factor for Kcell, which is the result of the adaptation to new realities of the market by expanding and applying more flexible tariff plans. In addition, the Company is vigorously developing the B2B segment, as a result of which we expect a slight increase in the number of clients in 2017.
Expectations for 2017. We expect consumption growth to 23 billion minutes and 140 petabytes of data in 2017. Starting from 2017, due to economic recovery and market consolidation (completion of Altel and Tele2 merger), we expect revenue growth to be on average at 6% y/y.
DCF-valuation. Due to a high competition in the telecommunications market and the growth of operating costs, we believe, that the improvement of key operating performance indicators of the Company will be slightly slower than previously assumed. We expect more conservative growth of EBITDA on average by 5% y/y vs. 9% y/y. At the moment, we estimate the fair value of the Company in the amount of 1184 tenge per share ($3.7 per GDR), the recommendation is to "HOLD".