Kazakhtelecom reported mixed results in 2016. On the one hand, the Company demonstrated strong operating results, on the other the significant loss in Altel’s JV has not yet given us an optimism. We keep “Hold” recommendation and estimate our 12M TP at T16390 with 2.4% upside potential.
Strong Operational results achieved in 2016. Kazakhtelecom demonstrated consolidated operational developments, by increasing operating profits 17% y/y. Consequences of escalated earnings by 8% y/y and decreased administrative expenses by 5% y/y were partially leveled by the growth of costs associated with providing services, which in turn surged 9% y/y in 2016. Considering major losses in joint stock with Altel and Tele2 that are amounted T 13.6 bn, which offset all positive effects of operating profit consolidation. In consequence, the net profit from continuing operating activities fell down by 43.5% y/y and accounted for only T 14.8 bn.
Altel, sole factor keeping growth pace. Considering substantial benefits from the merger of 4G network lines in Kazakhstan, we believe that joint enterprise of Altel and Tele2 has full capabilities and perspectives of achieving a higher number of users and synergy of operational outlays. Earlier we have discussed this joint enterprise on the matter of net profits expected in 2018, however, acknowledging weak financial quotations for 2016, we now expected to see lower growth rates and believe that company will only reach net profits to the year of 2022.
Low return on capital. As an additional burden to the prosperity of Kazakhtelecom, we see a low return on invested capital, which constitutes only 5.5% and still lower than the inflation rate in Kazakhstan by nearly 3%. This can be justified by small Р/В of 0.5, which 1.5 times lower that sector average. We mainly associate low returns on capital to an inability of the company to manipulate prices of its services, by some reasons.
Forecasts. In 2016, the company has continued to advance its revenues from services of data transmission, for the year passed, this indicator increased by 6% y/y. We expect further growth of this revenue streams as part of total revenues from 52% to 61% by 2020. Services such as IDhome and wide coverage of urban areas has to fuel profit-making process. Services of wire and wireless connection declined by 5% y/y. Substantially lower cost of internet connections and cell phones provide people with an alternative means of communication and in we expect a smooth decline in earnings from wired line services.
Target price of T 16390 per share, to be held. Operational cash flows of the company in 2016 appear to be strong and reliable, we forecast, stabilized growth of cash flows in the period 2017-2020 by 5% in average y/y. In this regard, negative development of key financial measures of Altel and Tele2 in mid-term time horizon, as well as high density of other means of telecommunication, constitute major constraining factors of Kazakhtelecom`s future growth. We recommend to held common shares of the company and we estimate the value of T 16390 per common share, which is 2.4% higher that it is traded on KASE.