The reduction of the loss in Tele2-Altel JV and the increase in revenues while controlling costs, allowed Kazakhtelecom to demonstrate strong financial results for 9M2017, achieving EBITDA margin of 43% versus the average of 35% for 2014-2016. Meanwhile, we expect a restrained growth of Kazakhtelecom's revenues (without the consolidation of the JV) at the rate not exceeding 4% y/y for the forecasted horizon, while EBITDA margin will remain slightly below 35%. Taking into account the strategic plans of the Company to expand its presence in perspective market segments, while maintaining a dominant position in broadband (72%) and fixed-line (93.3%), we think that Kazakhtelecom’s main sources of revenue have limited potential, while an increase in the presence in segments with a growth reserves will not provide considerable effects on the income in the short term. The main medium-term growth driver for the Operator will be Tele2-Altel JV. In our opinion, the current price of KZTK is close to its fair value. Our recommendation is Hold, with 12M TP of 23 739KZT per share.
Profit of the Joint Venture and the excess of EBITDA over CAPEX in 2018. Due to the fairly fast achievement of costs synergy and integration of business processes, in 3Q2017 Tele2-Altel JV reported a profit of 640mn KZT, completing a series of continuing losses since inception. Remaining the leader in 4G coverage and using an extensive infrastructure of Kazakhtelecom, JV has increased its subscriber base from the moment of the establishment by 8.5% to 6.83mn according to 3Q2017 data, taking over 26% of the market. According to the development strategy of Kazakhtelecom, presented in 2016, the Operator sets an ambitious goal for the JV to have 33% of the market share by 2025. In the medium term, the EBITDA margin is expected to be around 30%. According to Tele2 AB forecasts, the EBITDA margin improvement from 19% in 1Q2017 up to this level will be provided by 5% increase in the gross margin and optimization of other expenses by 6%. Meanwhile, we believe that a further increase in the capitalization of KZTK due to the Joint Venture is possible only with the generation of a nominally significant free cash flows by the latter, which is not expected in the next 12 months.
Core revenues without growth drivers. Having a monopolistic position in a number of market segments, Kazakhtelecom falls under antitrust regulations, which limits market pricing power and places a social burden on the Company (the development of telecommunications in rural areas). The broadband segment, which is the main source of revenue for Kazakhtelecom (52.3% for 9M2017) is close to saturation in large cities and has a lower profitability in rural areas. The landline phone segment representing 24.2% of the Company's revenue for 9M2017 is contracting. Despite the absence of direct competitors in the fixed-line telephony market, this segment, like the broadband, is experiencing intense competition from mobile communications and 4G internet.
Target price 23 739 KZT per share, Hold recommendation. Shares of KZTK rose by 40% since July 2017 and, according to our estimates, the current price fairly reflects the improvement of macroeconomic indicators of the economy of Kazakhstan, good financial results of the Company and the potential growth in revenues of the Joint Venture. The Company's strategic plans for 2025, of increasing its presence in a number of growing market segments and maintaining dominant positions in segments related to the Operator's core business, do not imply extensive expansion that would be capable to significantly increase growth rates of revenues. We recommend to Hold KZTK, with 12M TP of 23 739 KZT/share.