As expected, Kazakhtelecom’s annual shareholder meeting approved dividend of almost T20,000 per each common and preferred share. The company will pay its shareholders of record as of May 16, 2012 30% of net income earned in 2011 and virtually all of net profit received in 1Q2012. The latter includes proceeds from the sale of the 49% stake in GSM Kazakhstan. We updated our valuation model of Kazakhtelecom to reflect excellent 2011 results and raised our target prices of common and preferred shares to T36,680 and T35,000, respectively.
Dividend amounts to $1.5bn
The most interesting topic at the annual shareholder meeting (AGM) on May 8 was the issue of distribution of revenue received from the sale of the company’s share in GSM Kazakhstan earlier this year. Shareholders approved 2011 and 1Q2012 dividend in line with the recommendation by the Board of Directors.
The company will pay its equity holders of record as of May 16, 2012 30% of net income earned in 2011 and almost all (99.98%) of 1Q2012 net income, which includes proceeds from the sale of the 49% stake in GSM Kazakhstan. The regular dividend payout was raised from 17.5% to 30% per request by the company's largest shareholder, Samruk-Kazyna (51% stake).
Per each common and preferred share, Kazakhtelecom will pay T1,328.80 in 2011 dividend and T18,559.27 in 1Q2012 dividend. The total amount of money Kazakhtelecom is returning to its shareholders equals T225bn ($1.52bn), or T19,988.27 per share. Dividends will be paid twenty days after the record date set at 00:00am on May 16, 2012.
The market is at times slow
The first version of the AGM agenda distributed by Kazakhtelecom on April 3 mentioned only “distribution of 2011 net income.” This implied that the decision on the use of proceeds from sale of the company’s share in GSM Kazakhstan would be postponed indefinitely because the deal was closed on February 2, 2012. Kazakhtelecom amended the agenda seventeen days later to add to it the issue of distribution of 1Q2012 net income. The dividend amount recommended by the Board was made public on April 24 when equity holders received AGM materials.
Albeit with major delays, the stock market reacted to the gradual decrease in uncertainty regarding the sale of GSM Kazakhstan and the use of proceeds from the deal by higher Kazakhtelecom share prices. Between the first announcement of the transaction made in September 2011 and the AGM held on May 8, the company’s common shares gained some 56%, while price of preferred stock almost tripled. (See Fig. 1).Click to enlarge
On May 11, Kazakhtelecom common shares at Kazakhstan Stock Exchange (KASE) closed at T28,940, and the preferred one – at T26,980. The company’s market capitalization reached T325.2bn (or $2.2bn). Therefore, excluding the future dividend the market values Kazakhtelecom at T100bn ($675mn).
Before discussing the market view of Kazakhtelecom and the value of its stock we will first take a look at the company’s core business.
Excellent 2011 results and good future prospects
Kazakhtelecom 2011 revenue grew by 7% to T179.6bn with uneven distribution of growth among business segments. As we suggested previously, the key growth engine were broadband internet access services. Like in the prior year, revenues of this business segment jumped by over 25%. Sales of the fixed-line voice services, which for now remains the main source of the company’s revenue, amounted to just 1%. In 2012, we expect revenues from broadband data services to continue their impressive growth (+15% YoY) and revenues from fixed and mobile telephony to increase by modest 2-3%.
Last year, Kazakhtelecom noticeably improved its profit margins. Gross profit margin improved from 50.5% in 2010 to 51.3%, while EBITDA margin grew to 39.3% (in 2010 – 36.2%). Net profit margin bounced to 10,2%, back to the past five-year average (9,9%).
As of the end of 2011, the company’s total debt including financial lease obligations amounted to T90.1bn (+8,8% YoY), close to its cash balance (T88.7bn; +51.8% YoY). We estimate that by the end of June (i.e. after the dividend is paid) the company will have about T120bn in cash, cash equivalents and financial assets on its balance sheet.
Kazakhtelecom estimates its capex needs in 2012 and beyond at approximately T50-60bn, with roughly half of this amount to be financed through debt. According to our model, over the next five years Kazakhtelecom’s cash flows from operations will gradually grow from T50bn in 2010-2011 to T60bn in 2012 and, by 2016, will reach 80bn. Therefore, we believe that the existing cash cushion together with operating cash flows and significant borrowing capacity is sufficient for maintenance capex, expansion of fiber optic last mile solutions (iD Net) and a possible rollout of an LTE network.
Still trading at a 50% discount
2011 results had a positive impact on our valuation of Kazakhtelecom. Continuing fast pace of revenue growth, especially in the broadband business segment, and improved profit margins improved our DCF valuation of the company’s equity from T181.5bn to T210.8bn (or from T16,000 до T18,600 per share) .
|Figure 2. Financial forecasts of Kazakhtelecom's core business|
|in Tenge mln||2011A||2012F||2013F||2014F||2015F||2016F|
|Total sales||T 169 351||T 180 638||T 192 650||T 205 296||T 218 455||T 231 976|
|Voice (fixed line)||62 727||63 982||65 261||66 567||67 898||69 256|
|Mobile (Altel)||12 075||12 437||12 810||13 195||13 590||13 998|
|Data services||59 257||68 145||77 685||87 784||98 319||109 134|
|Interconnect||13 173||13 173||13 173||13 173||13 173||13 173|
|Rent of communication lines||11 163||11 721||12 307||12 923||13 569||14 247|
|Miscellaneous||5 362||5 362||5 362||5 362||5 362||5 362|
|Compensation for universal services||5 594||5 817||6 050||6 292||6 544||6 806|
|Net income||17 160||20 011||23 417||26 704||30 233||33 251|
|EPS, tenge||T 1 515||T 1 767||T 2 068||T 2 358||T 2 669||T 2 936|
|Dividend, tenge per share||455||530||620||707||801||881|
|Operating cash flows||59 658||66 974||72 175||77 681||82 493|
|Capex||50 733||52 825||54 143||56 735||58 696||58 377|
|Source: company data, Halyk Finance estimates|
Comparing Kazakhtelecom with peer telecom operators in emerging and developed markets on the P/E multiple largely confirms results of our DCF model. (See Appendix 1.) Due to low liquidity of Kazakhtelecom shares, we applied a 20% discount to the 2012 P/E peer multiple and value Kazakhtelecom shares at T13,900 – T15,6601, which is equivalent to P/E range of 7.9-8.9.
We establish our post-May 16 price estimate of Kazakhtelecom common shares at T16,690, or the simple average of the results of the two valuation models. Reflecting their lower liquidity, the price estimate for preferred shares is set 10% below that of common stock, at T15,000. Prior to the record date our estimated prices of common and preferred shares equal T36,680 and T35,000, respectively. We maintain a ‘Buy’ recommendation on both share classes.
Coming back to the issue of market of Kazakhtelecom we note that, over several years preceding the sale of GSM Kazakhstan, Kazakhtelecom common shares were trading at about a 50% discount to their estimated value. In their turn, preferred shares were priced at half the common ones. Currently, the nominal spread between the two share classes dropped to 6.8% (28,940 vs. 26,980). Yet, the size of this reduction is misleading because excluding the recently approved dividend common shares are priced at T8,952, and preferred – at T7,292. In other words, preferred shares are noticeably cheaper (by 18.5%) than common stock.
After the sale of GSM Kazakhstan and the large dividend resulting from the deal, the market continues to seriously undervalue the company’s core business. The implied ex-dividend price of common shares is 46% below our estimate. In the case of preferred shares, the discount equals 56%.
Our conclusion regarding market undervaluing Kazakhtelecom is supported by the following observations. First, the national telecom operator enjoys growing sales, promising opportunities in fixed and mobile Internet access services business and low vulnerability to external factors. The third item on this list makes Kazakhtelecom more attractive than KMG EP, Kazakhmys and ENRC, all of which depend on international commodity prices and global demand for commodities. Second, we like how Kazakhtelecom executed the sale of GSM Kazakhstan from the decision to dispose of the asset to returning most of the proceeds to shareholders.
The sale of GSM Kazakhstan rekindled investor interest in Kazakhtelecom and gave the market an opportunity to take a look at the company’s core business in its “clean” state. In addition to expanding its internet access services business and delivering strong financial results, the company’s market valuation would benefit from Kazakhtelecom establishing a dedicated communications channel with its investors by creating a standalone investor relations service.
Which share class to choose?
To clients with long investment horizons and/or with preference to high dividend yields, we recommend preferred shares. At the current implied ex-dividend price (T7,292) we estimate 2012 dividend yield of 7.3% with the guaranteed yield of 4.1%. Holding share price constant, dividend yield on this share class will grow to 12.1% by 2016, our model shows.
We see Kazakhtelecom common shares more attractive to investors who prefer better liquidity and greater likelihood of capital gains.
 Both DCF and comps valuations are made on a “post record date” basis, i.e. they exclude the amount of the approved 2011 and 1Q2012 dividend.
|Appendix 1. Relative valuation|
|Peer Companies||Ticker||Country||Market Cap||EV||P/E|
|$, bn||$, mn||2011||2012||2013||2014|
|Emerging Market Peers|
|Mobile Telesystems||MTSS RM||Russia||14,8||21,8||-||6,6||4,9||4,4|
|China Mobile Ltd||941 HK||China||224,8||177,0||11,5||11,2||10,9||10,5|
|Maxis Berhad||MAXIS MK||Malaysia||15,0||16,6||20,3||19,7||19,2||18,9|
|Sk Telecom, Co.||017670 KS||South Korea||9,5||11,3||6,1||6,8||6,0||5,6|
|Etihad Etisalat||EEC AB||Saudi Arabia||12,3||14,2||9,5||8,4||7,9||7,5|
|Total Access Communication||DTAC TB||Thailand||5,8||6,2||15,7||16,0||14,8||1,6|
|National Mobile Telecommunications||NMTC KK||Kuwait||4,3||4,7||12,9||10,9||10,1||9,5|
|Emerging Market and CIS Mean||10,7||10,8||10,0||8,1|
|Emerging Market and CIS Median||10,3||10,5||9,5||7,5|
|Developed Market Peers|
|Vodafone Group Plc||VOD LN||UK||135,3||181,9||10,5||10,7||10,3||10,0|
|Telefonica Sa||TEF SM||Spain||65,3||152,5||7,3||7,9||7,5||7,6|
|Deutsche Telecom||DTE GR||Germany||49,6||109,4||13,0||13,7||13,1||12,2|
|Telecom Italia||TIT IM||Italy||19,9||69,7||6,5||6,6||6,4||6,2|
|Swisscom Ag||SCMN VX||Switzerland||20,1||29,1||9,6||10,4||10,5||10,5|
|Tele2 Ab||TEL2B SS||Sweden||7,3||9,3||10,3||10,2||9,1||8,2|
|Developed Countries Mean||9,6||10,0||9,7||9,4|
|Developed Countries Median||9,9||10,3||10,2||9,9|
|Kazakhtelecom estimated P/E multiple|
|Net income (KZT mln)||17 160||20 011||23 417||26 704|
|Value per KZT share|
|Low||11 750||13 893||14 744||14 808|
|High||13 266||15 660||16 812||17 166|