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- Leading the market. KCell leads the market in terms of both the subscriber base and average revenue per user. This position is secured thanks to a widespread network and high service quality, which allow to maintain a dominant position in the market of high-margin customers, including corporate and government entities. As a result its EBITDA and profit margins are higher than peers’, both local and foreign. The company’s revenue and profit, just as those of the entire industry, grew at a double digit rate in 2010-2011. However, the market has been changing recently exposing KCell’s superior performance to rising risks.
- Voice market nears saturation. The mobile subscription growth rates keep slowing down. Voice services subscriptions have surpassed the population of Kazakhstan. As the mobile voice market approaches the point of saturation, competition intensifies and margins narrow. In order to maintain the pace of revenue growth in the face of slowing voice revenue growth the operators will need to accelerate the take up of data services.
Focus on data. The industry expects mobile data revenues to grow faster than those of other services, given low penetration, higher margins and less regulation. We believe the demand for data services is still constrained by high prices, the shortage of data-intensive content and smartphone-specific services, and low smartphone ownership rates.
Competition intensifies. An entry in 2010 of Tele2, a discount provider, has shaken up the duopoly of KCell and Kar-Tel, which had been supported by network economies of scale and mobile termination rate barriers. Competition led to lower tariffs eating into revenue and profit growth.
- Regulatory risks. In order to encourage competition, the regulator lowers mobile termination rates through negotiations with operators and debates the introduction of mobile number portability, which will lift a barrier for competition for high-end clients and can help Tele2 in its expansion. On the other hand, the regulatory risk is less tangible for the main revenue growth driver, data services, due to lower penetration of these services.
- Recommendation. We value the 12-month target price of Kcell stock at $15.1 per GDR and 2270 tenge per common share on KASE after accounting for the dividend payout of $1.08 or 168 tenge per share in the second quarter of 2013 and recommend to ‘Buy’ the stock. The Kcell stock provides a high dividend yield opportunity combined with certain, albeit limited, price growth potential. For retail Kazakh investors a purchase of shares on KASE might be more preferable due to the absence of the capital gain tax, unlike with GDRs. However, higher liquidity of GDRs on London Stock Exchange might become a more important factor for investors willing to purchase larger amounts of shares, more than $10-15k.
*Halyk Finance acted as a co-manager of the Kcell IPO.