Another special dividend

Bakai MadybaevDecember 10, 2013

Yesterday, Kazakhtelecom proposed its shareholders to distribute as dividends the entire 1H2013 profit of T10.7bn and T18.1bn of retained earnings. This would result in a T2603.9 dividend per share with a dividend yield of 16.4% and 17.1% for common and preferred stock, respectively. If the shareholders accept the proposed dividend payout on a December 19 meeting, the record date will be December 29, and dividends will be paid starting from December 30.

  • In our view, the decision to pay out the special dividend is defined by the concerns of optimizing the company’s capital structure. With the currently depressed return on average equity (6.5-8%, which is, apparently, much lower than those of marginal investments), excess liquidity and low leverage, returning capital to shareholders and raising cheap debt funding appears to best serve the shareholders’ interests.
  • The proposed dividend came much higher than our estimate of T480 per share. We probably underestimated the level of corporate governance in the company. Above-profit dividends have become a standard among telecom companies, but are rather an exception for Kazakh state-owned entities. We expected the company to finance capital expenditures with its accumulated cash balance and underestimated the company’s intention to use trade finance to fund purchases of equipment for FTTH and LTE/GSM networks.
  • Financing capital expenditures with debt, in our view, will improve the efficiency of capital structure, given the company’s current low leverage. After the company repurchased T31.2bn of bonds in 3Q2013, the net debt to EBITDA ratio amounted to just 0.04x and after the dividend payout should increase to 0.45x, quite a low level for any industry.
    As of the end of September Kazakhtelecom’s cash amounted to T51.5bn, but should decrease by more than a half to T22.7bn after the dividend distribution. Yet the company maintains its capex guidance of T87bn in 2013 and T75bn in 2014 as it plans to raise trade financing.
  • After accounting for the special dividend, our estimate of the fair value of the stock based on DDM model increased to T17,665 for a common stock. DCF valuation did not change much and resulted in a T17,329 fair value estimate for a common stock. As a result, our combined fair value estimate increased to T17,600 for a common stock and T14,100 for a preferred stock.
  • Ahead of the special dividend distribution preferred shares have surged much faster that common shares (Fig. 1), and, based on past experience, should fall more than common shares after the dividend payout. Last several years, an average discount between common and preferred shares has been about 20% (Fig. 1), much more than 4% reported yesterday.
  • We recommend selling preferred stock before the record date and holding common stock. After the special dividend will be distributed, we do not expect strong catalysts for share price growth. There will be no cash available for a potential stock buyback. Kazakhtelecom’s profit in 2013 and 2014 will decline, according to the company’s management, while the returns on large investments will realize only in a few years.

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