More conservative valuation with upside potential

Diyas SakanovApril 23, 2015

Yesterday, Kcell reported 1Q15 financial results. The sales came below our expectations, which we pinned on rapid data growth offsetting continued decline in voice and VAS services. Kcell appears to be in the process of changing its business model by shifting – out of necessity – towards lower margin retail and B2B segments. We also expect the uncertainty related to the decisions of the regulator in combination with the deteriorating macro environment and intensified competition to continue put pressure on the stock over the medium term.

Total revenue fell in 1Q15 by 2.3% YoY to T43.0bn, out of which 7.8% came from iPhone sales, which the company started in the previous year. Selling new iPhone models boosted Kcell’s other services revenue to T3.3 bn in 1Q15 from T1.74bn in 4Q14. While these activities help to upsell data products, on the other side, they put downside pressure on margins. Company guided for the ‘slightly lower total revenue’ in 2015.

Voice revenue continued to decline by 15.1% YoY in 1Q15, below our expectations, mostly due to MTR decrease to T8.0 from T11.1 in January 2015 and intensified competition. The company lost 363,000 subscribers in 1Q15 from 4Q14 which were, according to the company’s statement, mostly price-sensitive. ARMU dropped by 18.6% YoY to T3.5 per minute. MOU increased by 6.3% YoY to 187 minutes in 1Q15. Cannibalization from data services starts putting more pressure as smartphone penetration continues growing.

Value-added service revenue (VAS) fell by 17.1%YoY on the back of lower usage of SMS and MMS services, which was below our expectation.

Data income grows remains strong. Data revenue rose 15.1% YoY, mostly in-line with our expectations, as the growth was primarily driven by higher smart phone penetration (35.0%). The surge in data income led to increased share in the income structure of 22.2% from 18.9% year earlier.

EBITDA margin stayed high. Kcell was able to maintain its EBITDA margin at 55.3% in 1Q15, despite intensified competitive pressure. The company expects the EBITDA margin to decline to lower-fifties at the end of the year, particularly due to some pressure from lower margin retail segment.

Other reports