Kcell: 2Q15 revenue slipped 10.5% YoY

Bakhytzhan Khochshanov, CFAJuly 17, 2015

Today, Kcell reported its 2Q15 financial results, posting revenue of T43.0bn (-10.5% YoY). The decline was mainly due to a weakening outgoing call revenue, VAS and gadgets sales. Importantly, we note that a data volume growth slowed down to 5.6% QoQ in the 2Q vs 19.6% in the 4Q14. We put our recommendation on Kcell under review.

2Q15 revenue down 10.5% YoY. Kcell 2Q15 revenue amounted to T42,980mn, which is 10.5% lower YoY and 0.2% lower QoQ. The decline was largely due to a weak outgoing voice call revenue (-2.1% QoQ), as well as slumps in VAS (-9.7% QoQ) and handset sales (-13.1% QoQ). Cost of sales increased marginally by 1.6% QoQ, while EBITDA margin deteriorated by 3.7pp over the quarter, standing at 51.6% in the 2Q.

Data income growth slows down. In the 2Q15, data volume growth slowed down to 5.6% vs 6.1% in the 1Q15 and 19.6% in the 4Q14. Coupled with a decline in average rate (ARMB) of 2.4% QoQ due to a widespread use of prepaid packages and competition, data revenue added only 3.1% QoQ. If data revenue growth continues to slow down, it would no longer offset the decrease in voice revenue, leading to a stagnation of total revenue, at best.

Weak gadget sales. Handest contracts sales declined by 13.1% QoQ, which came as a surprise since this niche is one of the priorities in Kcell’s business strategy. Being an official distributor of Apple’s gadgets in Kazakhstan, the company opened three gadgets stores this year and four more are planned by the year-end. Still, we believe EBITDA of the segment would remain moderate, as charging high premiums is unlikely due to tough competition in the market.

Regulatory updates. In its 2Q release, Kcell informed that following ACP’s rulings the Company is still working on updating its billing system to interrupt calls for subscribers whose balance reaches nil on “Daily unlimited” service. Kcell built T1.6bn provisions at YE2014 to make refunds to customers, if necessary.

Recommendation. Given a rather weak data volume growth recently, we suspect data revenue would further offset decline in voice revenue. Other segments may support the revenue, but would contribute moderately to EBITDA due to moderate margins, in our view. We put our recommendation on Kcell “Under review”, and will release a valuation update soon.

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