Over the last 5 quarters Kcell’s data volume growth and revenue decelerated. Smaller and more aggressive Altel and Tele2 continue to gain the market shares, while Kcell’s share slid from 55% in 2012 to 50% in 1Q15. We downgrade our recommendation on Kcell from “BUY” to “HOLD”, lowering TP from $9.9 to $8.0/share.
2Q15 revenue down 10.5% YoY Revenue at T43.0bn, down 0.2% QoQ on slumping outgoing call revenue (-2.1% QoQ), VAS (-9.7% QoQ) and handset sales (-13.1% QoQ). Cost of sales was up slightly by 1.6% QoQ, while EBITDA margin narrowed down by 3.7pp QoQ to 51.6%.
Data growth is cooling During 1Q15-2Q15 Kcell’s data volume was growing at c.6% QoQ vs c.20% during 3Q14-4Q14. Sluggish growth in data volumes, coupled with a continued decrease in data rate ARMB (-2.4% QoQ in 2Q) lead to only moderate growth in data revenue (+3.1%), which fails to offset declines in voice revenue.
Shrinking market share Based on the number of subscribers, Kcell’s market share was down from 48% at YE2014 to c.41% at end-2Q2015 on our estimates, mainly due to advance of Altel. In terms of revenues, Kcell’s share was still at c.50% in 1Q15, but we expect to it to fall below this threshold by YE2015 on the intense competition.
Mobile number portability (MNP) Introduction of MNP is expected by YE2015 in Kazakhstan. We expect a modest impact on the subscriber bases given experience in Russia, where only 0.5% of subscribers elected to switch.
4G license The Company is yet to receive the license to operate in 4G format, which is highly likely by YE2015. Upon receiving the license, Kcell’s capex would hike up, as it would build upgrade its stations, and pay for the license and frequences. Kcell is to gain access to 2.5-2.6GHz frequencies by buying Alem Communications from its parent Telia Sonera at a cost of c.$205mn.
Dividends are a most important investment case for Kcell. Although we expect EBITDA margin to shrink (45% by 2018 vs 56% in 2014) and capex to hike on the 4G network roll out, the Company will keep up its dividend payout at 100%, in our view.
Rating update. Due to slowing volume growth in mobile data and plunging voice call revenues, we expect revenues to stagnate, at best. Moreover, Kcell’s market share shrinks, as stiff market competition brings down the pricing. We downgrade our rating to HOLD, and TP from $9.9 to $8.0/share.