TeliaSonera is to leave Eurasia

Bakhytzhan Khochshanov, CFAOctober 30, 2015

Kcell’s revenue in 3Q2015 amounted to T42.8bn, going down 11.8% YoY mainly on decreasing voice revenue. The Company’s major shareholder TeliaSonera plans to exit Eurasian businesses, including Kazakhstan, which is a negative for Kcell, in our view. We maintain our “HOLD” recommendation, decreasing 12-mo TP to $4.8/share due to devaluation of KZT and intensified competition in rates on services among telcos.

3Q15 revenue fell by 11.8% YoY. Decrease in 3Q2015 revenue (T26.5bn) was due to a fall in voice revenue, while data revenue was up by 20.1% on the increased data traffic (by 2.4 times YoY). The cost of sales was up by 9.6% QoQ to T24.4bn, while EBITDA margin was down by 11.7pp to 44.6%.

TeliaSonera plans to exit Kcell. On 17 September TeliaSonera announced its plans to exit Eurasia businesses, including Kcell, focusing on its assets in Europe and Sweden. TeliaSonera’s CEO Mr Dennelind among the reasons for exit mentioned “unresolved issues in Eurasia” on partner relations and cash repatriation. The Swedish operator does not know the ultimate owners of its local partners in Uzbekistan and Azerbaijan and has difficulty repatriating cash from Nepal and Uzbekistan.

Following TeliaSonera’s announcement, Turkcell, holding c.21% of equity in Kcell though Fintur Holding, expressed its interest in Telia’s assets in Kazakhstan, Azerbaijan, Moldova and Georgia. Telia’s exit may be a negative for Kcell, as the latter would not have access to Telia’s international expertise, but the effect can be mitigated, if other international operators come in, including Turkcell.

We remind that on 12 September 2014 Kcell’s CEO Mr Ali Agan left its post “to pursue other career opportunities”. On 29 September 2014 Kcell’s BoD announced an investigation into external suppliers’ contracts, as some contracts were in breach of the Company’s internal policies, and on 1 October 2014 the Company’s CFO left his post. The results of the internal investigation are not yet disclosed.

Dividend yield of 22% expected in 2016F. On 8 October 2015 Kcell paid a “special” dividend (30% of net income for 2014) in the amount of T17.5bn, or T87.4/share. On our estimates, the Company’s net income in 2015E will equate to T263/share (~$0.94/акцию). Assuming 100% payout, we expect a dividend yield of 22% to the current share price ($4.35/share on 30 October).

Devaluation effect and capex. We believe that the devaluation of Tenge is a negative for Kcell, as KZT’s weakening would lead to a rise in Tenge cost of the Company’s capex, which is incurred partially in FX and totaling to c.$100-120pa.
Capex/Sales ratio stands at 10-15% annually, which is comparable to Kar-Tel’s rate of 15% in 2014. According to Kcell, incurred capex enables the Company not only to maintain, but also to upgrade the infrastructure, e.g. increasing the coverage of 3G network.

Payment of T253m fine. On 19 October the Company announced it paid out T253m fine for signs of violation of its dominant position, namely, “partial restriction of international traffic from Kazakhtelecom” from March 2013 to December 2014. As the amount of the fine was at only 0.6% of 3Q revenue, we belive this news is neutral for the Company.
Refinancing of loans from Citi and RBS. On 25 September, the Company received a T17bn tranche on its credit line opened at KKB. On 28 September Kcell notified about retirement of its remaining T14.5bn syndicated loan from Citibank Kazakhstan and RBS Kazakhstan.

In our view, the Company’s decision to refinance could have been motivated by more favorable rates at KKB. Kcell entered loans from Citi and RBS back in 2012 on large dividend payments (T108bn), gradually reducing the outstanding amount from T45bn in 2012.

MNP and 4G/LTE. According to the Company, MNP service will be available as of January 2016. In our view, the effect on the market will be negligible based on the experience in Russia, where after introduction of this service only 0.5% of subscribers elected to switch their operators.

The Company expects to launch 4G/LTE in 2016, which would boost its network capabilities, taking peak speeds to 100Mb/s. Technically, the large operators (Kcell and Kar-Tel) were ready to launch the service back in 2010, successfully testing demonstration modes, and dealing with licensing issues since then. Prior to the launch of 4G, Kcell jointly with its subsidiary KT-Telekom acquires from its parent TeliaSonera 100% equity stake in Kaznet Media LLP, which through its subsidiaries owns frequencies that are compatible to provide 4G/LTE services. According to the Company, the amount of this deal would not exceed $70m.

Maintaining “HOLD”. Based on DCF approach we re-estimated our 12-month target price from $8.0/share to $4.8/share given Tenge devaluation by 48% to 279KZT/USD since 19th August and further margin erosion, as stiffening competition brings down rates on services. Our 12-month TP in Tenge we estimate based on the current EXR, i.e. at T1330/share.

Next events that may serve as value triggers for the Kcell’s equity are dividends for 2015 and receipt of 4G license. To repeat, these factors are partially offset by KZT depreciation and increased competition, weighing on the rates of services and lowering the Company’s profitability.

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