A turning point

Askar AkhmedovFebruary 23, 2016

We expect 2016 to be the turning point for the Company, as it has adjusted its tariffs (services prices no longer spur client loss) and as Kazakhstan has transitioned to a floating exchange rate. We believe that all possible downfalls have already happened last year. Company’s revenues declined by 10.2% yoy in 2015, mostly because of a drop in voice services (-24.5% yoy). Tenge depreciation and a harder competitive environment significantly pressured the share price, which plunged to all-time lows. TeliaSonera’s plans to sell its stake in Kcell was also negative for the stock price, but the news has already been priced in. In anticipation of high dividend yield and stabilization of Kazakhstan’s financial markets, we increase our target price to T1390 per share from T1330 and upgrade our recommendation to Buy.

Negative struggles are left behind. Previous year was an all-around hard year for Kcell: Tenge devaluation increased its capital expenditures and decreased smartphones’ availability, while competition and Kcell’s untimely reaction cost it two mn subscribers. As a result, revenues declined by 10% yoy, EBITDA - by 22% and shares’ prices fell from T1700 to T1200, an all-time low.

Adapting to new reality. Last year Kcell adjusted the tariffs (ARMU declined from T3.8 in 4q2014 to T2.7 in 4q2015), cut costs (non-interconnect expenses declined by 10% in 2015) and worked to obtain 4G frequencies. In our opinion, the Company has generally adapted to new market conditions and we do not expect further client loss – Kcell prices have fallen and are now in line with its premium brand. In addition, launch of 4G will eliminate Kcell’s only competitive disadvantage. Finally, the Company is putting efforts into developing B2B segments, which we expect will bring a minor client growth starting from 2017.

Less uncertainty. The transition to de-facto floating exchange rate in January 2016 puts off one-sided exchange rate expectations – Tenge can both appreciate and weaken. It is a positive factor that in the long-term can increase the demand for Tenge instruments, such as Kcell’s shares.

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