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A strong Q4, raising FY21 forecasts

Kcell Joint Stock Company 17 February 2021 Update
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Kcell Joint Stock Company

A strong Q4, raising FY21 forecasts

Q4 results

Telecoms

17 February 2021

Price (GDR)

US$5.80

Market cap

US$1,160m

KZT418/US$

Net debt (KZTbn) at FY20 excluding lease liabilities

50

Shares in issue

200m

Free float

25%

Code

KCEL

Exchanges

KASE, AIX, LSE

Share price performance

%

1m

3m

12m

Abs

N/A

N/A

N/A

Rel (local)

N/A

N/A

N/A

52-week high/low

$7.7

$5.2

Business description

Kcell Joint Stock Company (Kcell) is a mobile operator in Kazakhstan and a listed subsidiary of Kazakhtelecom (KT), a state-owned incumbent with a 70% share of the market. Consolidation is delivering dramatic improvements in the market and as a subsidiary of the dominant operator, Kcell is well positioned to benefit.

Next events

Q1 results

April 2021

Analyst

Dan Gardiner

+44 (0)20 3077 5700

Kcell Joint Stock Company is a research client of Edison Investment Research Limited

The recovery from the COVID-19 affected Q2 continued in Q4. Service revenue growth (ex bulk SMS) accelerated to 7.6% y-o-y, resulting in FY20 sales and EBITDA ahead of our forecasts and guidance. This trend is further evidence of an improving market in our view and leads us to raise our FY21 and FY22 adjusted EPS forecasts by 5% and 6% respectively. Kcell grew adjusted EPS by 20% in FY20 despite COVID-19. At $5.80 it trades at an adjusted FY22 P/E of 15x, its lowest rating in a year.

Year end

Revenue (KZTbn)

Adj EBITDA* (KZTbn)

Adj EPS* (KZT)

EV/adj EBITDA* (x)

P/E
(x)

FCF yield
(%)

Div yield
(%)

12/19

156.7

64.4

102

8.4

23.9

4.5

1.2

12/20

174.7

72.1

123

7.5

19.8

5.9

2.7

12/21e

189.0

78.7

148

6.8

16.4

6.9

4.4

12/22e

196.6

81.5

158

6.6

15.3

8.3

5.2

Note: *EBITDA and EPS are adjusted to exclude amortisation of acquired intangibles and exceptional items.

The recovery continues in Q4

Kcell saw growth in headline sales (KZT49.2bn) accelerate from 13.9% y-o-y in Q3 to 15.7% in Q4. While much of this reflected the continued strong performance of (lower-margin) handsets (KZT12.2bn, up 75%), the further recovery in service revenue trends was particularly encouraging. Adjusting for bulk SMS sales, service revenue rose 7.6% y-o-y (vs 2.0% in Q3). It added subscribers (for the second quarter in a row) and reported ARPU grew 7.9% y-o-y (an estimated 11.7% excluding bulk SMS).

Profit growth also accelerating

Gross margins were flat y-o-y at 32% in Q4 with underlying cost savings offset by higher network depreciation and the rise of handset sales in the mix. However, with opex down 5% y-o-y, 38% of incremental sales fell through to EBIT (similar to Q3) and underlying EBIT rose 29% y-o-y (vs 21% y-o-y in Q3). Adjusted EPS (Edison estimate) rose 75% y-o-y and FCF was flat at KZT5.9bn due to higher capex.

Raising forecasts

Kcell introduced FY21 guidance of ‘high single digits’ for sales and EBITDA growth (capex guidance will follow later). We expect the current rate of handset growth will abate, but the guidance looks underpinned by the recovery in service revenues, particularly against weak comparisons in Q2 and Q3. We lift our FY21 EPS forecast 5% to KZT148 (assuming 8.2% revenue growth and 9.0% growth in EBITDA). Our FY22 EPS forecasts rises by 6%. Data traffic assumptions leads us raise capex, resulting in a smaller increase to free cash flow (FCF).

Valuation: The lowest multiple in the last year

The positive underlying trends in the market that we detailed in Q3 (see our update note) strengthened further in Q4. Despite this Kcell’s share price has fallen 3% in the last three months. At $5.80 it implies an FY22 adjusted P/E of 15x, the lowest rating since our initiation. Given it delivered 20% growth in adjusted EPS in FY20 despite COVID-19 and the scope for further upgrades, this multiple looks modest in our view.

Q4 analysis, FY20 and forecast changes

Service revenue growth trends bode well for FY21

Headline service revenue grew 4.0% y-o-y in Q4 vs a 1.0% decline in Q3. Adjusting for bulk SMS sales, it rose 7.6% y-o-y (vs 2.0% in Q3) driven by an increase in reported average revenue per user (ARPU) growth to 7.9% y-o-y (vs 6.4% in Q3) and, after several years of declining subscriber growth, a second consecutive quarter of net additions (albeit a relatively modest 15k). We estimate that excluding bulk SMS, ARPU grew at 11.7%, a figure that bodes well for FY21 service revenue growth forecasts. Maintaining this rate of growth into Q2 (when the effect of the decline in bulk SMS annualises) would see headline service revenue growth accelerating noticeably. Exceptional charges including KZT3.7bn for an asset impairment and KZT4.4bn for a reserve on contract liabilities resulted in the company reporting a net loss of KZT0.1bn. FCF was KZT5.9bn, flat y-o-y despite the growth in cashflow from operations due to KZT8.6bn in cash capex.

Exhibit 1: Financial performance in Q4 (year-on-year)

KZTbn

Q4

Change

2019

2020

Absolute

%

Revenue

Core service revenue

34.3

36.9

2.6

7.6

Handset

7.0

12.2

5.3

75.5

Core revenue

41.3

49.2

7.9

19.2

Off-net bulk SMS

1.2

-

(1.2)

(100.0)

Total

42.5

49.2

6.7

15.7

Adjusted EBITDA

15.7

19.3

3.6

22.8

Margin (%)

36.9

39.2

Adjusted EBIT

8.7

11.2

2.6

29.5

Margin (%)

20.4

22.8

Adjusted EPS (KZT/share)

21.4

37.6

16.2

75.4

Reported EPS (KZT/share)

25.4

(0.4)

(25.8)

nm

Cash flow from operations (CFFO)

8.7

14.5

5.8

66.7

Capex

(2.8)

(8.6)

(5.8)

210.4

FCF

5.9

5.9

0..0

(0.8)

Margin (%)

13.9

11.9

Source: Kcell

FY20 revenues grew 11% y-o-y and adjusted EBITDA by 12%, however given the impact of COVID-19 in Q2 and the decision to exit the bulk SMS market the FY trends are arguably less representative of Kcell’s prospects than its performance in Q4. Despite COVID-19 underlying EPS (Edison calculated) grew by 20% in FY20 and FCF grew by 31%.

In January 2021 CEO and Chairman Kaspars Kukelis, stepped down from his role to take up another (yet to be specified) position within Kazakhtelecom, Kcell’s largest shareholder. Yuri Kharlamov, CFO has been appointed acting CEO and Chairman.

Raising FY21 forecasts

Kcell’s FY21 guidance of ‘high single digits’ for sales and EBITDA growth looks underpinned by the recovery in service revenues highlighted above, particularly given it will be against weak comparatives in Q2 and Q3. Assuming 8.2% growth in revenue and 9.0% growth in EBITDA (plus a modest benefit from lower debt interest rate) we lift our FY21 EPS forecast 5% to KZT148. Our FY22 EPS forecasts rises by 6%.

Exhibit 2: Changes to forecasts

KZTbn

FY20

FY21e

FY22e

Old

New

%

Old

New

%

Old

New

%

Revenue

Core service revenue

136.7

138.7

1.5

141.3

150.2

6.3

147.8

157.5

6.5

Handset

32.5

34.6

6.7

30.8

38.8

25.8

31.1

39.2

25.8

Core revenue

169.1

173.3

2.5

172.1

189.0

9.8

178.9

196.6

9.9

Off-net bulk SMS

1.4

1.4

(0.0)

-

-

-

-

Total

170.5

174.7

2.5

172.1

189.0

9.8

178.9

196.6

9.9

Adjusted EBITDA

70.9

72.1

1.8

73.1

78.7

7.6

75.0

81.5

8.6

Margin (%)

41.6

41.3

42.5

41.6

41.9

41.4

Adjusted EBIT

40.8

41.0

0.5

45.6

47.7

4.5

48.0

50.5

5.1

Margin (%)

23.9

23.5

26.5

25.2

26.8

25.7

EPS (KZT/share)

119.6

122.6

2.4

140.4

147.7

5.2

148.3

157.9

6.4

CFFO

48.7

52.3

7.3

61.5

61.7

0.4

63.7

69.6

9.3

Capex

(19.4)

(23.6)

(25.8)

(28.4)

9.8

(26.8)

(29.5)

9.9

FCF

29.3

28.7

(2.0)

35.7

33.4

(6.4)

36.9

40.1

8.9

Margin (%)

17.2

16.4

20.7

17.7

20.6

20.4

Source: Edison Investment Research


Exhibit 3: Financial summary

KZTbn

2017

2018

2019

2020e

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

147.5

149.7

156.7

174.7

189.0

196.6

Cost of Sales

(67.0)

(72.8)

(78.4)

(88.6)

(97.0)

(100.3)

Gross Profit

80.5

76.9

78.2

86.1

92.1

96.4

Adjusted EBITDA

 

 

57.6

50.9

64.4

72.1

78.7

81.5

Operating Profit (before amort. and except).

 

34.5

24.5

33.7

41.0

47.7

50.5

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(2.7)

(3.4)

(10.4)

(8.1)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

31.8

21.1

23.3

32.9

47.7

50.5

Net Interest

(9.4)

(8.9)

(10.5)

(9.5)

(8.3)

(10.0)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.1

(0.1)

1.2

0.0

0.0

Profit Before Tax (norm)

 

 

25.1

15.6

23.2

31.6

39.4

40.5

Profit Before Tax (reported)

 

 

22.4

12.3

12.7

24.6

39.4

40.5

Reported tax

(8.6)

(3.7)

(2.7)

(7.0)

(9.8)

(8.9)

Profit After Tax (norm)

16.5

11.8

20.5

24.5

29.5

31.6

Profit After Tax (reported)

13.8

8.5

10.0

17.6

29.5

31.6

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

16.5

11.8

20.5

24.5

29.5

31.6

Net income (reported)

13.8

8.5

10.0

17.6

29.5

31.6

Average Number of Shares Outstanding (m)

200

200

200

200

200

200

EPS – basic normalised (KZT)

 

 

82

59

102

123

148

158

EPS – diluted normalised (KZT)

 

 

69

43

50

88

148

158

EPS – basic reported (KZT)

 

 

69

43

50

88

148

158

Dividend per share (KZT)

58

59

30

65

108

125

Revenue growth (%)

Gross Margin (%)

54.6

51.4

49.9

49.3

48.7

49.0

EBITDA Margin (%)

39.1

34.0

41.1

41.3

41.6

41.4

Normalised Operating Margin (%)

23.4

16.2

21.5

23.5

25.2

25.7

BALANCE SHEET

Fixed Assets

 

 

138.6

132.7

147.1

143.5

140.8

139.3

Intangible Assets

43.1

40.1

38.8

39.7

40.2

41.1

Tangible Assets

93.7

88.4

82.3

78.1

75.0

72.6

Investments & other

1.9

4.2

26.0

25.6

25.6

25.6

Current Assets

 

 

42.3

34.4

44.2

73.3

73.5

89.6

Stocks

3.4

4.7

6.6

9.4

12.2

12.3

Debtors

26.2

23.6

23.8

17.8

22.0

22.9

Cash & cash equivalents

12.7

6.0

8.8

23.0

16.2

31.3

Other

0.0

0.0

5.0

23.0

23.0

23.0

Current Liabilities

 

 

(87.2)

(81.2)

(39.4)

(60.7)

(40.4)

(41.3)

Creditors

(28.8)

(29.4)

(21.2)

(30.5)

(32.2)

(33.0)

Tax and social security

0.0

0.0

0.0

0.0

0.0

0.0

Short term borrowings

(58.4)

(51.8)

(6.4)

(23.4)

(4.0)

(4.0)

Other

0.0

0.0

(11.8)

(6.8)

(4.2)

(4.2)

Long Term Liabilities

 

 

(18.0)

(17.8)

(80.4)

(74.0)

(83.8)

(91.0)

Long term borrowings

(12.0)

(14.9)

(55.5)

(49.9)

(70.0)

(70.0)

Other long-term liabilities

(6.0)

(2.9)

(24.8)

(24.0)

(13.8)

(21.0)

Net Assets

 

 

75.6

68.1

71.6

82.1

90.1

96.6

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

75.6

68.1

71.6

82.1

90.1

96.6

CASH FLOW

Op Cash Flow before WC and tax

57.6

50.9

64.4

72.1

78.7

81.5

Working capital

(13.8)

(20.6)

(17.0)

(22.8)

(8.6)

(1.8)

Exceptional & other

12.3

10.9

(0.7)

26.4

19.7

17.8

Tax

(12.9)

(5.4)

(2.1)

(14.1)

(19.7)

(17.8)

Net operating cash flow

 

 

43.2

35.8

44.5

61.6

70.0

79.6

Capex

(22.6)

(19.3)

(13.2)

(23.6)

(28.4)

(29.5)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

0.0

Net interest

(9.7)

(8.3)

(9.4)

(9.3)

(8.3)

(10.0)

Equity financing

0.0

0.0

0.0

0.0

0.0

0.0

Dividends

(11.7)

(11.7)

(6.0)

(12.9)

(21.5)

(25.0)

Other

0.0

0.0

0.0

(13.1)

0.0

0.0

Net Cash Flow

(0.8)

(3.4)

15.9

2.7

11.9

15.1

Opening net debt/(cash)

 

 

56.9

57.8

60.7

53.1

50.4

38.5

FX

(0.0)

0.1

(0.1)

0.0

0.0

0.0

Other non-cash movements

(0.0)

0.3

(8.3)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

57.8

60.7

53.1

50.4

38.5

23.4

Source: Company data, Edison Investment Research

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This report has been commissioned by Kcell Joint Stock Company and prepared and issued by Edison, in consideration of a fee payable by Kcell Joint Stock Company. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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This report has been commissioned by Kcell Joint Stock Company and prepared and issued by Edison, in consideration of a fee payable by Kcell Joint Stock Company. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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