Kcell Joint Stock Company — Navigating challenging times

Kcell Joint Stock Company (Kazakhstan Stock Exchange: KCEL)

Last close As at 23/04/2024

5.25

0.00 (0.00%)

Market capitalisation

1,050m

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Research: TMT

Kcell Joint Stock Company — Navigating challenging times

Despite the disruption caused by COVID-19, Kcell delivered both revenue and profit growth in Q2. Impressive handset sales (up 62% y-o-y) offset the impact of a consumer spending slowdown and an exit from off-net bulk SMS. With Kazakhstan entering a new lockdown, the outlook remains uncertain. Yet Q2 clearly shows Kcell’s resilience and longer term the scope for group synergies in a consolidated market should drive healthy profit growth.

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Written by

TMT

Kcell Joint Stock Company

Navigating challenging times

Q2 results

Telecoms

5 August 2020

Price (GDR)

US$6.25

Market cap

US$1,250m

KZT421/US$

Net debt (KZTbn) H1FY20

66.5

Shares in issue

200m

Free float

25%

Code

KCEL

Exchanges

KASE, AIX, LSE

Share price performance

%

1m

3m

12m

Abs

5.9

6.8

36.5

Rel (local)

N/A

N/A

N/A

52-week high/low

US$6.25

US$4.41

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

29 April 2020

Analyst

Dan Gardiner

+44 (0)20 3077 5700

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

Despite the disruption caused by COVID-19, Kcell delivered both revenue and profit growth in Q2. Impressive handset sales (up 62% y-o-y) offset the impact of a consumer spending slowdown and an exit from off-net bulk SMS. With Kazakhstan entering a new lockdown, the outlook remains uncertain. Yet Q2 clearly shows Kcell’s resilience and longer term the scope for group synergies in a consolidated market should drive healthy profit growth.

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

63.5

103

9.1

25.6

2.9

1.1

12/20e

155.1

64.8

98

8.9

27.0

6.2

1.7

12/21e

159.8

68.4

121

8.5

21.7

6.4

4.7

12/22e

170.5

71.9

136

8.1

19.3

6.7

4.8

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

Contrasting trends

Q2 saw revenue grow 2% y-o-y, but reflected contrasting trends. Consumer service revenues (74% of sales) fell 4.2% y-o-y (vs a 5.9% rise in Q1) as Kcell indicated that COVID-19 had affected both usage and spending patterns. However, the hit to handset sales proved less than we feared. A pivot to the online channel and the launch of iPhone SE saw handset sales grow 62% y-o-y, helping to offset the consumer slowdown and the exit from zero margin ‘off-net bulk SMS’ sales. Core business revenues continued to grow healthily (up 20% y-o-y vs 22% in Q1 – see Exhibit 1).

Navigating the impact

The combination of falling sales and marketing expenses plus lower depreciation charges saw underlying operating profit up 7.9% y-o-y. These benefits were largely mitigated by a higher tax charge, but underlying EPS of KZT23.6 was still up 2%. FCF of KZT11.4bn represented a margin of 29.6%.

Mix changes but profit forecasts largely intact

With the country recently entering a new lockdown Kcell is unable to provide forward-looking commentary at present. Our profit and cash flow estimates remain largely intact (we cut our FY20 adjusted EPS by 9.5% to reflect higher interest charges), but the forecast revenue mix changes. Our reduction to consumer service revenues is largely offset by higher handset and core business sales. Loss of bulk SMS affects our headline sales estimates but not profits (see Exhibit 2).

Valuation: Relative resilience continues

Most telecom service providers are up ytd and are outperforming broader markets. At US$6.25, Kcell’s share price implies an FY22e EV/EBIT multiple of 12.9x, a premium to its historical rating and its nearest peers. However, Q2 results highlight the resilience of its quasi-utility revenue stream to economic uncertainty. We believe this resilience plus the scope for healthy profit and cash flow growth driven by synergies within the enlarged KT group, justify a premium rating.

Contrasting trends in Q2

Q2 saw a fairly large impact from COVID-19 on Kcell’s core consumer business. Growth in consumer service revenue, which had accelerated to 5.9% y-o-y in Q1, driven by the adoption of premium packages (see Resilience and consolidation benefits expected), fell to -4.2%. A shortfall in lucrative international roaming revenues, delays to topping up, slower migration to premium bundles and modest falls in usage (as more customers were stuck at home) all affected revenue. Just how much of this slowdown reflected lockdown measures (and therefore may improve when restrictions ease) and how much reflected pressure on consumer spending (which may not improve and may even get worse) is not clear. Customer numbers fell sequentially and 9.4% y-o-y, but growth in data traffic usage per subscriber accelerated to 53.6% y-o-y.

The shortfall in consumer revenue was largely offset by a much better than feared performance elsewhere. Handset revenue, which we had anticipated turning negative in the remainder of FY20 due to store shutdowns, saw growth actually accelerate to 62% y-o-y. The combination of a pivot to the online sales channel and the launch of iPhone SE saw sales up sequentially. The performance of core business sales – up 20% y-o-y – was also surprisingly robust. The decision to exit the low/negative margin off-net bulk SMS business affected headline revenue numbers but had no impact on profits. Stripping out off-net bulk SMS, y-o-y revenue growth in Kcell’s ‘core’ business would have been 4.8% (see Exhibit 1).

The combination of falling sales and marketing expenses ensured that EBITDA was broadly flat year-on-year, while a fall in depreciation charges saw underlying operating profit up 7.9% y-o-y. This was largely mitigated by an increase in the tax rate, but underlying EPS of KZT23.6 was still up 2%. Tight control of working capital and capex resulted in Kcell posting FCF of KZT11.4bn (a margin of 29.6%).

Exhibit 1: Financial performance in Q2 (y-o-y) by customer

KZTbn

Q2

Change

2019

2020

Absolute

%

Revenue

Consumer

29.7

28.5

(1.2)

(4.2)

Business

3.5

4.2

0.7

20.2

Core service revenue

33.2

32.6

(0.5)

(1.6)

Handset

3.7

6.0

2.3

62.0

Core revenue

36.9

38.6

1.8

4.8

Off-net bulk SMS

1.0

0.0

(1.0)

(98.6)

Total

37.9

38.6

0.8

2.0

Adjusted EBITDA

16.1

16.2

0.1

0.7

Margin (%)

43.6

42.0

Adjusted EBIT

8.1

8.8

0.6

7.9

Margin (%)

22.0

22.7

EPS (KZT/share)

23.1

23.6

0.5

2.1

CFFO (Cashflow From Operations)

1.1

15.5

14.4

1,313.7

Capex

(3.4)

(4.0)

(0.7)

20.1

FCF

(2.3)

11.4

13.7

N/M

Margin (%)

(6.0)

29.6

Source: Kcell


Changing mix, but long-term forecasts remain largely intact

With Kazakhstan imposing a second round of lockdown restrictions in July, near-term visibility remains low and Kcell is understandably reluctant to provide forward-looking commentary at present. Consistent with management comments on the Q2 results call, we assume that these current restrictions are less severe than those seen in Q2, but still expect a squeeze on consumer budgets to result in y-o-y declines in consumer revenues in H2. We cut our FY20 consumer service revenues by 12.6% and now expect a 6.9% fall y-o-y. However, this is largely offset by a 27.8% and 69% increase to our business and handset forecasts, respectively. Our core revenue forecast falls by 1.1%. Our underlying EPS forecast falls by 9.5% to KZT97.6 to reflect a slightly higher interest cost assumption.

Longer term, we continue to see significant scope to monetise growth in mobile data in a consolidated market. We assume consumer revenues return to growth in FY21, albeit at a slightly lower rate (4.2%) and from a lower base. Again, the cut to our numbers here is largely compensated by higher handset and business revenues. While we expect much of the iPhone SE-related growth seen in Q2 to slow in H220, management believes Kcell has achieved sustainable share gains in the online market.

Key to driving longer-term profit and cash flow growth is the combination of falling depreciation and the potential for synergies within the wider group. Both of these stories remain intact after Q2. The fall in depreciation accelerated to 5.6% y-o-y in Q2 and depreciation remains substantially ahead of capex. The company confirmed its commitment to drive cost synergies (‘the strategy is focused on ensuring Kcell maintains market leadership…whilst driving the monetisation of data and exploiting synergies across the entire Kazakhtelecom Group’). Quantifying the scale of the potential is not easy but in Resilience and consolidation benefits expected, we highlighted that network maintenance costs were 5% of sales, and in May Kcell announced a trilateral network sharing agreement with other Kazakh mobile operators. We see potential for further savings beyond those in our forecast. Our adjusted EPS estimates for both FY21 and FY22 change by less than 3%, while modest cuts to our capex forecast preserve our FCF forecast (see Exhibit 2).

Exhibit 2: Changes to forecasts

KZTbn

FY20e

FY21e

FY22e

Old

New

%

Old

New

%

Old

New

%

Revenue

Consumer

126.7

110.7

(12.6)

133.7

115.3

(13.7)

138.0

122.9

(10.9)

Business

13.5

17.3

27.8

15.2

19.9

30.6

19.1

22.9

19.9

Core service revenue

140.2

128.0

(8.7)

148.9

135.3

(9.2)

157.1

145.8

(7.2)

Handset

15.3

25.8

68.8

16.8

24.5

45.7

16.8

24.7

47.2

Core revenue

155.5

153.8

(1.1)

165.7

159.8

(3.6)

173.9

170.5

(1.9)

Off-net bulk SMS

4.0

1.4

(66.1)

4.0

-

(100.0)

4.0

-

(100.0)

Total

159.5

155.1

(2.7)

169.7

159.8

(5.9)

177.9

170.5

(4.1)

Adjusted EBITDA

66.4

64.8

(2.4)

69.9

68.4

(2.2)

72.8

71.9

(1.2)

Margin (%)

41.6

41.8

41.2

42.8

40.9

42.2

Adjusted EBIT

36.7

35.3

(3.3)

42.4

40.9

(3.6)

46.3

44.9

(3.0)

Margin (%)

23.0

22.7

25.0

25.6

26.0

26.3

EPS (KZT/share)

107.9

97.6

(9.5)

123.8

121.3

(2.1)

138.2

136.3

(1.4)

CFFO

58.3

52.6

(9.7)

56.5

56.1

(0.7)

60.2

59.4

(1.4)

Capex

(24.8)

(19.8)

(23.8)

(22.4)

(24.9)

(23.9)

FCF

33.5

32.9

(1.9)

32.8

33.8

3.1

35.3

35.5

0.6

Margin (%)

21.0

21.2

19.3

21.1

19.9

20.8

Source: Kcell, 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

155.1

159.8

170.5

Cost of Sales

(67.0)

(72.8)

(79.2)

(78.6)

(79.9)

(85.6)

Gross Profit

80.5

76.9

77.4

76.5

79.9

84.9

EBITDA

 

 

57.6

50.9

63.5

64.8

68.4

71.9

Operating Profit (before amort. and except).

 

34.5

24.5

33.4

35.3

40.9

44.9

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(2.7)

(3.4)

(10.4)

(0.2)

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

23.0

35.1

40.9

44.9

Net Interest

(9.4)

(8.9)

(10.1)

(9.1)

(10.6)

(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)

0.5

0.0

0.0

Profit Before Tax (norm)

 

 

25.1

15.6

23.3

26.2

30.3

34.9

Profit Before Tax (reported)

 

 

22.4

12.3

12.9

26.6

30.3

34.9

Reported tax

(8.6)

(3.7)

(2.8)

(6.6)

(6.1)

(7.7)

Profit After Tax (norm)

16.5

11.8

20.6

19.5

24.3

27.3

Profit After Tax (reported)

13.8

8.5

10.1

19.9

24.3

27.3

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

16.5

11.8

20.6

19.5

24.3

27.3

Net income (reported)

13.8

8.5

10.1

19.9

24.3

27.3

Average Number of Shares Outstanding (m)

200

200

200

200

200

200

EPS – basic normalised (KZT)

 

 

82

59

103

98

121

136

EPS – diluted normalised (KZT)

 

 

69

43

51

100

121

136

EPS – basic reported (KZT)

 

 

69

43

51

100

121

136

Dividend per share (KZT)

58

59

30

45

123

127

Revenue growth (%)

4.6

(1.0)

3.0

6.8

Gross Margin (%)

54.6

51.4

49.4

49.3

50.0

49.8

EBITDA Margin (%)

39.1

34.0

40.6

41.8

42.8

42.2

Normalised Operating Margin

23.4

16.2

21.3

22.7

25.6

26.3

BALANCE SHEET

Fixed Assets

 

 

138.6

132.7

147.1

128.6

123.4

120.3

Intangible Assets

43.1

40.1

38.8

33.2

31.9

31.1

Tangible Assets

93.7

88.4

82.3

70.8

66.9

64.6

Investments & other

1.9

4.2

26.0

24.6

24.6

24.6

Current Assets

 

 

42.3

34.4

44.2

85.0

56.9

68.9

Stocks

3.4

4.7

6.6

7.5

7.2

7.2

Debtors

26.2

23.6

23.8

18.8

20.6

22.4

Cash & cash equivalents

12.7

6.0

8.8

36.1

6.6

16.8

Other

0.0

0.0

5.0

22.5

22.5

22.5

Current Liabilities

 

 

(87.2)

(81.2)

(39.4)

(38.0)

(18.9)

(19.7)

Creditors

(28.8)

(29.4)

(21.2)

(11.2)

(11.4)

(12.2)

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)

(23.3)

(4.0)

(4.0)

Other

0.0

0.0

(11.8)

(3.5)

(3.5)

(3.5)

Long Term Liabilities

 

 

(18.0)

(17.8)

(80.4)

(102.0)

(88.3)

(94.5)

Long term borrowings

(12.0)

(14.9)

(55.5)

(70.0)

(70.0)

(70.0)

Other long-term liabilities

(6.0)

(2.9)

(24.8)

(32.0)

(18.3)

(24.5)

Net Assets

 

 

75.6

68.1

71.6

73.5

73.1

75.0

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

75.6

68.1

71.6

73.5

73.1

75.0

CASH FLOW

Op Cash Flow before WC and tax

57.6

50.9

63.5

64.8

68.4

71.9

Working capital

(13.8)

(20.6)

(19.3)

(8.9)

(1.7)

(2.5)

Exceptional & other

12.3

10.9

0.8

19.1

12.1

15.4

Tax

(12.9)

(5.4)

(2.2)

(13.3)

(12.1)

(15.4)

Net operating cash flow

 

 

43.2

35.8

42.8

61.8

66.7

69.4

Capex

(22.6)

(19.3)

(18.2)

(19.8)

(22.4)

(23.9)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

0.0

Net interest

(9.7)

(8.3)

(9.4)

(9.1)

(10.6)

(10.0)

Equity financing

0.0

0.0

0.0

0.0

0.0

0.0

Dividends

(11.7)

(11.7)

(6.0)

(9.0)

(24.7)

(25.3)

Other

0.0

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

(0.8)

(3.4)

9.3

23.9

9.1

10.2

Opening net debt/(cash)

 

 

56.9

57.8

60.7

53.1

29.2

20.1

FX

(0.0)

0.1

(0.1)

0.0

0.0

0.0

Other non-cash movements

(0.0)

0.3

(1.6)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

57.8

60.7

53.1

29.2

20.1

9.9

Source: Company data, Edison Investment Research

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