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Research: TMT
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.
Written by
Kcell Joint Stock Company |
A strong Q4, raising FY21 forecasts |
Q4 results |
Telecoms |
17 February 2021 |
Share price performance
Business description
Next events
Analyst
Kcell Joint Stock Company is a research client of Edison Investment Research Limited |
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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 |
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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Research: TMT
EQS Group’s preliminary figures for FY20 show revenue growth of 18%, adjusted for last year’s sale of ARIVA. This is broadly in line with our estimates, with EBITDA of €4.8m (Edison forecast €4.9m), near double the prior year as the increasing scale of the business delivers efficiencies. FY21 should see good demand for compliance solutions as the whistleblowing regulations come into force, and the group is opening new offices in Milan and Madrid to help capture greater share.