KAZAKHTELECOM: Cash Cow at the Price of a Calf

With this report we initiate coverage of Kazakhtelecom – the largest fixed-line operator in Kazakhstan with an approximately 80% fixed-line market share, 0.9mn broadband subscribers and 1.3mn CDMA users, and the only LTE licence holder in the country. With its extensive local infrastructure network and near-monopoly status, in our view Kazakhtelecom is the domestic telecoms operator best positioned to benefit from the continuing broadband boom in Kazakhstan.

BUY rating for common and preferred shares.
According to our calculations, Kazakhtelecom’s shares can deliver a 95% 12M return, including the special dividend, amply justifying its BUY rating. Our ex-div target price still totals KZT37,756 per common share and KZT32,093 per preferred, offering 28% and 27% upside potential, respectively, on a 12-month horizon. Even after the company makes its substantial dividend pay-out, on our numbers the residual cash balance and the company’s anticipated future cash flows more than cover its capex and operating needs in the foreseeable future.

In our view, the combination of the enticing valuation of Kazakhtelecom’s stable and cash-flow-rich business and the opportunity to receive a large one-off dividend make it a rarely-available, special-situation opportunity in the CIS telecoms sector.

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