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Investment summary

Almost all telecom stocks under our coverage were under pressure in 2018 and showed negative returns (Figure 2) that were exacerbated by local currency (LCU) devaluation in nearly all the countries in our coverage universe.

As a result of weaker LCU vs the US dollar, DRs (MBT US and TKC US), companies with the highest hard currency exposure on their balance sheets (Turk Telecom: TTKOM) and those with operations in multiple countries (VEON US and GTHE) demonstrated the worst performance. There was another laggard – Sistema – a conglomerate/private equity-type holding with most of its value stemming from MTS (hence qualifies as a telco), which faces an uphill task to cut its debt and has reduced its dividend in 2018. The only stock that a delivered positive return in LCU in 2018 was RTKM after a 25% plunge in 2017.

In 2019, we expect the following trends to dominate the telco landscape:

▪An unfavourable FX outlook with a globally stronger USD and rising interest rates translating into continued currency weakness in Turkey, Russia, Kazakhstan and Pakistan.

▪5G becoming a more visible theme and IoT emerging as a meaningful theme with different players: telecom operators, applications and platform developers, service providers (including cloud data analytics and security) and professional service providers (systems integration, consulting and managed services) competing for a piece of a pie that is gaining critical mass.

In terms of stock picks going into 2019, we favour:

In Russia:

▪From an operational standpoint, we continue to like MTS. Although its FCF generation for 2019E (FCF yield at 5%) and dividend yield (at 8%) look less attractive than previously in light of the Uzbeki fine, its RoIC (around 17%) is at the high end among the telcos under our coverage (see Figure 3).

▪Rostelecom (RTKM) stands out as a defensive story and is likely to play a meaningful part in the realisation of the state’s Digital Economy project, with a commitment to pay a minimum dividend RUB5 per share (7% yield in RUB terms).

In Turkey:

▪Turkcell (TCELL) appears resilient to TRY devaluation given its hedging and is likely to demonstrate the highest growth rate in LCU terms in 2019 with solid FCF generation supported by cash proceeds from the Fintur sale.

In Africa:

▪Telecom Egypt (ETEL) could demonstrate strong top-line growth with the highest EBITDA CAGR in 2017-2020, on our estimates. Its mobile business continues to ramp up and we expect it to reach breakeven in 2020. The company states that it would like to go back to paying EGP1/share in dividends from 2019, implying a c. 8% yield at current prices.

Finally, of the diversified plays, VEON looks the most attractive to us, especially given its dividend yield: a potential $0.31/ADS dividend to be paid for the 2019 calendar year (final $0.18 and $0.13 interim) represents a 13% dividend yield – the highest among all the stocks we cover.

Renaissance Capital

8 January 2019

EMEA telecoms

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Renaissance Capital

8 January 2019

EMEA telecoms

We make the following changes to our ratings and TPs (please see relevant sections for the details):

▪Upgrade MTS locals to BUY from Hold following weakness in the share price.

▪Downgrade KCELL from Hold to SELL following completion of the majority stake acquisition by Kazakhtelecom, absence of a mandatory buyout offer and inflated valuation.

▪Increase TPs of TTKOM (by 10%), TCELL locals (by 1%) and TCELL GDRs (by 5%) due to increased financial forecasts and stronger exchange rate in Turkey.

▪Decrease TP of MTS locals (by 1%) on the back of lower FCFs and decreased TP of MTS GDRs (by 8%) on the back of weaker RUB/USD exchange rate.

▪Decrease TP of Sistema locals (by 18%) and GDRs (by 29%) after factoring in higher liabilities (net debt) for 2019 and weaker exchange rate in Russia.

▪Decrease TP of VEON (by 13%) on the back of higher holding costs, lower valuation of GTHE and weaker exchange rates in Russia and Ukraine.

▪Decrease TP of GTHE (by 4%) on the back of weaker exchange rate in Pakistan.

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Renaissance Capital 8 January 2019

EMEA telecoms

Figure 2: Telco sector summary ratings and TPs

	Ticker	Currency	Price	Current TP	Upside/(downside)	Current rating	5D	1M	1Y	EV/EBITDA 2019	P/E 2019	Dividend yield 2018*	FCFF yield 2018
Russia
MTS ADR	MBT US	$	7.65	10.1	32%	BUY	9%	5%	-27.1%	3.7	7.6	7.5%	11.2%
MTS, local	MTSS RX	RUB	249	301	21%	HOLD	6%	5%	-12%	3.5	6.9	8.0%	14.1%
VEON	VEON US	$	2.50	3.3	32%	BUY	6%	0%	-38%	3.3	20.9	12.0%	6.1%
Rostelecom common	RTKM RX	RUB	73.2	86	18%	BUY	2%	3%	15%	3.4	9.5	6.8%	6.3%
Rostelecom prefs	RTKMP RX	RUB	61	56	-8%	HOLD	2%	2%	9%			8.2%
Sistema, local	AFKS RX	RUB	8.2	13.0	58%	BUY	4%	0%	-33%
Sistema GDR	SSA LI	$	2.43	4.4	81%	BUY	7%	-1%	-44%
Kazakhstan
Kcell, local	Kcel KZ	KZT	1,888	1,089	-42%	SELL	8%	13%	11%	7.3	20.1	3.0%	3.2%
Kcell, GDR	Kcel LI	$	5.00	3.0	-40%	SELL	5%	10%	2%	7.0	19.2	3.1%	3.5%
Turkey
Turkcell, local	TCELL TI	TRY	11.9	16.6	39%	BUY	-1%	-3%	-21%	3.2	6.9	3.4%	5.2%
Turkcell, ADR	TKC US	$	5.6	6.9	24%	BUY	-2%	-2%	-46%	3.5	7.8	3.9%	5.7%
Turk Telekom	TTKOM TI	TRY	3.74	4.50	20%	HOLD	-4%	-3%	-41%	3.4	4.3	0.0%	12.6%
Africa&Asia
Telecom Egypt	ETEL EY	EGP	12.6	17.0	35%	BUY	-1%	8%	-5%	3.2	6.0	8.0%	nm
Global Telecom Holding	GTHE EY	EGP	3.84	5.20	35%	HOLD	3%	28%	-47%	3.8	26.2	0.0%	0.3%
Safaricom	SAFCOM KN	KES	21.5	23.5	10%	HOLD	-6%	-7%	-23%	6.6	13.9	9.1%	7.1%
Sonatel	SNTS BC	XOF	17,000	19,153	13%	HOLD	0%	-4%	-24%	3.9	10.7	9.0%	10.1%

Note: *Expected dividend to be paid in calendar 2019

Source: Bloomberg, Renaissance Capital estimates

Figure 3: Telco valuation summary in $ terms and main comparative metrics

	Region/		WACC	Target EV/EBITDA		Target P/E	EV/EBITDA			P/E			EBITDA CAGR	EBITDA CAGR	EPS CAGR	EPS CAGR	ROIC, LCU			Dividend yield			FCF yield			Net debt/EBITDA
	Company			2019, x		2019, x	2018E		2019E	2018E		2019E	2017-20, LCU	2017-20, $	2017-20, LCU	2017-20, $	2018E		2019E	2018E		2019E	2018E		2019E	2018E		2019E
	Global
	VEON		na	na		na	3.4	3.3		nm	20.9		na	-2.6%	nm	nm	7.7%	4.4%		12.0%	13.2%		6.1%	7.7%		1.8	1.9
	GTH		na	4.0**		na	3.6		3.8	52.6		26.2	na	-3.3%	nm	nm	8.3%		8.8%	0.0%		0.0%	0.3%		2.7%	2.0		2.1
	Russia
	MTS*		13.0%	4.5		10.0	3.5		3.7	6.7		7.6	2.1%	-1.6%	6.4%	0.2%	18.8%		16.9%	9.7%		7.5%	11.2%		4.6%	1.6		1.7
	Rostelecom*	12.5%		4.0		na	3.5	3.5		9.9	9.9		3.0%	-3.0%	18.2%	11.4%	7.1%	7.1%		7.3%	6.8%		6.6%	8.4%		2.0	2.0
	Kazakhstan
	Kcell	15.0%		4.0	8.5		7.2	7.0		24.8	19.2		0.2%	-3.1%	12.5%	8.9%	14.5%	16.9%		3.1%	3.7%		3.5%	5.3%		1.1	1.0
	Turkey
	Turkcell*	21.0%		4.5		na	3.5	3.5		6.5	7.8		10.8%	-0.6%	23.9%	1.3%	14.6%	16.3%		3.9%	6.2%		5.7%	14.5%		1.5	1.1
	Turktelekom*		20.7%	4.0		na	3.4		3.4	2.5		4.3	13.2%	-7.5%	12.3%	-8.2%	20.2%		20.0%	0.0%		11.3%	13.2%		10.8%	2.0		1.8
	Egypt
	Telecom Egypt		17.4%	4.0		8.0	2.7		3.2	6.0		6.0	16.8%	16.7%	8.6%	8.5%	6.1%		5.6%	8.0%		7.9%	neg		neg	1.8		2.4
	Africa
	Safaricom		13.4%	7.0		14.0	7.1		6.6	14.8		13.9	9.0%	9.1%	7.9%	8.4%	43.1%		46.0%	9.1%		7.3%	6.8%		7.1%	neg		0.0
	Sonatel	14.0%		4.5	10.5		4.0	3.9		11.0	10.7		3.7%	5.3%	-1.9%	-0.4%	20.3%	21.0%		9.0%	9.0%		10.1%	9.2%		0.1	0.1

Note: *Dividend yield for 2018 and 2019 calendar year; **2018-21 CAGR because of new standards impact; ***We apply 4.0x EV/EBITDA to GTH’s Pakistani, Bangladeshi and Algerian businesses; ****Incl. IFRS15 and IFRS16 impact; *****Incl. IFRS15 impact only

Source: Bloomberg, Renaissance Capital estimates

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