We assess Kazakhtelecom’s Q1 Performance Report as neutral. Year-on-year revenue growth slowed slightly and remains below the growth rate of cost of sales, resulting in a modest decline in gross margin. However, the EBITDA margin showed a more pronounced decline, while the key negative factor for the quarter was a sharp increase in leverage amid negative free cash flow. Capital expenditures remain elevated, putting pressure on the cash position. In our valuation model, we updated the key financial metrics and revised our capital expenditure forecasts downward. At the same time, we significantly lowered the cost of capital, driven by a reduction in the risk-free rate and cost of debt. As a result, our target price for one Kazakhtelecom share increased from KZT 38,200 to KZT 41,000, implying 8% downside. Recommendation: Hold.
Core Valuation Factors. The key risk remains margin compression at the gross and operating levels, along with a rapid deterioration in the debt profile driven by higher debt volumes. The EBITDA margin declined from 38.2% to 34.1%, while financial expenses increased by 47% YoY and financial income decreased by 56% YoY. At the same time, net debt increased by 41% QoQ to KZT 228 bn, while capital expenditures nearly doubled amid the rollout of the 5G network through Kcell and the development of digital infrastructure, resulting in quarterly free cash flow of negative KZT 54 bn. The key valuation catalyst remains the contingent consideration of KZT 170.6 bn from the sale of MTS; however, the realization of this asset is subject to the fulfillment of certain transaction conditions. The refinancing of debt at lower rates in yuan also has a positive impact on valuation by reducing the cost of capital, together with the decline in the risk-free rate. An additional supportive factor is a 90% reduction in radio-frequency usage fees, although the absolute impact is limited to savings of approximately KZT 2 bn per quarter.
Revenue: weak growth momentum persists. Quarterly revenue amounted to KZT 145 bn (+5.7% YoY), while including the government subsidy and rental income, total revenue reached nearly KZT 148 bn (+4.4% YoY). The mobile segment (Kcell) was the main contributor to growth, with external revenue increasing by 7.5% YoY to KZT 66 bn, while the fixed-line communications segment grew by 4.3% YoY to KZT 79.1 bn. By service type, the main contributors to growth were mobile device sales (+32% YoY) and data transmission services (+2.5% YoY). Revenue from voice services declined slightly by 2.4% YoY, continuing to reflect the structural decline in fixed-line telephony. The number of fixed telephone lines in Kazakhstan continues to decline (-3.3% QoQ) and reached 2.04 million lines.
Margins are being squeezed by cost pressures and a high base. Quarterly cost of sales increased by 5.3% YoY to KZT 114 bn, slightly outpacing total revenue this time, although growth slowed noticeably. Personnel expenses remain the main driver, increasing by 11% YoY. The cost of mobile device sales increased by 25% YoY, in line with the growth in sales. The pressure was partially offset by a 33% YoY reduction in radio-frequency usage fees to KZT 4.2 bn, driven by the aforementioned 90% discount. As a result, quarterly gross margin declined to 23.2% from 23.9% a year earlier. General and administrative expenses decreased by 9.2% YoY to KZT 8.2 bn, partially mitigating pressure on operating profit and continuing their year-on-year decline for the fifth consecutive quarter. Operating profit amounted to KZT 23 bn (-18% YoY), with the margin declining to 15.2% from 19.4%. According to our calculations, quarterly EBITDA margin decreased from 38.2% to 34.1%. The decline was largely due to a high base effect from the previous year, which included a one-off gain of KZT 6.8 bn from the write-off of accounts payable. Excluding this item, the margin decline amounted to 1.3 pp.
Quarterly net profit and a sharp deterioration in leverage. Financial expenses increased by 47% YoY amid higher leverage, while financial income decreased by 56% YoY. There was almost no foreign exchange loss in the second quarter. As a result, the Group reported quarterly net profit of KZT 7.2 bn, while net profit attributable to the owners of the parent company amounted to KZT 6.0 bn. The Group reported a net loss in the first quarter, while adjusted net profit, according to our calculations, decreased by 59% YoY. Cash flow from operating activities increased by 0.2% YoY, but was notably higher than in the first quarter, largely due to a positive change in contract liabilities. Quarterly capital expenditures nearly doubled and remain at relatively elevated levels. As a result, quarterly free cash flow amounted to negative KZT 54 bn, compared with negative KZT 3.2 bn a year earlier. Accordingly, cash and short-term financial assets amounted to KZT 135 bn as of end-June (-6.8% QoQ). This figure does not include the long-term financial assets created following the sale of MTS. Net debt, including these assets, increased by 41% QoQ to KZT 228 bn.
Our Opinion and Changes to the Valuation Model. The report confirms the risks incorporated into our model: moderate revenue growth, margin pressure below the gross margin level, rising leverage, and persistently high capital expenditures amid the rollout of 5G and the development of digital infrastructure. The key supporting factor remains the contingent consideration from the sale of MTS, while additional support comes from the reduction in radio-frequency usage fees and the shift to yuan-denominated funding at rates of 3.0–4.2% versus 8–20% for KZT-denominated debt. In our valuation model, we updated the key financial metrics: the 2026 capital expenditure forecast was increased, while the increase in net debt also had a negative impact. On the other hand, the WACC was reduced significantly. As a result, our target price for one share of Kazakhtelecom JSC increased from KZT 38,200 to KZT 41,000, implying 8% downside from the current share price. Recommendation: Hold.
Author: Daniyar Orazbayev,
CFA, Investment Analyst
(+7) 727 311 10 64 (688) | [email protected]