JSC Kazakhtelecom delivered a neutral report for Q4 2024. Quarterly revenue showed slight growth, and cash operating margin remained unchanged compared to the same quarter in 2023. We continue to note that the valuation is largely made up of cash received from the sale of its subsidiary Mobile Telecom-Service (MTS, Altel-Tele2). A question regarding special dividends from the deal was included in the agenda of the General Shareholders' Meeting. The further price movement will heavily depend on the amount that will be paid out to shareholders. Moreover, a notable price drop may occur even before the ex-dividend date if the dividend turns out to be small and the company decides to use the free cash for development. In our valuation model, we updated the key financial indicators and increased the WACC due to the rise in the base interest rate. As a result, our updated target price per Kazakhtelecom share increased to 52,600 KZT, implying a 5% upside from the current price. Recommendation – “Hold”.
(=) Quarterly revenue continues to grow slightly. The company’s revenue, including government subsidies, grew by 5.8% quarter-on-quarter (QoQ) and 3.7% year-on-year (YoY), reaching 130 billion KZT in Q4 2024. Data transmission service revenue showed strong annual growth due to an abnormally low base in Q4 2023. However, on a quarterly basis, revenue from this segment declined by 0.5%, amounting to 63 billion KZT, which is a stable quarterly result in 2024 excluding MTS. At the same time, quarterly revenue from fixed and wireless telephony services also remained stable at around 25–26 billion KZT. The “Other” revenue category showed significant annual growth of 52% YoY and remained approximately at Q3 levels.
(=) Margins declined, but EBITDA slightly increased. Gross margin fell from 25% in 2023 to 22.7%. Quarterly cost of sales grew by only 1.8% QoQ and 6.9% YoY, despite a 17% YoY reduction in personnel expenses. The cost increase was largely due to higher depreciation and amortization (+17% YoY) and costs associated with mobile device and SIM card sales (+19% YoY). As a result, despite the drop in gross margin, EBITDA margin increased from 31% to 31.5% YoY due to higher depreciation and amortization expenses. Positive “Other operating expenses” in Q4 also supported margin growth. Interest expenses in Q4 reached 8.5 billion KZT (-21% QoQ and +101% YoY). Nevertheless, a positive and substantial foreign exchange gain in Q4 led to a 24% YoY increase in net quarterly profit. Adjusted net profit attributable to shareholders grew by 75% YoY and amounted to 1,017 KZT per share.
(–) Decline in free cash flow. Free cash flow in Q4 2024 amounted to -33.3 billion KZT, which is 63.5 billion less than the same period last year and 65.9 billion less than Q3. These figures still include MTS cash flows, which makes it difficult to assess the performance of the remaining business. The quarterly decline mainly stemmed from a significant drop in operating cash flow generation. The company paid 81.2 billion KZT in corporate income tax in Q4, primarily related to the divested MTS subsidiary. As a result, the company significantly overpaid and recognized a tax asset of 76 billion KZT, though it is unclear whether this asset will be divested along with MTS. As of the end of 2024, cash and financial assets excluding the deal amounted to 50.6 billion KZT, down 2.8% QoQ. Net debt, including the deal, decreased by 0.7% QoQ, largely due to a favorable revaluation of the KZT equivalent of the USD proceeds from the MTS sale. At the same time, total debt increased by 22% QoQ.
Our opinion and valuation model changes. The Q4 report can be considered neutral. Revenue continues to grow slowly, while the cash operating margin of the remaining business shows a slight improvement compared to last year, although the quality of this margin remains in question. Most of the valuation is made up of the proceeds from the MTS sale, and if these funds are paid out as dividends, both the valuation and market price should decrease by the dividend amount. Given that the special dividend question is on the AGM agenda, it is likely that they will be paid. The key uncertainty is the size of the special dividends. If the amount is small, our valuation would not drop significantly. However, the market price might fall more sharply due to high investor expectations for dividends. If part of the funds is used to repay debt, this will not affect the valuation directly but could improve net profit and future dividends in the long term. In our model, we updated key financials and increased the weighted average cost of capital (WACC) amid a higher base interest rate. On the other hand, we revised our forecasts for depreciation, amortization, and capital expenditures for the remaining business. Also, the strengthening of the USD against the KZT increased the KZT-denominated value of the deal. As a result, our updated target price per JSC Kazakhtelecom share is 52,600 KZT, implying 5% upside from the current price. Recommendation – “Hold”.