OREANDA-NEWS. September 22, 2011. TeliaSonera announced today (21 Sep) that Kazakhtelecom is to sell its 49% stake in Kazakhstan’s leading mobile operator, KCell (the 51% balance is held by TeliaSonera). Half Kazakhtelecom’s stake will be sold to TeliaSonera or to TeliaSonera’s Fintur, while the balance will be offered on the market, though no timeframe for the IPO has been set. TeliaSonera will buy the stake at the market price.

Positive for Kazakhtelecom, in our view

KCell’s IPO valuation will be key to determining the exact influence on Kazakhtelecom, though at this stage the news sounds positive for Kazakhtelecom, in our view:

1)            The sale of the 49% stake could boost Kazakhtelecom’s dividends.

2)            The deal will determine Kazakhtelecom’s true market value. In our view, Kazakhtelecom has been trading at multiples of less than half those of its emerging market peers partially due to uncertainty regarding the monetisation of its stake in KCell. The deal will force the market to assess Kazakhtelecom as a pure operational telecoms business, not accounting for its investments.

3)            The deal will further improve Kazakhtelecom’s financial position (its net debt stood at USD 53mn in 1H11).

4)            There is also the possibility that Kazakhtelecom may seek to develop its own new mobile business based on a 4G licence. Kazakhtelecom’s administrative lobby is likely to be supportive in this initiative.

On the negative side the current stock market environment does not bode well for a KCell healthy valuation. Moreover, in order to support the development of Kazakhstan’s stock market, Kazakhtelecom could opt to list on the local stock exchange. This may result in a diminished valuation due to a smaller investor base, though our opinion is that this potentially undesirable consequence is largely offset by the market’s belief that value of Kazakhtelecom’s investment in KCell was questionable.

Kazakhtelecom could obtain up to USD 0.9bn for the stake

We note that Kazakhtelecom received USD 156mn of dividends from KCell in 2010, as such KCell’s potential equity value equals six years of FY10 dividend flow. KCell’s financials are not transparent. K-Cell generated revenue of USD 1,013mn in 2010 and USD 575 mn in 1H11. In our calculations we assumed a 50% OIBDA margin for K-Cell (vs VimpelCom’s 55% mobile OIBDA margin in Kazakhstan in 2010) and applied a target EV/trailing 12month OIBDA ratio of 4.3x which is in line with MTS’s EV/ trailing 12month OIBDA ratio. We also assumed USD 70mn net debt for K-Cell, referencing the selective disclosure of K-Cell’s key balance sheet metrics in KZTK’s FY09 results (the only available information). In addition, in valuing Kazakhtelecom’s stake in K-Cell we apply a 20% discount to reflect KZTK’s lack of control of the mobile operator and the illiquid nature of KZTK’s investment in the unlisted K-Cell. As such, we arrived at KCell’s 49% stake valuation of USD 916mn.

KZTK Looks Cheap on multiples

K-Cell’s financials do not affect KZTK’s top-line and OIBDA, but are reflected in its earnings via income from affiliates. We therefore must adjust KZTK’s EV for its investment in K-Cell to obtain EV-based valuation ratios. Valuation adjustments reveal low valuation ratios for KZTK. KZTK trades at significant discounts to its peers: KZTK has EV/OIBDA of 1.7x vs EM’s 4.6x and PE of 6.1x. vs EM’s 11.6x for FY10. KZTK also trades at EV/trailing 12month OIBDA of 1.3x and PE of 4.8x.