VimpelCom, A Value Play Or A Russian Company With Exposure?

| About: VimpelCom (VIP)


VimpelCom is now an undervalued telecom with significant upside.

Or VimpelCom is a value/growth company with slow growth, high debt and uncertain dividend.

Big options activity now, and the "Pit Boss" is a buyer.

VimpelCom (NYSE:VIP) is an Amsterdam-based NYSE-listed telecommunications service operator operating in five segments: Russia, Italy, Africa and Asia, Ukraine, and the Commonwealth of Independent States. Since the January 23 closing price of $12.43, the stock has fallen to a current price of $8.88 on June 10, after hitting a 52-week low of $7.53 on May 16 due to a myriad of reasons which we shall discuss.

The company has historically paid a high dividend, and the next ex-dividend date is not scheduled. That is right, it is not scheduled at this time. In 2012, VIP paid out over $2.0 billion in dividends. In 2013, VIP paid out over $2.19 billion in dividends. This is based upon 1.95 billion shares outstanding. Unfortunately, the company has decided in January 2014 to not pay significant dividends until the net debt/EBITDA ratio goes below 2xs. Presently, it stands at 2.4, according to the first-quarter annual report. We only expect slight improvement of this ratio in the 2nd quarter, but believe it could move under 2.0 after the 3rd quarter of this year.

These payouts were in US dollars, not rubles. The assumption amongst many investors is that VIP is a regional Russian telecom with excessive exposure to Russia and Ukraine. The fact is that VIP, in spite of a large Russian customer base that is said to not be "churning," or losing subscribers, is considered a Western company with US GAAP practices, based, as mentioned, in Amsterdam. Ok, now that is out of the way, where is the dividend for 2014? Unfortunately, it will be quite delayed. Historically, management was committed to paying annual dividends of at least $.80 per share going forward, but it was unsustainable with the debt coverage and earnings pressure, hence the change in policy. Revenue has been under pressure due to multiple issues, and much of the debt ($27.83 billion) is not going away. According to the recent earnings report released on May 14, the firm reported revenue of USD 5.0 billion, which is an organic decline of 5% YOY, mainly due to operational performance in Russia and continued market weakness in Italy. The firm reported EBITDA of USD 2.1 billion, which is an organic decline of 6% YOY, mainly due to declining revenue. The developing market activities of the firm remain strong, with increased subscribers and revenue from Bangladesh and Pakistan. According to the firm, due to the group's continued emphasis on cost control and what is termed "operational excellence," the group's EBITDA margin remains strong at 41.6%. Also, many believe the company does have a large subscriber base in Ukraine and Russia, and the violent and political issues that have occurred since January have hurt the company from a financial standpoint. This is not exactly correct. The company continues to roll out new 3G and 4G/LTE networks in Russia. There has been a slight drop-off in subscribers, which as mentioned, the industry calls "churn," but it has not been notable in terms of customers, with a YOY overall (global) customer growth up 3%.

Based upon the "Financial position and cash flow" statement issued by the company, net cash from operating activities was USD 1.2 billion in 1Q14, a decrease of 8% YOY, explained by lower EBITDA, partly offset by positive movements in working capital compared to the same period a year ago. Net cash used in investing activities increased to USD 1.2 billion in 1Q14, compared to USD 1.1 billion in 1Q13, mainly as a result of higher CAPEX due to investments in high-speed data networks.

After the company sold the Cambodian division and had a falling out with the government of Laos in an attempt to sell its Beeline subsidiary there, we looked for a similar sale in Bangladesh or Pakistan. We now believe this will not occur. We look for continued subscriber group and further development of the existing network. In addition, after the USD 4.0 billion Algeria resolution (due to Global Telecom Holding (GTH) selling its 51% stake in Orascom Telecom Algeria (Djezzy) to the Algerian National Investment Fund for $2.6 billion), the proceeds are intended for debt repayment as per the company's quarterly report. This also includes a USD $2 billion charge.

Based upon this statement, net cash from operating activities has declined YOY 6% to US1.168 billion for the 1st quarter 2014. It did have a decrease in net cash from financing activities due to fewer proceeds from borrowings, since bonds totaling USD 2.0 billion were issued and dividends of USD 1.3 billion were paid in 1Q13.

This begs the question "Where is my small dividend in 2014?" With the next earnings date set for August 06, we do expect a dividend declaration of at most $.020 (as per the company's policy), per share before or at that time, and the balance of the yearly dividend paid in the last quarter. We expect a full-year dividend at the company-stated $.035, but do expect Net Debt/EBITDA to improve in the 3rd quarter below, thus warranting a higher divided in the 4th quarter. Based upon the current amount, the dividend yield would decline to below 1%, a figure almost all shareholders are not happy with. As a value stock, VIP may be tough to ponder, but we see extensive growth for the company in South East Asia and look for growth in other developing markets. We tend to see growth in CIS, Ukraine, and Russia to slowly continue as the networks improve and the political situation, (which actually does not decrease or "churn" subscribers) de-escalates over time.

In terms of a price target, we do see the stock returning to its previous price range of late 2013, of over $12.00 per share, in spite of the Russian and Ukrainian issues and the company's extensive debt exposure. As such, we look at the stock as a value or growth play into developing markets with Western GAAP standards. With a six-month or year-end price target of $12.00 per share, a short-term gain would equal 33% on an annual basis. As such, we are a strong buyer ahead of the August earnings statement.

On June 09, CNBC reported that Pete Najarian, aka the "Pit Boss," saw extensive option activity in VIP, especially the July 10 calls. It was also stated that he would be a buyer of the stock, and the CNBC video headline was "bulls like VimpelCom."

We see this as a harbinger of at least two things, 1) professional money flowing back into Russian stocks, with VIP including in this group, 2) the improvement in the company's fundamentals and growth in developing markets on the horizon. In addition, there are minor items to note. On May 23, when the stock was $8.11, Deutsche Bank upgraded the stock to a buy, citing the refinancing of its Italian unit and the agreed sale of the majority stake in the Algerian operation. The upgrade noted that both of these events should be positive for earnings and reduced interest costs. Also, the closing price on June 10 of $8.88 would be considered propitious or a very lucky sign in China. Though we would never be a buyer based upon a simple closing price, we do see the stock as a value play with limited downside and significant upside at this time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Earlier submission missed company's new dividend policy which is presently in effect. My apologies to the readers.