Vimpelcom 2Q: Still Bullish Despite Results

| About: VEON Ltd. (VEON)

Summary

Vimpelcom Ltd. has published reporting for 2Q 2016. In general within expectations, but slightly worse than the consensus forecast.

On September 8 authorities of the Italian regulator will have to make their decision on the merger of Wind and Telecom3 Italia.

So far, the management fulfills all the plans scheduled on 2016.

I still see a good upside potential Vimpelcom Ltd. to $ 6-7.2 due to decrease debt burden and the commencement of dividend payments in 2017-2018.

Vimpelcom Ltd. (NASDAQ:VIP) has published quite satisfactory statements for 2Q 2016. The consolidated revenue of the company decreased by 16% compared to 2Q 2015 to $2.16 billion. EBITDA was $795 million, which is 26% lower than in 2Q 2015. The EBITDA margin rose to 42.3% from 41.5% a year earlier. Vimpelcom's net profit increased by 29% to $ 138 million.

Published results were slightly worse than the consensus forecast of analysts who had expected a decline of revenue by 15.1% to $ 2.2 billion, EBITDA - by 19.6%, to $ 860 million during margins of 39.4%. I've also expected more from the company.

VimpelCom Ltd. before Italy was classified as held for sale (in USD millions)

In general, the dynamics of revenue and EBITDA shows a strong influence of the devaluation of currencies in emerging markets, which creates certain problems and risks for Vimpelcom. In the local currency financial results show confident growth.

Now let's look at the dynamics of financial indicators in the main markets where Vimpelcom operates in detail.

Russia: everything is stable in rubles

The Russian market generates for Vimpelcom about 47% of revenues and 50% EBITDA. In the last 3 years the company consistently holds market share of 25%. During 2Q 2016 Vimpelcom was able to get $ 1.01 billion in revenue and $ 414 million EBITDA, which is 22% less than the 2Q 2015. In rubles Company's financial results are more stable, no growth is observed. Increased competition in the Russian market resulted in a decline in revenues by 2% in the fixed-line segment, while revenues from cellular services decreased by 0.4% yty.

On the positive side, I want to note growth in EBITDA margin to 40.9%, which is the best result since 3Q2014. Earlier this year, the management of Vimpelcom announced its intention to focus on optimizing costs and improving profitability. This strategy is beginning to bear fruit, but some deeper conclusions can be made after 2-3 quarters.

Dynamics of financial indicators of Vimpelcom in Russia (in USD millions)

Dynamics of financial indicators of Vimpelcom in Russia (in RUB millions)

Italy: focus on merger of Wind and Hutchison

Italian division looks quite stable and continues to generate around € 400 million EBITDA in the quarter. There are no surprises happened.

Dynamics of financial indicators of Vimpelcom in Italy (in EUR millions)

All the attention about the Italian business of Vimpelcom is now focused on deal to merge its subsidiary Wind Telecomunicazioni and subsidiaries of Hutchison Telecom3 Italia. From the press release follows that the companies were able to create all the conditions for the release of the new operator (French Lliad) in the mobile market. That was important for the Italian regulator, who feared monopolization of the market. About its decision the Italian authorities will have to declare on September 8, and I think that the conclusion will be positive.

Other markets: Ukraine and Pakistan are growing, Algeria upsets

On the Ukrainian and Pakistan market the revenue in 2Q 2016 respectively to 1Q 2016 increased by 11% and 14%, EBITDA - by 34% and 11% due to the launch of 3G networks.

Also in July, it was announced about the closing of the transaction on merger of Mobilink (a subsidiary of VimpelCom Ltd.) and Warid (Dhabi Group) on the Pakistan cellular market. According to the company estimates it will increase revenues to $1.4 bln per year (was $1 bln on the results of 2015) and EBITDA to $570 bln ($ 409 mln in 2015). The synergistic effect of the transaction due to savings on CAPEX and OPEX is expected to reach $ 500 million.

Algeria, on the other hand, has summed up. That is its results, what missed analysts within the formation of a consensus forecast. The loss of a number of customers in connection with the forced transfer to the new tariffs and the deterioration of SIM card sales dynamics have led to a drop in revenue and EBITDA by 15% and 18%, respectively.

The dynamics of Vimpelcom revenue on other markets (in USD millions)

The dynamics of Vimpelcom EBITDA on other markets (in USD millions)

The dynamics of the other markets in USD and national currencies present below. For ease of presentation the financial figures in the graph are expressed in national currencies as follows:

· Algeria in DZD billions

· Pakistan in PKR billions

· Bangladesh in BDT billions

· Ukraine in UAH 100 millions

· Uzbekistan in UZS 10 billions

The dynamics of Vimpelcom revenue on other markets (in local currencies)

Dynamics of EBITDA Vimpelcom on other markets (in local currencies)

OCF unchanged debt within the management forecasts

Operating cash flow remained at the level of 2Q 2015, amounting to $ 606 million.

Capital costs of the holding (excluding license costs) decreased by 34% to $ 306 million.

The Net debt of Vimpelcom excluding Wind grew up to $6 675 million at the expense of new borrowings, in particular, the issue of bonds GTH worth $ 1.2 billion. NetDebt/adjusted EBITDA ratio increased to 1.8x versus 1.3x year earlier. At the end of 2016 the company's management expects this figure to be around 2.0x due to the merger of Mobilink and Warid in Pakistan market. So still the dynamics of the debt burden is in the forecast. The impact of this transaction we will see in the report for 3Q 2016.

Dividends and target price

In general for now everything is going within the planned by management forecast for 2016. In my article VimpelCom: 2016 - A Year Of Big Plans And Hopes I told that the main task of Vimpelcom Ltd. for next two years is to reduce the debt burden, mainly due to the deconsolidation of Italian subsidiary Wind Telecomunicazioni, as well as optimization of the other business units.

At the end of 2016 the company's management expects the ratio NetDebt/EBITDA at 2.0x area and already by the end of 2017, this ratio may drop to 1.4-1.5x. After that, the company will be able to direct a significant part of their profits to dividends. The dividend policy of the main Russian competitor Vimpelcom - MobileTelesystems (NYSE:MBT) and Megafon implies the direction on dividends for at least 50% FCF during target NetDebt/EBITDA at a rate of 1.2-1.3. Thus, I believe that Vimpelcom. will seek to allocate at least 50% FCF on dividends.

My forecast about the fact that in the case of reducing net debt and beginning of paying dividends, there will be the revaluation of the company to the level of their Russian counterparts remains in force. EV/EBITDA multiplier is already on a level with Russian peers and remain unchanged due to the reduction in net debt and an increase in the share of Equity. Therefore I confirm a target price on shares of Vimpelcom Ltd. in the amount of $ 6-7.2 on the horizon of 1.5-2 years.

Disclosure: I am/we are long VIP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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