Veon: New Opportunities Due To Company Reorganization

Summary

• Transition from telecommunication business to digital business.
• Sale of assets of the retail chain "Euroset" in Russia.
• Increase in dividend payments.

Veon (NASDAQ: NASDAQ:VEON) is a holding company that controls telecommunication assets in the CIS countries, Italy and in several countries in Asia and Africa. Veon used to operate under the Vimpelkom brand until February 2017, and its main business was telecommunications in Russia and the CIS. And the company's revenue, as well as its share in the cellular communications market, has been falling rapidly in recent years. Therefore, the company's price since the end of 2013 fell from $14 to $4 and is now at a historical minimum. It was interesting that the company did the rebranding and stated in its press release that it was changing its field of activity and starting to engage in digital business.

_{source: Morningstar.com}

Company history and business description

The Russian company Vimpel-Communications (abbreviated VimpelCom) was founded in 1991 by a group of specialists working in the Radiotechnical Institute, headed by Dmitry Zimin. The co-founder of the company was American businessman Ogi Fabela. In August 1993, the company registered the trademark Bee Line, under which it began to provide mobile services. In 1996, VimpelCom listed on the New York Stock Exchange (NYSE); Later the company moved to NASDAQ.

_{source: РБК - новости в реальном времени}

In 2010, as a result of the merger of VimpelCom with Ukrainian cellular operator Kyivstar, VimpelCom Ltd. was established In 2011, the company merged with Wind Telecom of Egyptian businessman Naguib Sawiris. As a result of the transaction, VimpelCom entered the markets of Europe, Asia, Africa and North America. I want to note that such active deals in M&A greatly increased the company's debt burden, which subsequently led to an aggressive sale of assets and the company's entry into a depression. During this period after the deal the company lost a huge share of the Russian telecommunications market

Calendar catalyst

• Annual General Meeting of Shareholders
• VEON announces a new RUB 110 bn five-year ruble-denominated term loan with Sberbank
• Sale of assets of the retail chain "Euroset" in Russia

All this news is strongly related. The sale of assets speaks of decisiveness to get rid of offline business in Russia and to ease up the financial burden. And the debt attracted in May will allow the company to carry out actions on business restructuring and entering new markets. I'll wait for the meeting of shareholders to confirm my opinion that the company is moving in the right direction.

Key drivers

I consider this company an extremely good investment because VEON, despite the difficulties, has a strong brand and access to many markets, including Europe, Russia, and the CIS

According to the forecast of the company, in 2018, free cash flow should exceed $ 1 bln. At the end of 2016 this indicator was $588 mln and according to the results of 2017 free cash flow is expected at $ 700-800 million. - As reported on Monday, February 27, at the last investor's event in Barcelona, a representative of VimpelCom

The first step for the transition to the digital business segment was the launch in late 2016 of the VEON messenger for the European market. It is also expected that soon the messenger will be available in other countries.

In this case, the maximum number of functions that are not available in other services will be added to the app. For example, the possibility of ordering a taxi, conducting banking operations, shopping in online stores, etc. As part of the development of this direction, Veon announced a partnership with video service STUDIO +, music - Deezer, and also with financial platform MasterCard.
And the first confirmation of the new strategy began to appear. For example, a dividend yield of 5.76% was paid, which is several times more than the dividend levels of recent years.

_{source: morningstar.com}

Valuation

I have a DCF analysis. For calculating CAPM, I took reporting data and beta from the Morningstar website. The risk-free rate was taken for 2.32 - the official rate for the 10-year Treasury. The market risk premium is at 5.75 without any adjustments. The cost of equity was 15.5%. To calculate the cost of debt I add a risk-free rate with default spread, associated with BB rating of the company, and it was 6.32%. The total WACC with the tax included was 7.76%. The long-term growth rate was taken at the level of the risk-free US rate. The term of increased growth was taken at the level of seven years, approximately the same as for other companies in this sector. According to my calculations, the capitalization of the company VEON should be $13.6 billion. That is almost twice the market capitalization. Comparative analysis was not carried out because VEON ceased to position itself as a telecommunication brand. And it is not completely clear which companies should be regarded as competitive.

Conclusion

VEON is currently carrying out structural changes in its business and is already starting to show positive financial results. The company's shares are now at around $4 with their fair value of $7.50-$8.00. Therefore, buying a company's stock at this moment will be a good investment in the long term.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.