VEON: A Stock For All Seasons
Summary
- Continue to avoid stocks with lots of air under the price.
- VEON offer a nice combo of valuation, yield, and stock upside potential.
- A diversification play into a less-crowded industry group.
- This idea was discussed in more depth with members of my private investing community, WMA Investments & Monitors. Learn More »
With markets showing some signs of topping, and the S&P 500 still less than 3% from all-time highs, investors who want/need to cushion their portfolios against a downside move still have time. Often the catalyst for a move in the stock indexes comes after the movement already is in motion. Right now, the jump in interest rates, which reduces the present value of a firm’s future earnings stream, is triggering some sharp days of selling in the obviously overvalued segments of the market. The Nasdaq-100, for example, hit the -10% draw-down level this past week. Is this the correction? We don’t want to bet against the irrationality and greed of the buy-the-dip-at-any-price momentum investors, even if we are just about certain that one day, they will suffer permanent capital impairment.
What interests us as long-term investors is not speculation on the tech mania and stocks that have doubled or tripled (or more) in the past year, but rather positioning our portfolios in stocks that a higher probability of providing steady, above-market returns. As basketball commentator Dick Vitale used to say, we want to swing for Pete Roses, not Reggie Jacksons (ie: the safe, higher probability stocks, not the long-shot higher risk stocks). There will come a time to buy tech/growth, but that time is not when investors are fighting with one another to buy these stocks hand-over-fist before the next guy.
This week we added a telecom stock to our equity section portfolio. With market valuations stretched, 84.2% of U.S. stock above their 200-day moving average, and the average stock trading within 3% of its 52-week high, we are rotating out of momentum stocks at/near record highs. We are looking for a cushion in the portfolio via strong valuation stocks with good dividends. More specifically, stocks that don’t have a lot of air under them and pay us to wait in the event the bull market stalls out for an extended period.
One telecom that is highly ranked in our methodology is VEON (NASDAQ:VEON). VEON provides mobile, fixed-line, and data telecommunication services. The company trades on the Nasdaq (VEON) and on Euronext (VEON.AS). There's little recent news on the company, except that earnings have been announced in-line with expectations for the past quarter. VEON’s user base increased by 20 million y/y to 80 million, while mobile data revenues grew +15% y/y. We do note that several analysts have revised up EPS forecast for the next 12-months (reflected in our Growth score below). We’ll start with the context for our trade in VEON, then present our fundamentals rankings of VEON, and conclude with our chart analysis.
We are buying VEON in the context of a contrarian/return-to-the-mean play. As we will show valuation remains a compelling reason to own VEON and the company has historically paid a high dividend, rewarding investors for waiting for a return-to-the-mean in share price. VEON also provides exposure to emerging market growth, with a significant portion of revenues generated from services in emerging market countries, notably East Europe/Russia. As EM markets recover from the pandemic, we can expect VEON’s wireless service revenue to improve. We also like the 5G theme and have been looking for neglected companies active in the 5G deployment. VEON is actively rolling out 5G networks in Eastern Europe. Finally, we are orienting our portfolio more towards international stocks in an effort to diversify our portfolios away from the U.S. equity market, whose secular outperformance trend is long in the tooth.
There are also several limiting factors that could invalidate a bullish trade in VEON. First is the balance sheet of the company, as reflected clearly in our WMA Financial Situation score, 29.8, placing the company in the bottom 5% of all telecom companies. The balance sheet is over-leveraged versus peers in the telecom industry group with long-term debt at €8.832 billion. The debt/equity ratio is off the charts. The second related factor is the rise in interest rates. In general, telecoms, like utilities, are vulnerable to rising rates. If rates continue rising VEON’s high debt load makes the company particularly vulnerable to higher rates. Some encouraging news on this front is that the company managed to extend debt maturities by 18-months to 3.5 years and the average cost of debt was reduced from 7.4% to 5.9%. Finally, the company had to cut its dividend during COVID-19. Dividend yield for 2021 is again forecasted in the 11% range, but this might entail an unsustainable payout ratio if earnings don’t materialize.
Looking at VEON vs. direct peers based on stock price performance, we see that VEON is still down -29.1% on a 2-year period. Some peers (Millicom and 1 & + Drillische) have also had difficulty bouncing back from the Covid crash.
Looking back five years, we see the lag in VEON’s price, down -46.2%. Again, we are betting on a “catch up,” as the company is stronger, on a relative basis compared to these peers, than its stock price indicates.
A Deep-Value Fundamental Trade
At WMA, we do intense fundamental modeling work using company financial data and Refinitiv consensus earnings and revenue forecast estimates. We have very high confidence in our various category rankings as a reliable screening tool for equity selection. We begin with a look at our Value ratings, which are divided into Relative scores (the company versus its industry group peers) and Historical scores (the company’s current valuation versus is own past). Our Relative Valuation scores are composed of numerous comparative measures including enterprise value-to-revenue, enterprise value-to-EBITDA, price-to-earnings, price-to-book value, and market cap-to-EBITDA. On a relative basis, VEON ranks #10 within the Telecom industry group, making the company a compelling Buy for longer-term investors.
WMA Relative Value Ratings for Telecom | |||
Industry Group Constituents: | 82 | ||
1.) | China Telecom Corporation Limited (CHA) | HK728 | 92.12 |
2.) | China Unicom (Hong Kong) (CHU) | HK762 | 92.00 |
3.) | KT Corp (KT) | SK30200 | 91.20 |
4.) | China Mobile Ltd. (CHL) | HK941 | 87.25 |
5.) | Turkcell Iletisim Hizmetleri A.S. (TKC) | TKC | 83.06 |
6.) | BT Group PLC (OTCPK:BTGOF) | BTA.GB | 81.45 |
7.) | Orange (ORAN) | ORA.FR | 79.34 |
8.) | SK Telecom Co Ltd (SKM) | SK17670 | 78.52 |
9.) | MTN Group Ltd (OTCPK:MTNOY) | MTN.SA | 77.22 |
10.) | VEON Ltd | VEON | 74.05 |
11.) | Telekom Austria AG (OTCPK:TKAGY) | TKA.AT | 74.04 |
12.) | Rostelecom PAO (OTC:ROSYY) | RTKM.RU | 73.96 |
13.) | Telecom Italia SpA (OTCPK:TIIAY) | TIT.IT | 73.55 |
14.) | Nippon Telegraph And Telephone Corp (OTCPK:NTTYY) | JP9432 | 73.44 |
15.) | Telefonica SA (TEF) | TEF.ES | 72.22 |
16.) | Orange Polska SA (OTCPK:PTTWF) | OPL.PL | 71.70 |
17.) | Telephone and Data Systems Inc (TDJ) | TDJ | 71.42 |
18.) | Telefonica Brasil SA (VIV) | VIVT3.BZ | 70.88 |
19.) | Proximus PLC (OTCPK:BGAOF) | PROX.BE | 70.60 |
20.) | Telephone & Data Systems, Inc. (TDS) | TDS | 70.51 |
Our Historical Valuation scores also are composed of numerous comparative measures, including the same valuation ratios above, in addition to price-to-sales. VEON is #37 in our Historical Valuation ranks, meaning the company offers a slightly better-than-average valuation level in the industry. Again, buying a solid company at the nadir of a firm’s valuation cycle, equates to a long-term investment for us.
Within our Growth ranking for the industry, VEON comes in at #20 (top 25%). Our in-house growth rate for VEON, which comes from a weighted-average of different forward-looking EPS, revenue, and EBITDA estimates, is 1.8%. On this growth rate alone, VEON is #47 in the industry group.
WMA Growth Ratings for Telecom | |||
Industry Group Constituents: | 82 | ||
1.) | TIM SA (TIMB) | TIMS3.BZ | 82.27 |
2.) | China Tower Corp. Ltd. (OTC:CHWRF) | CN788 | 78.72 |
3.) | Turkcell Iletisim Hizmetleri A.S. (TKC) | TKC | 75.69 |
4.) | Vodafone Group PLC (VOD) | VOD.GB | 74.06 |
5.) | Cogent Communications Holdings Inc (CCOI) | CCOI | 73.98 |
6.) | Cellnex Telecom SA (OTCPK:CLNXF) | CLNX.ES | 69.80 |
7.) | TPG Telecom Ltd (OTCPK:TPGTF) | TPG.AU | 69.09 |
8.) | T-Mobile US (TMUS) | TMUS | 68.90 |
9.) | SK Telecom Co Ltd (SKM) | SK17670 | 68.56 |
10.) | Vodacom Group Ltd (OTCPK:VODAF) (OTCPK:VDMCY) | VOD.SA | 67.41 |
11.) | Nippon Telegraph And Telephone Corp (OTCPK:NTTYY) | JP9432 | 67.29 |
12.) | Telekomunikasi Indonesia (Persor) Tbk PT (TLK) | TLK | 67.13 |
13.) | Telefonica Brasil SA (VIV) | VIVT3.BZ | 67.00 |
14.) | China Unicom (Hong Kong) (CHU) | HK762 | 66.98 |
15.) | Airtel Africa PLC (OTCPK:AAFRF) | AAF.GB | 66.92 |
16.) | China Telecom Corporation Limited (CHA) | HK728 | 66.22 |
17.) | Telekom Austria AG (OTCPK:TKAGY) | TKA.AT | 64.95 |
18.) | Hellenic Telecommunications Organization SA (OTCPK:HLTOY) | HLTOY | 62.97 |
19.) | TELUS Corporation (TU) | T.CA | 62.85 |
20.) | VEON Ltd | VEON | 62.67 |
In addition to the forecasted growth rate, our Growth rating also considers EPS and revenue revisions (providing insight into the direction analysts are leaning over the past weeks), our PEG calculation, and our Risk Score. VEON’s three-month revisions and one-month revisions are both positive, with a majority of analysts revising up EPS and revenue forecasts. Our PEG ratio calculation also puts VEON at the #7 spot for its industry group. Finally, our Risk Score for VEON is 3 (on a scale of 1, least risky, to 5, most risky). Among the industry group, VEON is at the 45th percentile. Our Risk Score considers the stock’s 10-year weekly beta vs. the MSCI All-World, the stock’s standard deviation, as well as the 52-week close location value and the percent of the current stock price above/below the 40-week moving average. As we are believers in an (eventual) “return-to-the-mean,” the risk-aspect rationale with these latter two measures is that stock prices that are high have more downside risk. VEON’s beta is at 1.13 with a standard deviation of 40%. In sum, this stock with have price swings that exceed that of the MSCI World index.
As mentioned above, the Financial Situation score for VEON is a problem. Nevertheless, our Yield rating for VEON puts the stock at the top of its industry group. Why? Our Yield rating looks at several sub-scores, including Profitability (a company cannot, or should not, be paying dividends if not profitable), again our Financial Situation score, and our dividend growth score. VEON is forecast to pay €0.23 in 2021 in dividends, giving a very healthy 15% yield. The dividend has a growth rate is at 22%, again a healthy sign. Finally, VEON is one of the more profitable Telecoms, ranking in the top 30% in the profitability category. The dividend, on both the U.S. and Amsterdam shares, is paid semi-annually.
WMA Yield Ratings for Telecom | |||
Industry Group Constituents: | 82 | ||
1.) | VEON Ltd | VEON | 70.34 |
2.) | Mobil'nye Telesistemy PAO (MBT) | MTSS.RU | 70.21 |
3.) | Vodacom Group Ltd (OTCPK:VDMCY) | VOD.SA | 68.47 |
4.) | China Mobile Ltd. (CHL) | HK941 | 67.49 |
5.) | Orange (ORAN) | ORA.FR | 65.69 |
6.) | Telefonica SA (TEF) | TEF.ES | 65.32 |
7.) | Telefonica Deutschland Holding AG (OTCPK:TELDF) | O2D.DE | 65.20 |
8.) | Proximus PLC (OTCPK:BGAOF) | PROX.BE | 64.74 |
9.) | TIM SA (TIMB) | TIMS3.BZ | 62.89 |
10.) | Telekomunikasi Indonesia (Persor) Tbk PT (TLK) | TLK | 62.38 |
11.) | Chunghwa Telecom Co., Ltd (CHT) | CHT | 61.23 |
12.) | AT&T (T) | T | 60.49 |
13.) | Telephone and Data Systems Inc (TDJ) | TDJ | 60.19 |
14.) | Telenor (OTCPK:TELNY) | TEL.NO | 59.75 |
15.) | China Telecom Corporation Limited (CHA) | HK728 | 58.97 |
16.) | Tele2 AB (OTCPK:TLTZY) | TEL2B.SW | 58.80 |
17.) | Swisscom AG (OTCPK:SCMWY) | SCMN.CH | 58.79 |
18.) | KDDI Corp (OTCPK:KDDIY) | JP9433 | 58.69 |
19.) | Lumen Technologies, Inc. (LUMN) | LUMN | 58.41 |
VEON’s Charts Full Of Potential Energy
Starting with our weekly chart, we see that VEON’s stock bumped along a few years in a consolidation range after its 2014-15 tumble. COVID-19 sent shares below the lower end of the post-2015 consolidation range. Based on our fundamental analysis above, share prices at current levels represent a downside overshoot.
Our daily chart below, with the 200-day moving average in yellow, shows that price has regained the 200-day level. While more tests of the 200-day may be forthcoming, the downward momentum has been broken. With VEON, we are not a falling knife scenario. While the speed of the price recovery cannot be known, we are looking for the $3.20 level, corresponding to 2019 highs, to be recovered in the next 52 weeks. While we can’t project earnings in one-year, if current earnings forecasts are projected forward, even at $4.20/share, VEON would remain a Buy in the WMA value rankings.
Conclusion
VEON, a beaten down value telecom stock, is currently trading at a stock price not consistent with our fundamental read. The growth rate is low but above the telecom industry group average, and analysts are revising higher. Despite the ugly weekly chart, we see no existential risk with VEON. The stock basing pattern with price crossing above the 200-day moving average should be seen as an encouraging sign. The risks to our trade include (1) obstacles to the re-opening of the EM markets where VEON has the mass of its customer base, (2) rising interest rates with the overleverage balance sheet of VEON, and (3) an unexpected change in our WMA Fundamental Ranking for VEON. We maintain a Buy on VEON. Our Financial Situation score prevents awarding a Strong Buy on the stock. Our Company Summary box below recapitulates our ratings on the stock.
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This article was written by
Analyst’s Disclosure: I am/we are long VEON. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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