vk.com/id446425943

EMEA telecoms

2019 outlook

The general growth outlook remains lukewarm with around zero percent real growth rates across the markets we follow. In Russia, we continue to see the potential for better margins followed by much delayed retail consolidation (still a possibility at this stage), but we fear 5G licensing may add pressure to cash flows. In Turkey, we see companies translating inflation into higher prices. Elsewhere, the picture is mixed but Telecom Egypt, with its good balance between growth and dividends, looks the most interesting to us. Our top stock ideas for 2019 are: Telecom Egypt, Rostelecom (RTKM), Turkcell, MTS and VEON.

Lukewarm growth at best

Growth prospects for telco service revenues in our coverage universe remain unexciting – around zero percent in real terms at best. We see potential for margin improvement (not just optical resulting from IFRS16 but real), especially in Russia, but there is no guarantee. We see regulatory risks generally rising across the board, potentially constraining telco cash flows and dividend payments.

Russia – constructive backdrop but 5G looms

Russia’s competitive environment remains constructive, but regulatory risks have grown (some, such as the termination of nationwide roaming, have materialised already, with others, such as 5G, still to come), especially those relating to the allocation of 5G frequencies and the ensuing infrastructure buildout, potentially dampening capex and FCF outlooks. With low-single-digit top-line growth, retail consolidation remains the best chance for faster EBITDA growth, in our view. We think at current prices, MTS’s risks are overly discounted (we upgrade MTS locals to

BUY from Hold; see page 14), although its 2019 dividend could be lower than 2018, making VEON potentially more attractive in terms of dividend yield. The less risky play, in our view, is Rostelecom.

Turkey – likely to enjoy fast growth again

Turkey’s weaker economy should have only a minor impact on defensive telcos.

We believe companies will again inflation-adjust prices upwards, implying a positive outlook for EBITDA growth in 2019. Given its superior liability management and virtually no real FX exposure, Turkcell remains attractively priced, in our view.

Africa, Asia and elsewhere

We believe Telecom Egypt offers one of the better mixes of growth and dividends. The company is growing strongly in fixed line, spurred by its new cable business and growing demand for internet. Safaricom’s valuation has become more reasonable, in our view, as the stock was caught in the global fintech stock sell-off. Given a potential corporate tax rate hike in Kenya, we believe the time has not yet come to buy. Sonatel has de-rated but its position in the markets where it operates has worsened too. Global Telecom Holding (GTHE) is a tricky mix of operating assets exposed to a difficult macro (e.g. Pakistan) and a Cairo listing that makes it vulnerable to VEON’s perseverance to take it private against shareholder resistance. KCELL is now part of Kazakhtelecom’s mobile assets but it remains unclear how the latter will operate its three brands: we downgrade our rating to SELL from Hold (see page 22).

Sector update

Equity Research 8 January 2019

Telecoms

EMEA

Alexander Kazbegi +41 (78) 883-4527 AKazbegi@rencap.com

Artem Yamschikov

+7 (495) 258-7770 x7511 AYamschikov@rencap.com

Mikhail Arbuzov

+7 (495) 258-7770 x4594 MArbuzov@rencap.com

Figure 1: Summary TP and ratings

Prices are as of close 4 January 2019 *Upgraded – previously Hold **Downgraded – previously Hold

Source: Bloomberg, Renaissance Capital estimates

vk.com/id446425943

Contents

Renaissance Capital

8 January 2019

EMEA telecoms