VEON - 1Q20 in Line; Still Weak in Russia

VEON's 1Q20 results were broadly in line with the consensus on revenues and EBITDA. The company's Russian operations continue to deteriorate, although this was offset by a decent operating performance in Ukraine, Kazakhstan and Bangladesh; the underlying results from Pakistan were good. VEON withdrew its previous guidance owing to the effects of the lockdowns and currency headwinds. Due to the low visibility of current trading, we do not yet update our model from March 20 and thus reiterate our target price of $1.92 per share and BUY recommendation for VEON.> Underperformance in Russia continued. Revenues were down 2.6% y-o-y in ruble terms to R67.5 bln, with mobile service revenues declining by 4.4% (the respective declines in 4Q19 were 3.3% and 5.9%), while mobile users decreased by 1.4% y-o-y. Adjusted EBITDA declined by 8.8%, for a 41.8% margin (down 2.9 pp), due to higher structural costs, although this was slightly offset by continued distribution optimization through the closure of more than 300 stores (out of a planned 400 in 2020). Capex excluding licenses decreased by 30.7%, due to the timing of the network rollout, to 18% of revenues. > Ukraine strong. Total revenues were up 16.1% in the local currency. The EBITDA margin rose 5.0 pp y-o-y to 67.9%. In 1Q20, Kyivstar recorded a quarterly churn of 4.2%, which remains the lowest churn in the market.> Pakistan results strong on an underlying basis. Excluding the impact of a change in the tax regime, revenue growth was 12.8% in the local currency (after 14.1% in 4Q19) and EBITDA growth was 7.7% (after 5.3% in 4Q19). Financial services revenues grew by 18.9% y-o-y as Jazz Cash increased its 30-day active wallet subscriber base to 7.8 mln (up from 7.3 mln in 4Q19). There is no firm date for the court hearing on a $450 mln license fee that VEON is challenging.> Bangladesh mixed and Algeria weak. Revenue growth in Bangladesh accelerated to 3.7% y-o-y in local-currency terms (from 1.2% y-o-y in 4Q19), helped by a 1.9% y-o-y increase in the customer base. EBITDA was flat y-o-y, pressured by an increased minimum tax rate. Excluding the impact of tax changes, EBITDA growth would have been 2.9%. Revenues in Algeria eased 2.1% in the local currency, due to the MTR change (DZD500 mln) and 11.4% decline in the customer base triggered by price competition. EBITDA fell 7.8% and the margin decreased by 2.7 pp to 43.6%. > EFCF down 46% y-o-y. In 1Q20, VEON generated $104 mln of EFCF after licenses, down from $194 mln in 1Q19 (adjusted for the $175 mln contribution from Ericsson in 1Q19). Net debt/EBITDA was 2.0, flat Q-o-Q (including capitalized leases). Headquarter costs totaled $49 mln in 1Q20, down 8% y-o-y on an LFL basis (implying a 6% y-o-y decline in euros).> Full-year guidance withdrawn on Covid-19 lockdown effect. In April, the company saw a high-single-digit y-o-y decline in revenues and a mid-teen decline in EBITDA in local-currency terms, with Russia being the most affected.> Valuation. We do not yet update our model from March 20 due to the low visibility of current trading and thus reiterate our target price of $1.92 per share and BUY recommendation for VEON. The stock is trading at a 3.2 2020E EV/EBITDA and 6.1 P/E (and a respective 3.0 and 5.9 for 2021E). We think that the company might not have enough FCF after frequency payments (assuming that it will have to pay $450 mln to renew its licenses in Pakistan) to pay dividends in 2020 given the expected increase in operating capex (by around 1 pp as a percentage of revenues; we see it flat y-o-y in dollar terms).