VEON - Weak Results Trigger Downgrade

We cut VEON to HOLD and reduce our target price 9% to $1.74 per share given the weaker than expected 2Q20 results and bearish outlook for the Russian operations. VEON expects an operational turnaround to become evident in Russia only in 1H21, thanks to ongoing network reinvestment, which will drive overall capex excluding licenses this year to 24.8% of revenues, on our estimates. VEON also noted it will most likely not pay dividends for 2020, which we flagged as possible early in the year. On our estimates, the stock is trading at a 2021E EV/EBITDA of 3.1 and P/E of 5.4.> 2Q20 below consensus. Overall, the results were pressured by y-o-y depreciation of local currencies against the dollar, as well as a drop-off in high-margin international roaming revenues, the loss of migrant customer revenues and lower device sales. In Russia, revenues were down 9.7% y-o-y in ruble terms to R65.5 bln, with mobile service revenues declining 12.2%, while mobile users fell 8.4%, including an 11.8% y-o-y decline of more profitable data users.> Bearish guidance for 2020. The company expects both revenues and EBITDA to decline by the low- to mid-single-digit percent in local-currency terms in 2020. The lower end of the guided range implies a low-single-digit y-o-y local-currency recovery in revenues and EBITDA in 2H20. We now expect revenues and EBITDA to decline by a respective 9.5% and 10.1% this year, which implies 2.4% and 2.6% declines in constant-currency terms.> Likely no dividends for 2020. VEON noted it will most likely not pay dividends for 2020. We flagged this as a risk in our March report due to low FCF.> Valuation. We reduce our target price for VEON by 9% to $1.74 per share. We downgraded our forecasts to factor in the weak 2Q20 trends and guidance and local-currency depreciation. We now use a target multiple to calculate the target price, which is a 3.1 2021E EV/EBITDA. This implies a 35% discount to MTS. We think this discount is justified given the following: the holding discount due to the multiple countries of operation and persisting currency risks; the likely lack of dividends (we expect an 8.7% dividend yield for MTS in the next 12 months); the poor execution track record and low visibility on the turnaround in Russia; the low stock liquidity (around $10.0 mln traded daily on average versus $56.9 mln for MTS). On our estimates, VEON is trading at a 2021E EV/EBITDA of 3.1 and P/E of 5.4.> Risks and concerns. These include the low visibility on the turnaround in Russia (where VEON faces competition from Tele2), the challenge of re-establishing a dialogue with the regulator in Pakistan, and the company's trouble generating consistent FCF and maintaining dividend payments.