INTERVIEW: Kcell rides Kazakhstan's hot pursuit of smart phones

By bne IntelliNews November 8, 2013

Ben Aris in Moscow -

Kazakhstan may not be booming, but it is prospering. And nothing shows off personal wealth better than the status symbol of the 21st century: the mobile phone.

Kcell has operated in Kazakhstan since 1998 and today is the country's largest mobile operator by both revenue and number of subscribers. Growth is limited by the size of the population - Kazakhstan has less than half of the people in next-door Uzbekistan - but Kcell's 13.5m subscribers give it just under half the whole market, and these are the most affluent subscribers in Central Asia. But more importantly, the government has provided the best business environment in Central Asia in which to work. "Kazakhstan has one of the most liberally managed countries in the region. And it is not just in our industry," says Kcell's new chief executive, Ali Agan, in an exclusive interview with bne.

A Turkish national, Agan came to Kazakhstan from Ucell, the Uzbek subsidiary of the giant Scandinavian telecommunications group TeliaSonera, which took full control of Kcell in 2011. Ucell is the second largest operator in Uzbekistan, where Agan was CEO from September 2012. Prior to that, he was CEO of Azercell, the leading mobile operator in Azerbaijan, another subsidiary of TeliaSonera. "There is a vision for Kazakhstan that is well designed and executed. It's a soccer game where there are professional teams and an honest referee," he says.

Kcell finds itself in a sweet spot following an IPO on the London Stock Exchange at the end of last year, which raised $525m from selling 25% of the shares to investors and valued the company at $2.1bn. TeliaSonera remains the parent company and retained 61.9% of the shares.

Kcell has two brands: the Kcell brand, which is targeted primarily at corporate subscribers (including government subscribers), and the Activ brand, which is aimed primarily at mass-market subscribers. And it is the latter that provides the company with its future.

Handset ownership is reaching saturation in Kazakhstan, but the economy is recovering nicely from the 2008 economic crisis: it is expected to grow by more than 6% this year, according to the government's most recent predictions, and by 5.2% in 2014 predicts the International Monetary Fund. "The market is limited by population, but the GDP/capita income ratio in Kazakhstan is very high," says Agan. "There are market opportunities in all the countries of the [Commonwealth of Independent States], but after Russia Kazakhstan is the most promising."

This dynamism of the market shows in the company's results. The topline revenue growth was up 44% in the third quarter from the year before to $1.2bn and the value-added share of this was up 22%. The Ebitda margin was down a bit from earlier in the year, but still came in at a fat 55%. There are few telecom markets in the world that are turning in results like these.

And the fast growth is also visible in the company's share price, which is up by over half since the IPO in December 2012: the companies share price was $18.10 at the time of writing, well ahead of its $10.50 floatation price. The share price performance has been helped by Kcell's dividend policy, with a minimum of 70% of net income to be paid as dividends to shareholders and analysts are expecting another good dividend payment following this year's good results.

Kcell is also receiving international plaudits. On November 7, the big CEE/CIS investor East Capital announced that Kcell was among its winners of the East Capital Awards 2013, which have been held since 2004 to reward the progress of outstanding companies in the region. Kcell was awarded the Best IPO Award on the back of the 67% return for shareholders. "Though the company operates in a very competitive environment, with cuts experienced in the sector both in new mobile subscription as well as contract termination rates, Kcell has managed to keep its subscriber market share of 50% and its profits intact," East Capital noted.

Data and smart phones

While everyone who wants a phone in Kazakhstan probably has one by now, there are two trends that will continue to drive Kcell's revenue growth.

Like other CIS countries, consumers in Kazakhstan are upgrading to better and more sophisticated smart phones. As these phones are internet enabled, this will also drive the growth in data traffic, which is already showing up on Kcell's bottom line. "Data traffic has growth by 40% in the second quarter of this year," says Agan. "Handsets are at close to saturation levels, but data is growing very fast. The trend is the same as in Russia, but the penetration of smart phones is still much lower than in Russia."

In the Scandinavian counties of Kcell's parent, smart phone penetration has already topped out and in Russia fast growth means one in two Russians now has a smart phone, but in Kazakhstan the trend is only now starting to gather momentum. "It depends a bit on the economy," says Agan. "GDP per capita has reached $13,030 in Kazakhstan, which is the level where people start trading in their old phones for smarter ones."

Agan says Kcell will focus its Kazakhstan strategy on expanding its third-generation (3G) network, which now reaches 45% of the population. The next phase will be the switch to the even faster fourth generation (4G) network that has begun to appear in other CIS countries. But in Kazakhstan the punters will have to wait a bit longer for their super-fast mobile downloads. More people need to own smart phones before the incumbents start investing in the new 4G networks. "Currently most handsets in Kazakhstan are not even 3G," says Agan. "We are still building the 3G platform, however we have the technology, the frequency allocations and we are ready to launch 4G - all we are missing is the license," says Agan.

Kcell is in talks with the regulator and expects the license to be issued soon. Currently only one company has a 4G license, Altel, a subsidiary of the state-owned Kazakhtelecom, but Agan is confident the government will issue more licenses in the visible future. "As the prices [of handsets] fall, then more people will change over. But we are not in a rush and not having 4G now is not a problem for our business," says Agan. "Actually, there is an advantage to being behind, as it means the costs will fall. In Europe companies paid billions for a 4G license, but many of them are regretting it now."

INTERVIEW: Kcell rides Kazakhstan's hot pursuit of smart phones

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