The decline in revenue from voice services was mainly due to a decrease in voice traffic (-7.7% y/y). According to the results of 2018, the ARMU indicator remained at the same level as in 2017, and amounted to 2.1 KZT. A slight increase in revenue from data transmission services (+ 0.6% y/y) was observed due to an increase in traffic volume (+ 34% y/y), while the ARMB index decreased to 0.18 KZT (0.23 KZT in 2017). The Company's revenue from additional revenues decreased by 18.9% y/y. Other types of income increased by 52.6% y/y due to an increase in sales of contract phones.
Kcell’s cost of sales grew by 7.9% y/y mainly due to the recognition of expenses associated with interconnection charges, as well as due to an increase in handset sales. The company reduced sales and marketing costs to KZT 9,805 mn (-5.6% y / y) by improving the distribution process, as well as reducing subsidies and paid commissions. The annual increase of 23.6% y/y in the Company's general and administrative expenses was mainly due to the tax reserve and the increase in consulting and staff costs. In August 2018, the Company announced that 87% of the net income for 2017 in the amount of 11 678 mn KZT (or 58.39 KZT/share) was paid as an annual dividend.
The Company's subscriber base at the end of 2018 decreased to 8 969 thousand contracts (10 009 thousand contracts at the end of 2017) due to the outflow of inactive promotional SIM-cards as a result of the revision of strategic priorities, namely the transition from distribution to attracting high-quality customers. According to the results of 2018, ARPU and MOU indicators amounted to 1 150 KZT (+ 0.3% y/y) and 218 min/month (-3.5% y/y), respectively. According to the Company, in 2018 the significant expansion of 4G/LTE network coverage has improved the quality of services provided. The 4G/LTE network currently covers 61.9% of the country's population.
On December 21, 2018 the Company announced the completion of the transfer of 75% of ordinary shares to the telecommunications operator Kazakhtelecom.
Our opinion:
According to the results of 2018, the Company exceeded our revenue expectations, mainly due to an increase in other revenues. Sales of contract phones, along with insignificant data transfer revenues, continue to provide significant support to the Company's revenues.
In general, the Company does not demonstrate any special improvements in financial and operational performance beyond our expectations. At the same time, the potential opportunities and the expansion of the scope of activities in connection with the acquisition by Kazakhtelecom of a controlling stake will combine the strategic and operational resources of the companies. Since the value of the shares has reached the target price, we put our recommendation under review.
