Neutral results for 2018. The results of 2018 met our expectations. Operating profit amounted to T8.9bn, having strengthened by 18% compared to 2017 due to an increase in gross profit by 11%. Deviation in operating profit is 2.3% of our forecast. Profit for the period amounted to T40bn, which is 22% higher than in 2017. The weakening of the tenge, as a result of which the loss from exchange rate differences increased by 35% to T5.9bn and the assets depreciation amounted to T2.9bn (+ 31% yoy), had a restraining effect on net income. Adjusted net income (excluding impairment) is also in line with our expectations (T42bn vs. T44bn).
The forecast for tariffs is saved. Despite the company's optimism regarding the cancellation of tariff freezing as early as next year, our forecast for tariff stagnation in 2019-2020 at levels accepted by the regulator remains unchanged. We still expect an increase in tariffs only after 2020 and we maintain the forecast for the growth of transmission and balancing tariffs by 5% (CAGR) and for dispatching - by 8%.
Capex growth may put pressure on dividend yields. At a meeting with investors, the Company announced plans to implement new investment projects. We increased capital expenditures in 2019-2025 from the previous range of T10-40bn (incl. maintenance investments) to T45-75bn. In light of the expected larger cash outflows, according to our forecasts, for servicing capital-intensive projects and because of groundlessness in conditions of debt load, the company will review the policy of paying high dividends and reduce the payout ratio to 50%. The dividend per share, according to our forecasts, will decrease from T135/share for 2018 to T40/share by 2026.
Recommendation downgrade from Hold to Sell, 12M TP of T1 1337/share. Our new 12M target price amounts T1337/share, the discount to market price exceeds 17%. We see no obvious growth catalysts capable of leveling the weak dynamics of cash flows due to the social importance of the source of income. Dividend payments have reached their peak and cannot act as a growth driver for share prices. We recommend to Sell KEGOC shares.
