VEON - VEON Ltd. Stock: After Russian Exit A Cheap But Speculative Bet

2023-11-20 12:59:07 ET

Summary

• VEON Ltd. has dumped its Russian assets.
• The company's valuation metrics are attractive, with massive debt reduction and strong cash flow valuation metrics.
• VEON Q3 performance showed growth in digital operations, with increased total revenue and EBITDA. However, there are still risks in emerging markets, particularly Ukraine.
• A speculative trade for investors.

VEON Ltd. ( VEON ) is an international wireless communications company. The stock was a pretty poor investment for a long time, up until recently. While there are challenges that persist, a huge weight has been lifted off of its shoulders as the company has dumped its Russian assets entirely. This was critical as the company had challenges with profitability and a substantial debt burden, which was only exacerbated by the ongoing international strife in Russia.

The company just reported Q3 earnings , and we were asked about the stock given what looks to be somewhat appealing valuation . Our take is that this is now a speculative buy as the company moves into the next chapter of its operational life. Let us discuss.

Valuation

The company does enjoy a valuation rating of A+ from Seeking Alpha's quant metrics :

Of course, this valuation may be a bit muddied but the sale of Russian assets. The Russian assets came in the name of Beeline, but this offloading starts a new chapter for VEON in our opinion. But getting out of that challenging market, VEON can now turn to other areas of operation that require attention. This is why we view it as speculative, as there is more work to be done. However, from an earnings standpoint we are at 5-6X FWD earnings, with attractive EV/sales and EV/EBITDA metrics, and really attractive cash flow valuation metrics. The challenge is the debt, but the debt has been reduced tremendously over the last year. Net debt excluding leases (we do not consider lease liability debt) has dropped significantly from $5.1 billion a year ago to $1.3 billion at the end of Q3 2023. That takes the debt-to-EBITDA ratio from 3.3x a year ago to 0.86x now. That is positive, but the debt is still large, yet manageable even in a higher rate environment.

Now, we mentioned the valuation metrics were a bit muddied because these measures largely still look at the Russian assets. Before the sale, the Russian market accounted was some 40% plus of the company's revenue and EBITDA. So while the debt is reduced, going forward we will see a reduction in revenues and EBITDA from the leaner company. That said, let us discuss performance.

Q3 performance

Starting with the top line total revenue was $945 million, an increase of 6.1% year-over-year, though, was up 19.3% in local currency. The bulk of this was service revenues amounted to $913 million, an increase of 6.9%, or up 19.8% in local currency.

Where growth exists is in the digital operations. VEON's digital operators are providing digital experiences in financial services, entertainment, education and healthcare for customers. Customers paying for digital services as well as 4G voice and data accounted for nearly 24% of the subscriber base. Further, 42% of subscribers revenues were in the B2C segment. There are nearly 30 million digital-only users.

Factoring in expenses we saw EBITDA of $444 million, a 17.0% increase, or up 30.6% YoY in local currency. Capex in $131 million, which was a massive reduction of 29.8% from last year. While this helps save cash and cut debt, it can hamper expansion, so it is a mixed bag. That said, following performance and recent moves to offload assets, VEON has raised its full-year local currency revenue growth guidance from 16-19% to 18-20%, and raised its local currency EBITDA growth guidance from 10-14% to 18-20%. This is strong.

Looking ahead

So why is it speculative if it is leaning out operations and also having cleaned up its balance sheet? While Russia was certainly a risk, nearly 30% of revenues will now come from Ukraine, and until the war over there comes to a conclusion, which could be months or years from now, it remains a risk. There is some concentration in emerging markets, too. Pakistan, Ukraine, and Kazakhstan, now make up 4/5ths of VEON's EBITDA power. For more on why Ukraine has risks, please see this commentary which lays out some possibilities, including nationalization of Ukraine operations. This is a major reason why we view the stock as speculative, despite the fact that the company seems to be firing on most cylinders here.

With this said, we view the company as undervalued, particularly with the company having exited the Russian business. While the risk in Ukraine is real, and other nations within which operations are ongoing are not without risk, we believe the company is turning the corner. Ultimately, we think the market is likely to give you a chance to enter the stock lower from here, and we would view $18-$19 as a prudent target entry point for the risk being taken on, when factoring in the undervalued nature of the stock, as well as the positives of the balance sheet cleanup. We see the company as continuing to streamline operations, and work to improve its capital structure.

We anticipate VEON Ltd. EPS and EBITDA growth moving forward, and the investment case will be incredibly more bullish if there is a resolution to the conflict in Ukraine, though the timeline is wholly unclear. Overall, we rate shares a speculative buy here for traders.

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