Telecom 2019 Outlook 080119

Sector update
Equity Research
8 January 2019
Telecoms
EMEA
EMEA telecoms Alexander Kazbegi

+41 (78) 883-4527
2019 outlook AKazbegi@rencap.com
Artem Yamschikov
The general growth outlook remains lukewarm with around zero +7 (495) 258-7770 x7511
percent real growth rates across the markets we follow. In Russia, AYamschikov@rencap.com
we continue to see the potential for better margins followed by Mikhail Arbuzov
much delayed retail consolidation (still a possibility at this stage), +7 (495) 258-7770 x4594
but we fear 5G licensing may add pressure to cash flows. In MArbuzov@rencap.com
Turkey, we see companies translating inflation into higher prices.
Elsewhere, the picture is mixed but Telecom Egypt, with its good
balance between growth and dividends, looks the most interesting
to us. Our top stock ideas for 2019 are: Telecom Egypt,
Rostelecom (RTKM), Turkcell, MTS and VEON.
Lukewarm growth at best Figure 1: Summary TP and ratings

Old
CP New TP Rating
Growth prospects for telco service revenues in our coverage universe remain TP
MTS, ADR, $ 7.65 10.1 11.0 BUY
unexciting – around zero percent in real terms at best. We see potential for margin
MTS, local, RUB 249 301 304 BUY*
improvement (not just optical resulting from IFRS16 but real), especially in Russia, VEON, $ 2.5 3.3 3.8 BUY
but there is no guarantee. We see regulatory risks generally rising across the board, Rostelecom, comm, RUB 73.2 86 86 BUY
potentially constraining telco cash flows and dividend payments. Rostelecom, pref, RUB 61 56 56 HOLD
Sistema, local, RUB 8.2 13.0 15.8 BUY
Sistema, GDR, $ 2.43 4.4 6.2 BUY
Russia – constructive backdrop but 5G looms Kcell, local, KZT 1,888 1,089 1,089 SELL**
Kcell, GDR, $ 5.0 3.0 3.3 SELL
Turkcell, local, TRY 11.9 16.6 16.5 BUY
Russia’s competitive environment remains constructive, but regulatory risks have Turkcell, ADR, $ 5.6 6.9 6.6 BUY
grown (some, such as the termination of nationwide roaming, have materialised Turk Telekom, TRY 3.74 4.5 4.1 HOLD
already, with others, such as 5G, still to come), especially those relating to the Global Telecom Holding, EGP 3.8 5.2 5.4 HOLD
Telecom Egypt, EGP 12.6 17.0 17.0 BUY
allocation of 5G frequencies and the ensuing infrastructure buildout, potentially Safaricom, KES 21.5 23.5 23.5 HOLD
dampening capex and FCF outlooks. With low-single-digit top-line growth, retail Sonatel, XOF 17,000 19,153 22,593 HOLD
consolidation remains the best chance for faster EBITDA growth, in our view. We Prices are as of close 4 January 2019
*Upgraded – previously Hold
think at current prices, MTS’s risks are overly discounted (we upgrade MTS locals to **Downgraded – previously Hold
Source: Bloomberg, Renaissance Capital estimates
BUY from Hold; see page 14), although its 2019 dividend could be lower than 2018,
making VEON potentially more attractive in terms of dividend yield. The less risky
play, in our view, is Rostelecom.
Turkey – likely to enjoy fast growth again
Turkey’s weaker economy should have only a minor impact on defensive telcos.
We believe companies will again inflation-adjust prices upwards, implying a positive
outlook for EBITDA growth in 2019. Given its superior liability management and
virtually no real FX exposure, Turkcell remains attractively priced, in our view.
Africa, Asia and elsewhere
We believe Telecom Egypt offers one of the better mixes of growth and dividends. The
company is growing strongly in fixed line, spurred by its new cable business and growing
demand for internet. Safaricom’s valuation has become more reasonable, in our view, as
the stock was caught in the global fintech stock sell-off. Given a potential corporate tax
rate hike in Kenya, we believe the time has not yet come to buy. Sonatel has de-rated but
its position in the markets where it operates has worsened too. Global Telecom Holding
(GTHE) is a tricky mix of operating assets exposed to a difficult macro (e.g. Pakistan) and
a Cairo listing that makes it vulnerable to VEON’s perseverance to take it private against
shareholder resistance. KCELL is now part of Kazakhtelecom’s mobile assets but it
remains unclear how the latter will operate its three brands: we downgrade our rating to
SELL from Hold (see page 22).
Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange
Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.
Contents Renaissance Capital
8 January 2019
EMEA telecoms
Investment summary 3
Mobile market outlook 6
Global trends 6
Markets under our coverage 8
Russia – market trends and company outlooks 12

MTS 14
VEON 16
Rostelecom 19
Sistema 20
Kazakhstan – KCELL 22
Turkey – market trends and company outlooks 24
Turkcell 27
Turk Telekom 29
Africa and Asia 31

Global Telecom Holding – GTHE 31
Egypt – Telecom Egypt 33
Kenya – Safaricom 34
West Africa – Sonatel 36
Disclosures appendix 41
2
Investment summary Renaissance Capital
8 January 2019
EMEA telecoms
Almost all telecom stocks under our coverage were under pressure in 2018 and showed
negative returns (Figure 2) that were exacerbated by local currency (LCU) devaluation in
nearly all the countries in our coverage universe.
As a result of weaker LCU vs the US dollar, DRs (MBT US and TKC US), companies with
the highest hard currency exposure on their balance sheets (Turk Telecom: TTKOM) and
those with operations in multiple countries (VEON US and GTHE) demonstrated the worst
performance. There was another laggard – Sistema – a conglomerate/private equity-type
holding with most of its value stemming from MTS (hence qualifies as a telco), which
faces an uphill task to cut its debt and has reduced its dividend in 2018. The only stock
that a delivered positive return in LCU in 2018 was RTKM after a 25% plunge in 2017.
In 2019, we expect the following trends to dominate the telco landscape:
▪ An unfavourable FX outlook with a globally stronger USD and rising interest

rates translating into continued currency weakness in Turkey, Russia,
Kazakhstan and Pakistan.
▪ 5G becoming a more visible theme and IoT emerging as a meaningful theme

with different players: telecom operators, applications and platform developers,
service providers (including cloud data analytics and security) and professional
service providers (systems integration, consulting and managed services)
competing for a piece of a pie that is gaining critical mass.
In terms of stock picks going into 2019, we favour:
In Russia:
▪ From an operational standpoint, we continue to like MTS. Although its FCF

generation for 2019E (FCF yield at 5%) and dividend yield (at 8%) look less
attractive than previously in light of the Uzbeki fine, its RoIC (around 17%) is at
the high end among the telcos under our coverage (see Figure 3).
▪ Rostelecom (RTKM) stands out as a defensive story and is likely to play a

meaningful part in the realisation of the state’s Digital Economy project, with a
commitment to pay a minimum dividend RUB5 per share (7% yield in RUB
terms).
In Turkey:
▪ Turkcell (TCELL) appears resilient to TRY devaluation given its hedging and is
likely to demonstrate the highest growth rate in LCU terms in 2019 with solid
FCF generation supported by cash proceeds from the Fintur sale.
In Africa:
▪ Telecom Egypt (ETEL) could demonstrate strong top-line growth with the
highest EBITDA CAGR in 2017-2020, on our estimates. Its mobile business
continues to ramp up and we expect it to reach breakeven in 2020. The
company states that it would like to go back to paying EGP1/share in dividends
from 2019, implying a c. 8% yield at current prices.
Finally, of the diversified plays, VEON looks the most attractive to us, especially given its
dividend yield: a potential $0.31/ADS dividend to be paid for the 2019 calendar year (final
$0.18 and $0.13 interim) represents a 13% dividend yield – the highest among all the stocks
we cover.
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8 January 2019
EMEA telecoms
We make the following changes to our ratings and TPs (please see relevant sections for
the details):
▪ Upgrade MTS locals to BUY from Hold following weakness in the share price.
▪ Downgrade KCELL from Hold to SELL following completion of the majority stake
acquisition by Kazakhtelecom, absence of a mandatory buyout offer and inflated
valuation.
▪ Increase TPs of TTKOM (by 10%), TCELL locals (by 1%) and TCELL GDRs (by
5%) due to increased financial forecasts and stronger exchange rate in Turkey.
▪ Decrease TP of MTS locals (by 1%) on the back of lower FCFs and decreased
TP of MTS GDRs (by 8%) on the back of weaker RUB/USD exchange rate.
▪ Decrease TP of Sistema locals (by 18%) and GDRs (by 29%) after factoring in
higher liabilities (net debt) for 2019 and weaker exchange rate in Russia.
▪ Decrease TP of VEON (by 13%) on the back of higher holding costs, lower
valuation of GTHE and weaker exchange rates in Russia and Ukraine.
▪ Decrease TP of GTHE (by 4%) on the back of weaker exchange rate in

Pakistan.
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8 January 2019
EMEA telecoms
Figure 2: Telco sector summary ratings and TPs

Ticker Currency Price Current TP Upside/(downside) Current rating 5D 1M 1Y EV/EBITDA 2019 P/E 2019 Dividend yield 2018* FCFF yield 2018
Russia
MTS ADR MBT US $ 7.65 10.1 32% BUY 9% 5% -27.1% 3.7 7.6 7.5% 11.2%
MTS, local MTSS RX RUB 249 301 21% HOLD 6% 5% -12% 3.5 6.9 8.0% 14.1%
VEON VEON US $ 2.50 3.3 32% BUY 6% 0% -38% 3.3 20.9 12.0% 6.1%
Rostelecom common RTKM RX RUB 73.2 86 18% BUY 2% 3% 15% 3.4 9.5 6.8% 6.3%
Rostelecom prefs RTKMP RX RUB 61 56 -8% HOLD 2% 2% 9% 8.2%
Sistema, local AFKS RX RUB 8.2 13.0 58% BUY 4% 0% -33%
Sistema GDR SSA LI $ 2.43 4.4 81% BUY 7% -1% -44%
Kazakhstan
Kcell, local Kcel KZ KZT 1,888 1,089 -42% SELL 8% 13% 11% 7.3 20.1 3.0% 3.2%
Kcell, GDR Kcel LI $ 5.00 3.0 -40% SELL 5% 10% 2% 7.0 19.2 3.1% 3.5%
Turkey
Turkcell, local TCELL TI TRY 11.9 16.6 39% BUY -1% -3% -21% 3.2 6.9 3.4% 5.2%
Turkcell, ADR TKC US $ 5.6 6.9 24% BUY -2% -2% -46% 3.5 7.8 3.9% 5.7%
Turk Telekom TTKOM TI TRY 3.74 4.50 20% HOLD -4% -3% -41% 3.4 4.3 0.0% 12.6%
Africa&Asia
Telecom Egypt ETEL EY EGP 12.6 17.0 35% BUY -1% 8% -5% 3.2 6.0 8.0% nm
Global Telecom Holding GTHE EY EGP 3.84 5.20 35% HOLD 3% 28% -47% 3.8 26.2 0.0% 0.3%
Safaricom SAFCOM KN KES 21.5 23.5 10% HOLD -6% -7% -23% 6.6 13.9 9.1% 7.1%
Sonatel SNTS BC XOF 17,000 19,153 13% HOLD 0% -4% -24% 3.9 10.7 9.0% 10.1%
Note: *Expected dividend to be paid in calendar 2019
Figure 3: Telco valuation summary in $ terms and main comparative metrics

Region/ Target EV/EBITDA Target P/E EV/EBITDA P/E EBITDA CAGR EBITDA CAGR EPS CAGR EPS CAGR ROIC, LCU Dividend yield FCF yield Net debt/EBITDA
WACC
Company 2019, x 2019, x 2018E 2019E 2018E 2019E 2017-20, LCU 2017-20, $ 2017-20, LCU 2017-20, $ 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E
Global
VEON na na na 3.4 3.3 nm 20.9 na -2.6% nm nm 7.7% 4.4% 12.0% 13.2% 6.1% 7.7% 1.8 1.9
GTH na 4.0** na 3.6 3.8 52.6 26.2 na -3.3% nm nm 8.3% 8.8% 0.0% 0.0% 0.3% 2.7% 2.0 2.1
Russia
MTS* 13.0% 4.5 10.0 3.5 3.7 6.7 7.6 2.1% -1.6% 6.4% 0.2% 18.8% 16.9% 9.7% 7.5% 11.2% 4.6% 1.6 1.7
Rostelecom* 12.5% 4.0 na 3.5 3.5 9.9 9.9 3.0% -3.0% 18.2% 11.4% 7.1% 7.1% 7.3% 6.8% 6.6% 8.4% 2.0 2.0
Kazakhstan
Kcell 15.0% 4.0 8.5 7.2 7.0 24.8 19.2 0.2% -3.1% 12.5% 8.9% 14.5% 16.9% 3.1% 3.7% 3.5% 5.3% 1.1 1.0
Turkey
Turkcell* 21.0% 4.5 na 3.5 3.5 6.5 7.8 10.8% -0.6% 23.9% 1.3% 14.6% 16.3% 3.9% 6.2% 5.7% 14.5% 1.5 1.1
Turktelekom* 20.7% 4.0 na 3.4 3.4 2.5 4.3 13.2% -7.5% 12.3% -8.2% 20.2% 20.0% 0.0% 11.3% 13.2% 10.8% 2.0 1.8
Egypt
Telecom Egypt 17.4% 4.0 8.0 2.7 3.2 6.0 6.0 16.8% 16.7% 8.6% 8.5% 6.1% 5.6% 8.0% 7.9% neg neg 1.8 2.4
Africa
Safaricom 13.4% 7.0 14.0 7.1 6.6 14.8 13.9 9.0% 9.1% 7.9% 8.4% 43.1% 46.0% 9.1% 7.3% 6.8% 7.1% neg 0.0
Sonatel 14.0% 4.5 10.5 4.0 3.9 11.0 10.7 3.7% 5.3% -1.9% -0.4% 20.3% 21.0% 9.0% 9.0% 10.1% 9.2% 0.1 0.1
Note: *Dividend yield for 2018 and 2019 calendar year; **2018-21 CAGR because of new standards impact; ***We apply 4.0x EV/EBITDA to GTH’s Pakistani, Bangladeshi and Algerian businesses; ****Incl. IFRS15 and IFRS16 impact; *****Incl. IFRS15 impact only
5
Mobile market outlook Renaissance Capital
8 January 2019
EMEA telecoms
Global trends
According to GSMA, mobile internet users will rise by 1.6bn over 2018-2025 globally with c.
40% attributable to China and India while additions in Nigeria, Pakistan and Indonesia will
amount to 50-75mn each. The rest comprises a ‘long’ tail mainly represented by SSA and
South East Asia (see Figure 4). The growth is to be driven by higher smartphone affordability
(e.g. in 2013-2017, the average selling price of a smartphone in Kenya declined 45% to $115)
and a reduction in mobile data pricing (see Figure 6). GSMA’s analysis of developing countries
shows that the mid-level tariff bundle (600 MB to 2 GB) declined from 2-3% of average
disposable income in 2015 to 0.5%-1% in 2017.
Social and messaging services are an integral part of the smartphone ecosystem, while
video streaming and especially e-commerce are yet to be monetised and represent one of
the main growth opportunities for telcos, according to GSMA. We discussed the first topic
at the beginning of 2016: EM and FM telecoms: What price for a video? – and concluded
then that while video is the main traffic generator and revenue driver for telcos, cheaper
pricing and competition may neutralise most of the growth. As for the e-commerce
opportunity and the wider use of payments by mobile operators, we discussed this at
length in EMEA & South Asia: Telecom mobile – Mobile money: Where does it work? and
concluded that few countries offer strong potential for mobile money development (e.g.
Pakistan) while prospects elsewhere are either modest (Turkey) or immaterial (Egypt).
Figure 4: Increase in mobile internet users by country between mid-2018 Figure 5: Unique mobile penetration across emerging markets
and 2025, mn
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Russia
Algeria
Indonesia
Nigeria
Turkey
Kenya
Egypt
India
Ukraine
Kazakhstan
Pakistan
China
Bangladesh
Source: GSMA Intelligence Source: GSMA Intelligence
Figure 6: Monthly data bundle costs in major emerging markets. Tariff as Figure 7: Mobile ecosystem adoption. Activity performed at least once a month –
percentage of monthly income (medium bundle) percentage of smartphone users
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EMEA telecoms
Concerning top-line growth and revenue streams, GSMA takes a conservative stance on
global mobile growth until 2025 (see Figure 8) due to a slowing of unique subscriber
growth, regulatory interventions and increased competition.
GSMA sees upside risks to its conservative top-line forecasts coming from 5G and IoT
services, not so much from plain connectivity but more from the development of new
services. As long as the revenue potential for carriers from IoT and 5G is unproven,
GSMA sees mobile connectivity being commoditised, with the related revenues
demonstrating the slowest growth rates and losing market share in the growing global IoT
pie (see Figure 9), as operators struggling to compete with applications, platforms and
service providers (including cloud data analytics and security), and professional services
(systems integration, consulting and managed services).
We think 5G will become a bigger focus for us and for operators as the year progresses. It
will be interesting to watch how two competing strategies to attract (keep) customers
unfold in the US: on the one hand, that of Verizon which has focused on a quick rollout of
5G and is betting on connectivity quality; and on the other, that of AT&T, which, after the
acquisition of Time Warner, is betting on content quality and a potential boost to its
advertising revenues. In EM/FM, we are likely to see 5G auctions and licensing only in
Russia, possibly Turkey but unlikely anywhere else. Still, we see the potential for 5G
auction and frequency allocations to affect (likely negatively) operators’ financial
performance.
Figure 8: Projected growth in global mobile revenue Figure 9: Global IoT revenue projections. Percentage of total IoT revenues
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Figure 10: Growth in connections, 2017-2025 (mn)
Source: GSMA Intelligence
Markets under our coverage
Russia is the most penetrated country across our universe (albeit with notoriously high
churn rates), while we see room for organic growth in Pakistan, Bangladesh, Kenya and
Guinea: something that should continue benefiting GTH, Safaricom and Sonatel.
Competition remains fierce across these countries though.
Figure 11: Mobile penetration across developing and frontier markets Figure 12: Mobile penetration across frontier markets
180% 140%
160% 120%
140% 100%
120% 80%
100% 60%
80% 40%
60% 20%
40% 0%
Algeria
Sierra Leone
Senegal
Kenya
Guinea
Mali
Pakistan
Bangladesh
20%
0%
Russia Kazakhstan Ukraine Egypt Turkey
Source: Euromonitor Source: Euromonitor
Despite strong growth of 3G and 4G connections, smartphone adoption in Russia is

significantly lower than in Turkey and developed countries, although consumer demand
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8 January 2019
EMEA telecoms
for smartphones is increasing, as a growing share of more affordable devices (Xiaomi,

Huawei, ZTE) should bring smartphone adoption to 85% by 2025 from 62% currently,
according to GSMA. We believe demand for more data, supported by growing
smartphone penetration, will be the main driver of ARPU in Russia as data pricing is
extremely low given the highly competitive backdrop (the cost of a 5 GB high-end basket
in Russia is $8/month with the same level in Italy vs $15 in Netherlands, $21 in Spain, $24
in Germany and $38 in the US, according to GSMA).
Figure 13: Smartphone adoption dynamics (selected countries). Smartphone Figure 14: Daily mobile internet usage in 2017, minutes (selected countries)
connections as a percentage of total mobile connections
250
2017 2025
100%
90% 200
80%
70%
150
60%
50%
40% 100
30%
20% 50
10%
0%
Turkey Russia Ukraine Kazakhstan Developing 0
markets Kenya Egypt Turkey Russia
Note: Based on survey of internet users aged 16-64
Source: GSMA Intelligence Source: Hootsuite
Turkey has demonstrated the highest ARPU growth across our universe, driven by the
successful expansion of digital telco services (the OTT video market in Turkey is
dominated by Turkcell TV+ – a rare win of a telco over OTT players) and carriers’ ability to
adjust prices upwards given high inflation rates.
Ukraine, Bangladesh, Pakistan and Kenya are the countries with the lowest ARPU across
our universe, but with potential to grow due to ongoing expansion of mobile broadband
and increasing smartphone affordability, we believe.
Figure 15: Mobile ARPU dynamics across developing and frontier markets, Figure 16: Mobile ARPU dynamics across frontier markets,
$ (at constant 2015 FX rate) $ (at constant 2015 FX rate)
2015 2016 2017 2018E 2015 2016 2017 2018E
14 9
11.8 8 7.6
12
7
10
6
5.1
8 5 4.2
6 5.5 5.1 5.2 4 3.3
3
4 1.9
2.4 2 1.5
2
1
0 0
Turkey Russia Kazakhstan Egypt Ukraine Senegal Algeria Mali Pakistan Kenya Bangladesh
Note: Avg. levels based on companies’ data under our coverage (excl. Vodafone Egypt) Note: Avg. based on companies’ data under our coverage
Source: Company data, Renaissance Capital estimates Source: Company data, Renaissance Capital estimates
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Figure 17: Mobile ARPU dynamics across developing and frontier markets, Figure 18: Mobile ARPU dynamics across frontier markets,
$ (at current FX rates) $ (at current FX rates)
2015 2016 2017 2018E 2015 2016 2017 2018E

10 9
8.1
9 8
8 7
6.7
7
6
6 5.1 5 4.4 4.4
5
4
4 3.3 2.8
3
3 2.3 2.0 1.6
2 2 1.4
1 1
0 0
Turkey Russia Kazakhstan Egypt Ukraine Senegal Algeria Mali Pakistan Kenya Bangladesh
Note: Avg. levels based on companies’ data under our coverage (excl. Vodafone Egypt) Note: Avg. based on companies’ data under our coverage
Consolidated telecom EBITDA margins across selected countries stood at 35-50% in

9M18 with notable contraction in Kazakhstan, Algeria and Bangladesh and expansion in
Ukraine, Turkey, Kenya and Pakistan. We would point out that some companies have
already adopted IFRS16 reporting standards, with others to adopt them from 1 January
2019, which should lead to an overall uplift in EBITDA margins – e.g. MTS saw its
EBITDA margin expand by 6.5 ppts once it adopted the new policy in 2018. The change
to net income and cash flows is likely to be minimal though.
Figure 19: Telecom EBITDA margin dynamics (consolidated) across developing Figure 20: Telecom EBITDA margin dynamics (consolidated) across frontier
and frontier markets markets
2015 2016 2017 9M18 2015 2016 2017 9M18

50% 60%
48%
45% 55%
46%
43% 50%
44% 48%
50%
42%
39% 44%
40% 45%
38% 37%
36% 40%
36%
35%
34%
35%
32%
30% 30%
Egypt Ukraine Russia Turkey Kazakhstan Kenya Pakistan Algeria Bangladesh
Note: Excl. new IFRS standards and non-recurring items; avg. levels based on companies’ data under our coverage Note: Avg. levels based on companies’ data under our coverage
(excl. Vodafone Egypt; and incl. MFON for Russia)
Source: Company data Source: Company data
Capex/sales stood between 15-25% in 2018 with higher than average historical spending
in a period of new technology adoption: e.g. 3G in Ukraine in 2015 and LTE in Turkey.
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Figure 21: Capex/sales average ratio dynamics across developing and frontier Figure 22: Capex/sales average ratio dynamics across frontier markets
markets
2015 2016 2017 2018E 2015 2016 2017 2018E

45% 30%
40% 25%
25%
35%
20% 19%
30% 20%
25% 16%
25% 15% 14%
21% 20% 15%
20% 17%
15% 11% 10%
10%
5%
5%
0% 0%
Ukraine Turkey Russia Egypt* Kazakhstan Bangladesh Senegal Pakistan Algeria Kenya Mali
Note: Excl. licenses; based on average companies’ data under our coverage (excl. Vodafone Egypt) Note: Excl. licenses; based on companies’ data under our coverage
*9M18
11
Russia – market trends and Renaissance Capital
8 January 2019
company outlooks EMEA telecoms
▪ Russian telcos saw an inflection point in their mobile service revenue growth in
2016, driven by price repair with low-to-mid single-digit growth since then.
MegaFon (MFON; not covered) has lagged other players in the market but
caught up in 3Q18 and demonstrated higher growth than MTS and VEON’s
Beeline (see Figure 24). The competitive environment remains benign and
constructive; however, unlimited tariffs, despite being priced at above-average
ARPU levels (RUB600-650 in Moscow), could cap growth over the long term. In
2019, we think mobile growth could be around 3%, driven mostly by VAT
indexation. MFON and VEON have already notified their customers about tariff
indexation (by a coefficient of 1.016949) related to the VAT increase from 18% to
20% coming into effect in Russia in 2019.
▪ Regulatory risks have increased: 1) regional roaming has already been

abolished; 2) higher capex driven by the introduction of an anti-terrorism law
(the so-called Yarovaya law) – this is already discounted in valuations and there
is no evidence so far to suggest capex needs to be increased; 3) we have no
clarity on the 5G licence issuing process, or on frequency allocations especially
in the 3 GHz domain where they are scarce (especially concerning to us is that
MFON and RTKM have already received allocations but VEON’s and MTS’s
applications were not satisfied) and we see risks of overspending on
licences/frequencies (40 MHZ wide blocks cost between EUR0.5-1bn in 3 GHZ
domain in UK and Italy) and infrastructure buildout1.
▪ Retail: All companies have been improving their gross margin on handsets
(towards 10-15% from zero in 2016), with a focus on accessories and up-selling,
but a reduction of PoS may only start in earnest in 2019. Legal restructuring is
complete: Euroset was split, with VEON’s part merged into VEON’s mono brand
network and MFON’s part merged with Svyaznoy (MFON took a 25% stake in
Svyaznoy and negotiated a preferential deal with it). Svyaznoy (multi-brand) will
have 4,700 shops, plus 3,600 MFON own shops; VEON will have 5,500 stores
(3,500 monobrand), MTS has 5,700 monobrand stores and Tele2 about 4,000
PoS (mostly franchise). We think that Svyaznoy could close 10-15% of the shops
overlapping with Euroset in the next three months. VEON’s agreement with
Svyaznoy expires in March 2019 and we doubt it will be extended.
As an upside risk, we think that each player could close 1,000-2,000 shops
over the next 12-15 months at a RUB6bn pa cost, and this could add 200 bpts to
operator margins, but we stick with our more conservative current forecasts not
factoring such a possibility.
▪ Operators are seeking new streams of income: e.g. MTS has invested in event
ticketing – generally leading the B2C effort; MFON and RTKM as well as MTS
are active in B2B as well. We also see those as potential sources of upside risk
to our forecasts – we provide a closer looks in our latest report on Russian
mobiles Russian telcos – Growth vs risks.
▪ Capex budgets for 2019 are unlikely to be much different from those in 2018
unless 5G auctions come into the spotlight with potentially higher spending.
1
The four mobile operators have agreed (we do not have the details though) to join forces when
constructing 5G infrastructure.
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Figure 23: Big three mobile subscriber dynamics in Russia, mn Figure 24: Big three mobile service revenue dynamics in Russia, YoY %
MFON MTS VEON MFON MTS VEON
11%
210 10%
9%
190 8%
57.7 57.4 58.1 58.3 57.0 58.3 58.8 58.2 56.3 56.4 56.2 7%
170 6%
5%
150 4%
3%
130 2%
77.3 77.8 79.0 80.0 79.0 78.0 78.5 78.3 78.1 78.1 78.0 1%
110 0%
-1%
90 -2%
-3%
70 -4%
74.5 74.7 75.5 75.6 75.6 75.8 75.6 75.4 74.5 75.9 75.2 -5%
50 -6%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Figure 25: Big three EBITDA margin dynamics in Russia Figure 26: MTS and MFON handset sales dynamics in Russia, YoY %
MFON* MTS VEON MFON MTS
80%
49% 75%
70%
47% 65%
60%
55%
45% 50%
45%
43% 40%
35%
41% 30%
25%
20%
39% 15%
10%
37% 5%
0%
35% -5%
-10%
-15%
33% -20%
-25%
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
*MFON consolidated EBITDA
13
Renaissance Capital
8 January 2019
EMEA telecoms
MTS
MTS plans to announce a new dividend policy in the spring and we think it could be
similar to the previous one with a target payout of at least RUB75/sh over the next three
years (it was RUB25-26/sh for 2016-2018). However, given its provision for the Uzbeki
investigation, we think RUB15-20/sh in 2019 would be a more realistic expectation with
higher payments in 2020-2021.
We have factored the consolidation of MTS Bank and the Uzbeki fine provision of
RUB56bn, with a relevant payment due in 2019, into our financials. However, we exclude
MTS Bank’s financials from our multiple valuation (EV/EBITDA and P/E); we have also
increased our WACC from 12.5% to 13% for the DCF.
We apply a RUB70/$ exchange rate for 2019, reduce our TP to $10.1/ADR (from
$11/ADR) and retain our BUY rating. For locals our new TP is set at RUB301/sh (from
RUB304/sh) and we upgrade to BUY from Hold following the weakness in share price in
4Q18.
Figure 27: MTS – old estimates vs new, RUBmn (unless otherwise stated)
Old estimates (October 2018) New estimates* Deviation
2018E 2019E 2018E 2019E 2018E 2019E
Revenue 462,688 474,856 478,700 509,763 3.5% 7.4%
EBITDA 215,049 219,104 220,035 228,226 2.3% 4.2%
EBITDA margin 46.5% 46.1% 46.0% 44.8%
Net income 49,089 62,388 8,970** 64,164 -81.7% 2.8%
Capex 89,092 89,398 89,540 90,941 0.5% 1.7%
Note: Including IFRS 15 and IFRS16 impacts
*Incl. MTS Bank
**Affected by RUB56bn Uzbeki fine provision
Source: Renaissance Capital estimates
Figure 28: MTS TP YE19 calculation – blended DCF and multiples, RUBmn (unless otherwise stated)
WACC, % 13.0%
Growth, % 1.0%
DCF fair value, RUB/share 380
DPS, RUB/share 20.0
DCF fair value including DPS, RUB/share 400
Target 2019 EV/EBITDA, x (excl. MTS Bank) 4.5

Target EV 1,010,482
Target MktCap 625,302
Fair value per share, RUB 342
Fair value per share including DPS, RUB 362
Target 2019 P/E, x (excl. MTS Bank) 10

Fair value per share, RUB 334
Fair value per share including DPS, RUB 354
MTS Bank valuation

Target P/BV, x 0.5
Equity value 10,100
MTS stake 5,555
Fair value per share, RUB 3.0
TP: average EV/EBITDA, P/E, DCF, RUB/share (incl. MTS Bank) 354
With 15% discount, cum dividend, RUB/share 321
With 15% discount, ex. dividend, RUB/share 301
Fair value per GDR cum dividend, $ 10.9

TP per GDR ex. dividend, $ 10.1
14
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 29: MTS financials adjusted for new IFRS standards, RUBmn (unless otherwise stated)
Income statement 2017 2018E 2019E 2020E
Sales 442,911 478,700 509,763 520,190
Cost of sales (263,124) (258,665) (281,536) (288,221)
EBITDA adj. 179,787 220,035 228,226 231,970
EBITDA margin (%) 40.6% 46.0% 44.8% 44.6%
Depreciation & amortisation (79,912) (104,028) (106,109) (107,170)
Operating profit 99,875 116,006 122,118 124,800
Other income/(expense), including FX and discontinued operations (17) (56,837)* (255) (260)
Net interest (20,516) (29,712) (37,305) (35,567)
PBT 75,567 85,209 84,558 88,973
Tax (18,977) (19,598) (19,448) (20,464)
Tax rate 25.1% 23.0% 23.0% 23.0%
Minorities (548) (888) (946) (965)
PAT 56,042 8,970 64,164 67,544
Shares, mn** 1,831 1,831 1,831 1,831
ADR, mn 915 915 915 915
EPS per ADR, RUB 61.22 9.80 70.10 73.79
DPS per common share***, RUB 26.0 26.0 20.0 25.0
Balance sheet 2017 2018E 2019E 2020E

Non-current assets 379,665 555,066 551,898 538,070
Current assets 60,575 63,061 65,094 64,325
Monetary assets 81,343 118,748 72,278 43,757
Other assets 29,487 29,487 29,487 29,487
Total assets 551,070 766,361 718,757 675,639
Current liabilities 78,159 86,992 90,064 89,281
Indebtedness (incl. lease liability) 304,644 488,872 469,672 404,597
Minorities and other 48,141 104,781 49,975 50,941
Equity 120,126 81,497 109,046 130,821
Total liabilities & shareholders' equity 551,070 762,143 718,757 675,639
Net debt 223,301 370,124 397,394 360,840
Cash flow 2017 2018E 2019E 2020E

NI ex other items 54,741 67,668 64,164 67,544
Non-cash Items 79,159 107,863 107,055 108,135
Change in working capital 10,740 6,348 (54,714) (14)
Operating cash flow 144,640 181,879 116,505 175,664
Capex (76,152) (89,540) (90,941) (93,342)
Investing cash flows (73,178) (113,610) (102,941) (93,342)
Free cash flow incl. lease payments 71,462 56,269 1,563 70,323
Financing cash flow (50,445) (26,645) (55,815) (110,844)
Note: *Including RUB56bn Uzbekistan fine (according to the company’s provision)
**Shares adjusted for treasury shares
***Dividend for the respective calendar year
Source: Company data, Renaissance Capital estimates
15
Renaissance Capital
8 January 2019
EMEA telecoms
VEON
We have adjusted our 2018 and 2019 EBITDA down due to a weaker currency outlook in
Russia and Pakistan as well as higher HQ costs than we assumed before. During its 3Q18
results conference call, management confirmed its FY18 target to reduce corporate costs by
around 20% YoY from $431mn in FY17, but its target to halve them is likely to be reached
only in 2020, in our view.
Telenor’s convertible bond matures in September 2019 and the current conversion price
adjusted for dividends is $4.0649 (vs $4.9 initial). Since 12 October 2018, Telenor has a
right for a call (Telenor can redeem the bond in cash, shares or a combination) with the
call trigger price of $5.284/ADS (at current conditions) which is more than twice the
current market price.
Figure 30: VEON ownership structure

Shareholder Common shares % of common and voting shares
Free float 513,454,732 29.2%
Telenor 256,703,840 14.6%
LetterOne 840,625,001 47.9%
The Stichting 145,947,562 8.3%
Total 1,756,731,135 100%
Source: Company data
Figure 31: Telenor convertible bond information

Issue size, $ 1,000,000,000
Maturity date 20-Sep-2019
Initial conv price, $ 4.9
Initial underlying exchange shares (Exchange property) 204,081,633
Current conv price, $ (adj. for dividends based on formula in the terms & conditions of the bond) 4.0649
Underlying exchange shares (Exchange property) 246,008,512
Issuer call (Telenor can redeem the bond in cash*)
Date after 12 Oct 2018
Share price trigger, $ 5.284
Value of the underlying exchange shares, $ 1,299,908,977
Premium to the bond principal value 130%
Telenor current ownership, shares 256,703,840
VEON market price, $ 2.36
Note: *Telenor has the flexibility to deliver cash, shares or a combination
Source: Bloomberg, Company data
The conversion price changes depending on the amount of dividends VEON pays before
maturity.
Figure 32: Possible scenario of conversion price with a $0.31/ADS dividend distributed until maturity
Underlying VEON shares Amount of Dividend Shares to be added to VEON market price
(Exchange Property) dividends, $ per ADS the Exchange Property assumption*, $
Final 2018
Current 246,008,512 44,281,532 0.18 14,760,511 3.0
dividends
Interim 2019
263,721,125 34,283,746 0.13 11,299,991 3.0
dividends
After 272,069,013 shares and
dividends $3.68 conversion price
*Avg. price during the dividend payment period
With $3.4bn cash in hand (after $2.8bn proceeds from the Italian deal; $472mn
consolidated by GTH) at end-3Q18, VEON currently intends to redeem its notes expiring
in 2021-2024. We believe it is also likely that the company will issue longer maturity
bonds at a lower effective interest in hard currency ($ or EUR) or issue LCU bonds (e.g. in
RUB) at a higher interest but matching the interests of the operating entity.
16
Renaissance Capital
8 January 2019
EMEA telecoms
We retain our BUY rating on the stock but lower our TP to $3.3/DR from $3.8/DR
previously on the back of higher headquarter costs, lower valuation of GTHE and weaker
exchange rate in Russia and Ukraine; we think VEON can pay dividends in 2019
exceeding those of MTS in yield terms. However, the operating environment in a number
of the countries it operates in remains challenging.
Figure 33: VEON – old estimates vs new, $mn (unless otherwise stated)
Old (October 2018) New Deveiation
2018E 2019E 2018E 2019E 2018E 2019E
Revenue 8,942 8,874 9,051 8,626 1.2% -2.8%
EBITDA 3,429 3,449 3,344 3,259 -2.5% -5.5%
EBITDA margin 38.4% 39.0% 36.9% 37.8%
Net income* 1,063 213 1,090 160 2.5% -24.8%
Net debt 6,035 5,946 6,171 6,141 2.3% 3.3%
Note: *Including gain on sale of 50% stake in Wind 3 in 2018
Figure 34: VEON valuation, $mn (unless otherwise stated)

Segment EBITDA 2019E Target EV/EBITDA, x EV
Russia 1,595 4.5 7,179
Ukraine 384 4.0 1,536
Algeria 348 4.0 1,566

Pakistan 654 4.0 2,941
Bangladesh 187 4.0 843
Kazakhstan 154 4.0 617

Uzbekistan 138 3.5 484
Kyrgyzstan 57 3.0 170
Armenia 34 3.5 117
Tajikistan 37 3.0 111
Georgia 11 3.5 40
PV of HQ costs and eliminations (305) 2.5 (762)
Total ex GTH 9,491
Equity value calculation

GTH target equity value 793
GTH market equity value 555
VEON total net debt 6,141

GTH net debt 1,938
Less minorities 270
Equity with GTH at target value 5,811
$ per ADS 3.3
Equity with GTH at market value 5,573
$ per ADS 3.2
TP, $ per ADS, ex-div 3.3
17
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 35: VEON key financials, $mn (unless otherwise stated)

Sales 9,474 9,051 8,626 8,858
Cost of sales (5,799) (5,707) (5,367) (5,466)
EBITDA underlying 3,675 3,344 3,259 3,391
EBITDA margin 38.8% 36.9% 37.8% 38.3%
PBIT 1,506 1,255 1,271 1,406
Other income/expenses (168) (50) (50) (50)
Net interest (840) (833) (741) (681)
Associates (522) 1,200* 0 0
PBT (24) 1,571 481 675
Tax (472) (483) (313) (405)
Tax rate na 31% 65% 60%
Minorities 13 1 (8) (19)
PAT (483) 1,090 160 251
ADS, mn 1,757 1,757 1,757 1,757
EPS per ADS, $ (0.27) 0.62 0.09 0.14
DPS per ADS, $ 0.28 0.30 0.33 0.35

Current assets 1,441 1,377 1,312 1,347
Monetary assets 1,377 3,447 2,977 2,528
Total assets 19,521 19,733 18,863 18,083
Other liabilities 1,461 1,462 1,454 1,435
Indebtedness 11,102 10,602 10,102 9,602
Minorities (425) (426) (418) (399)
Equity 3,927 4,524 4,165 3,855
Net debt 8,741 6,171 6,141 6,090
Cash flow 2017 2018E 2019E 2020E

Capex 1,731 1,947 1,651 1,619
Investing cash flows (3,016) 1,004 (1,651) (1,619)
Free cash flow (541) 3,061 558 630
Financing cash flow (733) (992) (1,027) (1,080)
Note: *Gain on sale of 50% stake in Wind 3
18
Renaissance Capital
8 January 2019
EMEA telecoms
Rostelecom
According to TMT Consulting, the fixed broadband market in Russia will grow at a c. 1%
2018-2022E CAGR mainly driven by an ARPU uptick in the B2C segment due to a shift
towards high-speed tariffs, while convergence continues diluting prices. Meanwhile, the
pay TV market will demonstrate a higher pace of growth of 3.4% 2018-2022E CAGR on
the back of a higher share of the IPTV segment given its expansion to rural areas,
according to TMT Consulting. Consolidation in the market is likely to continue with larger
players taking over small regional carriers, which are likely to suffer in the ‘Yarovaya law’
(anti-terror law) environment.
Figure 36: Fixed broadband market structure in Russia Figure 37: Pay TV market structure by subscribers in 3Q18
Other Tricolor TV
Other 33% 28%
35%
Rostelecom
36%
MTS Rostelecom
8% 23%
VEON
ER Telecom
7% MTS ER Telecom
12%
10% 8%
Source: TMT Consulting Source: TMT Consulting
RTKM demonstrated solid revenue growth in 2018 (+5.3% in 9M18), driven by broadband
(+11.5%), Pay-TV (+25%) and VAS and Cloud revenues (+48% YoY in 9M18) mainly due
to the development of state-related projects (e.g. ‘Smart City’), data-centres and the
promotion of cloud services. Concerning the customer split, the B2B/B2G unit is the main
growth driver with its revenue up 11% in 9M18, while B2C is up just 1.3% – a trend we
expect to continue in 2019.
We slightly increase our EBITDA forecast, but decrease FCF to RUB11bn, 38% lower
than in 2017. FCF has been under pressure in 2018 due to negative WC dynamics
related to one-off projects and lower proceeds from the sale of PPE, specifically real
estate.
RTKM started to pay interim dividends in 2018 – RUB2.5/sh for 9M18– and we expect
total dividends to amount to RUB5/sh – the minimum level allowed by its dividend policy
due to the softer FCF generation in 2018.
We maintain out TP for common shares at RUB86/sh (BUY rating also maintained) and
preferred shares at RUB56/sh (HOLD maintained).
Figure 38: Rostelecom – old estimates vs new, RUBmn (unless otherwise stated)
Old (October 2018) New Deviation
2018E 2019E 2018E 2019E 2018E 2019E
Revenue 317,119 324,648 317,119 324,648 0.0% 0.0%
EBITDA 99,510 102,343 100,462 103,317 1.0% 1.0%
EBITDA margin 31.4% 31.5% 31.7% 31.8%
Net income 19,008 20,892 19,001 21,219 0.0% 1.6%
Capex (excl. state programs) 63,567 62,386 63,567 62,386 0.0% 0.0%
Note: Including IFRS 15 and IFRS16 impacts
19
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 39: Rostelecom financials adjusted for new IFRS standards, RUBmn (unless otherwise stated)
Sales 305,329 317,119 324,648 333,112
Cost of sales (208,472) (216,657) (221,331) (227,294)
EBITDA 96,857 100,462 103,317 105,818
EBITDA margin (%) 31.7% 31.7% 31.8% 31.8%
PBIT 37,885 41,647 42,533 44,493
Other income (548) (1,200) (200) (200)
Net interest (15,739) (16,038) (16,485) (17,157)
Associates (2,692) 940 2,122 2,597
PBT 18,906 25,349 27,970 29,733
Tax (4,856) (5,858) (6,204) (6,513)
Tax rate) 26% 23% 22% 22%
Minorities (353) (490) (547) (583)
PAT 13,697 19,001 21,219 22,637
Common shares, mn 2,575 2,575 2,575 2,575
Preferred shares, mn 210 210 210 210
EPS per common share, RUB 5.3 7.4 8.2 8.8
DPS per common share, RUB 5.0 5.0 5.2 5.5
DPS per preferred share, RUB 5.0 5.0 5.2 5.5

Current assets 66,178 71,352 72,396 74,284
Monetary assets 3,815 3,500 3,500 3,500
Investments 141,806 142,746 144,868 147,465
Total assets 560,229 597,495 599,314 601,268
Indebtedness (incl. lease obligation) 191,372 210,159 206,532 201,884
Minorities 3,242 3,732 4,279 4,862
Equity 246,122 253,552 260,849 269,095
Net debt 187,557 206,659 203,032 198,384
Cash flow 2017 2018E 2019E 2020E

Capex* (60,752) (67,567) (66,386) (66,244)
Free cash flow 18,311 11,285 17,550 19,039
Note: *Including state programme
Sistema
Sistema’s deleveraging process has progressed slowly in 2018, with RUB228bn liabilities
as of end-3Q18 (net liabilities of around RUB214bn). We think that by the end of 2018 net
liabilities could decrease by RUB8bn to around RUB206bn supported by MTS interim
dividends, MTS buybacks and dividends from subsidiaries.
Over the next three months, Sistema is likely to close the Detsky Mir (DM) deal, as a
result of which its leverage profile should see a notable improvement. In 2019, c.
RUB58bn debt is due to mature including c. RUB25bn of eurobonds. Management
currently targets RUB150bn of liabilities during the course of 2019 (or by YE19).
We have made slight adjustments to our forecasts, factoring in higher liabilities (largely due
to higher investments in 2019) and an exchange rate of RUB/$70, and reduce our TP to
RUB13 per common share (from RUB15.8/sh) and $4.4 per GDR (from RUB6.2/GDR),
maintaining our BUY ratings.
Fundamentally the shares look undervalued to us, but we doubt the stock will attract
much attention given historic risk and the absence of wider investor interest in Russia.
20
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 40: Discount of SSA (GDR) to MBT (GDR) and value of other assets (net of costs and liabilities)
-10%
-15%
-20%
-25%
-30%
-35%
-40%
-45%
-50%
-55%
-60%
-65%
-70%
Jul-17
Jul-18
Jun-17
Oct-17
Nov-17
Dec-17
Jan-18
Mar-18
Apr-18
Jun-18
Oct-18
Nov-18
Dec-18
Jan-19
May-17
Aug-17
Sep-17
Feb-18
May-18
Aug-18
Sep-18
Figure 41: Sistema – valuations of individual companies

Effective SSA's equity SSA's equity Valuation
Company Sector Multiple
ownership value RUBmn value $mn* approach
MTS Telecoms 50.00% 275,556 3,937 Target price na
Multiples (Blended
Segezha Group Pulp&paper 100% 54,138 773 na
EV/EBITDA, P/E, x)
Detsky Mir Retail 52.1% 44,908 642 Target price na
Bashkirian Power Grid
Utilities 91% 14,379 205 Multiples (EV/km, RUB) 192,902
Company
Defence/Microelectronic
RTI 87.0% 3,402 49 Multiples (EV/EBITDA) Various***
s
MTS-bank Banking 43.2% 4,367 62 Multiples (P/BV, x) 0.50
Multiples (EV/EBITDA,
Medsi Healthcare 100% 27,203 389 14.0
x)
Real-estate portfolio** Real estate misc 43,638 623 misc na
Agricultural assets
(88.1% of Agroholding Multiples (EV/EBITDA,
Agriculture misc 20,400 291 Various****
Steppe and 50% of RZ x)
Agro)
Other (Binopharm,
Ozon, Concept Group,
Kronshtadt Group,
Technopark Sarov, Misc 24,024 343 Deal value, multiples na
Sistema Capital
Partners, Intourist and
Regional Hotel Chain)
Total gross NAV 512,014 7,314
Note: *Translation at $/RUB 70; **Assets: Lider-Invest (development business fair value at RUB24bn), Business – Nedvizhimost, Mosdachtrest (rental assets fair value at c. RUB20bn); ***Defence and security solutions at 7.4x and
microelectronics at 5.6x. ****Steppe at 6.5x and RZ Agro at 6x.
Figure 42: Sistema – calculation of TP

Valuation with TP of MTSS (RUB301/sh.) Valuation with TP of Valuation with MP of Valuation with MP
and DM (RUB117/sh), RUBmn MTSS and DM, $mn* MTSS** snd DM**, RUBmn of MTSS**, $mn*
Gross market NAV 512,014 7,314 440,422 6,292
Liabilities to Rosimushchestvo 19,100 273 19,100 273
Holding' Net debt*** 205,700 2,939 205,700 2,939
Holding's costs PV 46,631 666 46,631 666
Net NAV 240,583 3,437 168,991 2,414
Holding discount with additional risks, % 40% 40% 40% 40%
Sistema's NAV 144,350 2,062 101,394 1,448
TP
Value per GDR, $ 4.4 3.1
Value per local share, RUB 15.3 10.8
Value per local share at a historical average 15%
13.0 9.2
discount to GDR, RUB
Note: *Translation at $/RUB 70; **MTSS price RUB232/share; DM (DSKY) price RUB90/share.; ***3Q18 net debt adj. for future inflows/outflows until YE18
21
Kazakhstan – KCELL Renaissance Capital
8 January 2019
EMEA telecoms
Kazakhstan’s mobile market backdrop remains bleak – a slow-growing customer base

due to high penetration, tough competition and unfavourable regulation (i.e. the
termination of pay-as-you-go data charges in 2Q18) continued putting pressure on
revenues, while growth is mainly driven by higher handset sales negatively affecting
margins. There were four mobile operators in the market (Tele2 and Altel operate under
separate brands) in 3Q18 but after the acquisition of KCELL by Kazakhtelecom, the latter
became the main force in the market in 2019.
Figure 43: Telecom market structure in Kazakhstan in 2017 Figure 44: Mobile market structure in Kazakhstan in 2017
Other
22%
Altel/Tele2 Kcell
Kazakhtelecom 38%
30% JV*
26%
Beeline
12%
Altel/Tele2 JV
15% Beeline
Kcell 36%
21%
Note: *Kazakhtelecom owns 51%/49% of the economic interest/voting shares in Altel/Tele2 JV with a call option to
consolidate 100% effective in 2019
Kazakhtelecom has closed the deal and purchased a 75% stake in KCELL (24% owned
directly by Telia and 51% owned by Fintur, in which TCELL owned a 41.45% stake and Telia a
58.55% stake) for $446mn, with an implied EV of $771mn for 100% on a cash and debt free
basis.
Kazakhtelecom did not make a mandatory tender offer for minorities, as, according to
local law, entities in which the state has more than 50% (and the sovereign wealth fund
Samruk-Kazyna owns 51% in Kazakhtelecom) are exempt from MTO procedures.
The regulator has committed to the implementation of a number of remedies for the deal’s
approval: 1) to keep flat tariffs over the three-year period after the deal’s close; 2) to retain
existing infrastructure sharing agreements with other operators (e.g. network sharing with
VEON’s Beeline); 3) to roll out 4G in rural areas with a population above 4k; 4) to
implement 5G standards no later than 2021; 5) to retain the KCELL and Activ brands with
an independent management in the mobile operator.
We adjust our forecasts for down KCELL, reduce our TP to $3/ADR (from $3.3) and
downgrade the stock to SELL from Hold as we see higher risks to its business from
Kazakhtelecom ownership.
Figure 45: Kcell – old estimates vs new, KZTmn (unless otherwise stated)
Old (January 2017) New Deviation
2018E 2019E 2018E 2019E 2018E 2019E
Revenue 157,581 163,864 150,718 153,146 -4.4% -6.5%
EBITDA (excl. non-recurring items) 66,668 71,915 54,614 56,778 -18.1% -21.0%
EBITDA margin 42.3% 43.9% 36.2% 37.1%
Net income 27,909 33,937 13,931 18,779 -50.1% -44.7%
Note: Including. IFRS15 impact
22
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 46: Kcell key financials, KZTmn (unless otherwise stated)

Sales 147,475 150,718 153,146 154,975
Costs ex. D&A (89,828) (96,104) (96,367) (96,987)
EBITDA (excl. non-recurring items) 57,647 54,614 56,778 57,988
EBITDA margin, % 39.1% 36.2% 37.1% 37.4%
PBIT 31,827 26,343 31,897 32,299
Net interest (9,419) (8,483) (7,821) (7,109)
PBT 22,408 17,860 24,075 25,190
Tax rate 39% 22% 22% 22%
PAT 13,786 13,931 18,779 19,648
Shares, mn 200 200 200 200
ADR, mn 200 200 200 200
EPS, KZT 69 70 94 98
DPS, KZT 58 56 66 69

Current assets 28,973 33,158 32,467 32,855
Monetary assets 12,659 11,231 11,793 11,761
Total assets 179,849 177,445 181,633 185,754
Indebtedness 70,418 73,418 70,418 67,418
Other 6,172 6,172 6,172 6,172
Equity 74,437 76,690 84,324 90,827
Net debt 57,758 62,187 58,624 55,656
Cash flow 2017 2018E 2019E 2020E

Net income attributable to parent 13,786 13,931 18,779 19,648
Non-cash items 23,147 26,261 24,882 25,689
Change in working capital (17,871) (11,843) 245 230
Capex (22,584) (21,101) (21,440) (21,697)
Investing cash flow (22,584) (21,101) (29,198) (29,454)
Free cash flow to equity 10,899 7,249 14,707 16,113
23
Turkey – market trends and company Renaissance Capital
8 January 2019
outlooks EMEA telecoms
▪ Turkish mobile’s revenue growth in 2017-2018 surpassed that of any other telcos
globally and it was not a one-off.
▪ The government equalised the communications tax on voice and data, but
because they are levied on telco revenues, the state makes it easier for telcos to
inflation-adjust prices.
▪ However, the government’s willingness to curb inflation has currently prompted

carriers to increase data allowance in bundles to address an inflation issue – we
think temporarily – until YE18.
▪ The development of successful mobile apps, content and services plays well to
Turkish national traits and preferences for local content in local language, and
the impressive monetisation of this content distinguishes Turkey from most EM
countries. TCELL is demonstrating strong monetisation of innovative products
and these are likely to continue driving its superior growth. TTKOM has similar
products although with less emphasis on marketing but we also see signs of
improving margins.
▪ FX exposure of the balance sheet mismatched with TRY exposure of P&L is the
biggest problem for Turkish telcos. However, TCELL has only limited actual FX
exposure due to high level of hedging.
▪ TTKOM had around TRY25bn in gross debt at 3Q18 with 57% total hedge ratio –
up from 44% in 2Q18, but at a higher cost. TCELL reported TRY23bn in total debt
in 3Q18 – 57% in LCU after hedging and the remainder is naturally hedged with FX
cash balances.
▪ TCELL’s cash position will be supported by the sale of its stake in Fintuir and
TCELL receiving approximately EUR350mn in cash (deal to be completed in
January 2019).
▪ We have a preference for TCELL given its stronger growth and more prudent
hedging approach than that of TTKOM.
▪ We have adjusted out forecasts upwards given the stronger guidance provided
during the 3Q18 results call, and we increase out TP for TCELL to TRY16.6/sh
(slightly up from TRY16.5/sh before) and $6.9/ADR (up from $6.6/ADR),
maintaining our BUY ratings. We increase our TP for TTKOM to TRY4.5/sh (from
TRY4.1/sh) and maintain our HOLD rating.
24
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 47: Revenue growth forecast, % YoY (LCU) Figure 48: Mobile revenue growth forecast, % YoY (LCU)
TCELL TTKOM* TCELL* TTKOM**

29% 20%
18%
24% 23% 16.7%
16% 15.5% 15.9%
15.2%
14% 14.4%
21%
19% 12.8%
12.3%
12% 12.1%
16% 10% 10.3%
9.2%
14% 8%
12% 12% 6.9%
12% 6.7%
11% 11% 6%
9% 10%
4%
7% 6%
6% 2%
4% 0%
2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E
Note: *Excl. construction revenue Note: * Incl. sales of handsets; **Calculated based on ARPU and subscribers
Figure 49: Mobile subscribers net change in Turkey, QoQ ’000 Figure 50: Blended mobile ARPU growth, YoY
TTKOM TCELL VOD TTKOM TCELL VOD
900 800 18%
800 16%
700 600
600 500 500 14%
500 400 400 12%
400 10%
300 200 200
200 100 8%
100
100 6%
0 4%
-100 2%
-200
-300 0%
-400 -2%
-500 -4%
-600
-700 -6%
-600
-800 -8%
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Figure 51: Group sales growth YoY (net of elimination) Figure 52: Consolidated EBITDA margin
TTKOM TCELL TTKOM TCELL
30% 40%
28%
25% 38%
23%
20% 36%
18%
15%
34%
13%
10%
8% 32%
5%
3% 30%
0%
-3% 28%
-5%
1Q18*
2Q18*
3Q18*
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Note: Excl. new standards impact

25
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 53: TTKOM and TCELL EV/EBITDA dynamics (based on Bloomberg estimates)
TTKOM 1y fwd EV/EBITDA TCELL 1y fwd EV/EBITDA avg

7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
May-12
Sep-12
May-13
Sep-13
May-14
Sep-14
May-15
Sep-15
May-16
Sep-16
May-17
Sep-17
May-18
Sep-18
Source: Bloomberg
26
Renaissance Capital
8 January 2019
EMEA telecoms
Turkcell
Figure 54: TCELL debt and cash position at end-3Q18, TRYmn
Total debt (excl. fin leases) 21,969
Breakdown before hedging
TRY 6%
USD 50%
EUR 38%
Other LCU 6%
Total debt (incl. fin leases) 23,055
LCU 15%
FX 85%
Breakdown after hedging
LCU 57%
FX 43%
Cash and cash equivalents 8,749
TL and other LCU 23%
FX 77%
Figure 55: TCELL net FX position*, $m

0
-50
-100
-91
-150
-144
-200
-250 -203 -204
-300 -255
-350 -301
-330
-400
-450
-500
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18
Note: *Including advance payments, hedging and assuming the 4.5G licence payables in TRY for the periods before April 2017 and excluding FX swap transactions
for TRY borrowing.
Figure 56: Turkcell – old estimates vs new, TRYmn (unless otherwise stated)
2018E 2019E 2018E 2019E 2018E 2019E
Revenue 20,880 24,271 21,286 24,656 1.9% 1.6%
EBITDA 8,553 9,767 8,774 9,922 2.6% 1.6%
EBITDA margin 41.0% 40.2% 41.2% 40.2%
Net income 1,622 2,971 1,808 3,672 11.5% 23.6%
Net debt 11,490 10,592 13,495 11,279 17.4% 6.5%
Note: Including IFRS15 and IFRS16 impacts
27
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 57: TCELL YE19 TP calculation – blended DCF and EV/EBITDA, TRYmn (unless otherwise stated)
WACC 21.0%
Perpetuity growth 2.0%
Fair value per share, TRY 15.8
Fair value per ADR*, $ 6.5
Target EV/EBITDA, x 4.5

Target EV 44,649
Fair value per ADR*, $ 7.2
Target price per share ex. div., TRY 16.6

Target price per ADR ex. div., $ 6.9
Note: *Converted at TRY6.05/$
Figure 58: Turkcell financials adjusted for new IFRS standards, TRYmn (unless otherwise stated)
Sales 17,632 21,286 24,656 27,585
Cost of sales (11,404) (12,513) (14,734) (16,584)
EBITDA 6,228 8,774 9,922 11,001
EBITDA margin 35.3% 41.2% 40.2% 39.9%
PBIT 2,932 4,758 5,687 6,675
Net interest (107) (481) (659) (672)
PBT 2,610 2,464 4,916 5,041
Tax (572) (591) (1,180) (1,210)
Tax rate 22% 24% 24% 24%
Minorities 59 64 64 64
PAT 1,979 1,808 3,672 3,767
Shares, mn 2,200 2,200 2,200 2,200
ADR, mn 880 880 880 880
EPS per ADR, TRY 2.25 2.05 4.17 4.28
DPS per common share, TRY 0.86 0.41 0.83 0.86
DPS per ADR, TRY 2.16 1.03 2.09 2.14

Current assets 8,062 8,940 9,369 10,207
Monetary assets 4,712 9,104 13,465 15,452
Other assets 3,202 4,566 3,782 4,294
Total Assets 33,982 42,209 46,676 50,592
Indebtedness 12,536 22,599 24,744 26,889
Minorities 56 (9) (73) (138)
Equity 14,989 13,054 15,372 16,592
Net debt/(net cash) 7,824 13,495 11,279 11,437
Cash flow 2017 2018E 2019E 2020E

PAT before minorities 1,920 1,744 3,607 3,702
Non-cash items 2,597 4,016 4,235 4,327
Change in working capital and other adjustments (714) 648 (698) 289
Capex 4,090 4,409 4,697 4,907
Investing cash flow (3,305) (5,010) (2,597) (4,907)
Free cash flow (203) 1,397 4,548 3,412
Financing cash flow (1,567) 100 (1,104) (2,036)
28
Renaissance Capital
8 January 2019
EMEA telecoms
Turk Telekom
Figure 59: TTKOM debt and cash position at end-3Q18, TRYmn
Interest-bearing liabilities, TRYmn 24,713
TRY 0.1%
USD 70.0%
EUR 29.9%
Breakdown after hedging
LCU 36%
FX 64%
Cash and equivalents, TRYmn 6,187
TL and other LCU 16%
FX 84%
Figure 60: TTKOM FX debt and hedge ratio (hedge ratio includes participating CCS & FX swaps & FX-based cash)
Gross FX debt, $mn Hedge ratio (RHS)

5,000 70%
4,300 4,300 4,400 4,400
4,500 4,200 4,200 4,100 62%
4,000 54%
3,500
46%
3,000
38%
2,500
30%
2,000
22%
1,500
1,000 14%
500 6%
0 -2%
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18
Figure 61: Turk Telekom – old estimates vs new, TRYmn (unless otherwise stated)
2018E 2019E 2018E 2019E 2018E 2019E
Revenue 20,167 22,079 20,359 22,258 1.0% 0.8%
EBITDA 7,922 8,557 8,219 8,847 3.7% 3.4%
EBITDA margin 39.3% 38.8% 40.4% 39.7%
Net income (3,309) 1,623 (2,843) 1,803 na 11.1%
Net debt 16,752 15,884 16,674 15,680 -0.5% -1.3%
Note: Including. IFRS15 impact
Figure 62: TTKOM YE19 TP calculation – blended DCF and EV/EBITDA

WACC 20.7%
Perpetuity growth rate 2.0%
Target MktCap, TRYmn 12,124
Target MktCap, TRYmn 3.5
Target 2019E EV/EBITDA, x 4.0

Target EV, TRYmn 35,387
Target MktCap, TRYmn 19,707
Target price per share (blended), TRY 4.5

Source: Renaissance Capital
29
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 63: Turk Telekom key financials, TRYmn

Sales 18,140 20,359 22,258 23,627
Cost of sales (11,688) (12,140) (13,411) (14,279)
EBITDA 6,452 8,219 8,847 9,348
EBITDA margin (%) 35.6% 40.4% 39.7% 39.6%
PBIT 3,545 4,539 4,868 5,210
Other income/losses (1,391) (7,518) (1,600) (1,400)
Net interest (412) (665) (896) (968)
PBT 1,867 (3,645) 2,372 2,842
Tax (343) 802 (569) (682)
Tax rate 18% 22% 24% 24%
PAT 1,525 (2,843) 1,803 2,160
Shares, mn 3,500 3,500 3,500 3,500
EPS per common share, TRY 0.44 (0.81) 0.52 0.62
DPS per common share, TRY - - 0.47 0.57

Current assets 6,429 7,533 8,013 8,151
Monetary assets 4,100 6,786 8,880 9,763
Other assets 1,066 1,066 1,066 1,066
Total assets 29,149 33,505 36,812 38,415
Indebtedness 16,492 23,460 24,560 25,460
Equity 4,555 1,400 3,203 3,704
Net debt 12,392 16,674 15,680 15,697
Cash flow 2017 2018E 2019E 2020E

PAT before minorities 1,525 (2,843) 1,803 2,160
Non-cash Items 2,906 3,680 3,979 4,138
Change in working capital and other adjustments 1,902 6,958 1,524 1,463
Capex (4,224) (4,247) (4,712) (4,719)
Free cash flow 3,112 3,236 2,594 3,042
Financing cash flow (607) (550) (500) (2,159)
30
Africa and Asia Renaissance Capital
8 January 2019
Global Telecom Holding – GTHE EMEA telecoms
Pakistan continues to be GTHE’s strongest market with a significant opportunity to further

develop its mobile money product. However, the Pakistani rupee’s (PKR) devaluation – it
lost around 26% vs the dollar in 2018 – is the main drag on performance, with currency
controls in place and the inability to upstream cash from the country.
The Bangladeshi and Algerian markets remain highly competitive, and in Algeria margins
are likely to continue to be under pressure owing to competitive pricing in 2019 and a new
Finance Law, effective from January 2018 and tax increases since mid-July 2018.
Subject to EGM approval, GTHE intends to proceed with a rights issue and to raise
EGP11.8bn of new capital. If VEON participates in the capital rise, it could get to an 87% or
even 92% stake in the company if no other shareholder participates. We think that getting
approval for the rights issue will be tricky and VEON may revert to the stock buyback option
in order to achieve its goal of taking GTHE private; prior to that, however, VEON might need
to offer bridge financing to GTHE in order for the latter to honour its obligations to creditors.
We adjust our forecasts (mostly lower), incorporate a weaker exchange rate in Pakistan
and reduce our TP to EGP5.2/sh (from EGP5.4/sh) while maintaining our HOLD rating.
Figure 64: GTHE – old estimates vs new, $mn (unless otherwise stated)
2018E 2019E 2018E 2019E 2018E 2019E
Revenue 2,712 2,687 2,808 2,705 3.5% 0.7%
EBITDA 1,223 1,181 1,215 1,159 -0.7% -1.9%
EBITDA margin 45.1% 44.0% 43.3% 42.8%
Net income (1) 19 (3) 19 na -1.7%
Net debt 2,440 2,376 2,399 2,384 -1.7% 0.3%
Figure 65: SoTP valuation of Global Telecom Holding, $mn (unless otherwise stated) – YE19
Value Approach FX Used DCF WACC
Algerian equity value 827 @ 4x EV/EBITDA 119 819 16.0%
Pakistan equity value 1,849 @ 4x EV/EBITDA 139 2,217 15.5%
Bangladesh equity value 257 @ 4x EV/EBITDA 84 82 14.3%
Holding costs + withholding taxes (70) (70)

Holding net debt 1,429 1,429
Equity value 1,435 1,619
Equity value, (50% multiple and 50% DCF SoTP), $mn 1,527
TP (50% multiple and 50% DCF SoTP and applying 10%
5.2
discount due to corp. governance), EGP/share
31
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 66: Global Telecom Holding (GTHE) key financials, $mn (unless otherwise stated)*
Sales 3,015 2,808 2,705 2,821
Cost of sales (1,670) (1,593) (1,546) (1,606)
EBITDA 1,344 1,215 1,159 1,215
EBITDA margin 44.6% 43.3% 42.8% 43.1%
Depreciation & amortisation (580) (523) (496) (506)
PBIT 764 692 663 709
Net interest (379) (319) (292) (252)
PBT 316 351 351 447
Tax (358) (246) (228) (290)
Tax rate 113% 70% 65% 65%
Minorities (103) (108) (104) (112)
PAT (144) (3) 19 44
Shares, mn 4,721 4,721 4,721 4,721
EPS per common share, $ (0.030) (0.001) 0.004 0.009
DPS per common share, $ - - - -

Current assets 592 562 541 564
Monetary assets 374 230 123 110
Other assets 830 830 830 830
Total assets 5,333 5,398 5,325 5,390
Indebtedness 2,692 2,629 2,508 2,332
Minorities 139 247 351 463
Other liabilities 526 526 526 526
Equity (50) (53) (34) 10
Net debt 2,318 2,399 2,384 2,223
Cash flow 2017 2018E 2019E 2020E

PAT before minorities (41) 105 123 156
Non-cash items 580 523 496 506
Change in working capital (103) 53 (54) 61
Operating cash flow 877 681 565 724
Capex (766) (761) (550) (562)
Investing cash flow (766) (761) (550) (562)
Free cash flow 110 (81) 14 161
Financing cash flow (157) (63) (121) (175)
Note: *GTH is majority-owned by VEON and our GTH TP forms part of our valuation for VEON.
32
Renaissance Capital
8 January 2019
Egypt – Telecom Egypt EMEA telecoms
Telecom Egypt (TE) has continued demonstrating positive dynamics in its recently
launched mobile business and core fixed line segment, while the cable business provides
additional opportunities.
The mobile business continued to ramp up in 3Q18 despite tax fees imposed on new
SIMs in July 2018, contributing high single digit share in retail revenue. In 3Q18, TE’s
mobile market share reached 3% with 3.6mn subs (+9% QoQ) that bodes well for our
expectation of c. 3.7mn subs at YE18 and the company’s plan to reach 10-15% market
share by YE22 with a breakeven level at YE20
The company expects to beat its 2018 revenue guidance (high single- to low-double digit
growth) due to the MENA cable acquisition and Bharti deal and despite it generating high
non-recurring revenue of c. EGP1.6bn, TE expect to continue to demonstrate strong top-
line growth in 2019 (see Figure 67). The company states that it would like to go back to
paying EGP1/share in dividends from 2019, although that would grow ND/EBITDA to c.
2.4x on our estimates. We maintain out TP of EGP17 and reiterate our BUY rating.
Figure 67: Telecom Egypt's 2019 guidance vs our expectations

ETEL RenCap
Revenue Mid-to-high single digit 7.2%
Revenue (excl. MENA cable) Mid double digit 15.0%
EBITDA margin Mid-to-high twenties 27.6%
Capex/Sales 30% 30.0%
Figure 68: Telecom Egypt financials, EGPmn (unless otherwise stated)

Sales 18,876 23,878 25,591 28,838
Cash opex (13,692) (17,344) (18,535) (20,581)
EBITDA 5,184 6,534 7,057 8,257
EBITDA margin (%) 27.5% 27.4% 27.6% 28.6%
EBIT 2,122 3,145 3,389 3,962
Net interest (296) (1,041) (1,406) (1,429)
Associates 2,337 2,205 2,352 2,377
PBT 3,813 4,309 4,334 4,910
Tax (520) (754) (758) (859)
Net earnings after minorities 3,150 3,544 3,565 4,038
Shares, mn 1,707 1,707 1,707 1,707
EPS, EGP 1.85 2.08 2.09 2.37
DPS per common share, EGP 0.25 1.00 1.00 1.00

Current assets 8,558 13,460 12,449 13,947
Monetary assets 507 1,575 120 432
Total assets 52,383 65,110 70,927 77,113
Indebtedness 7,293 13,293 16,793 19,293
Minorities and other 12 23 34 46
Equity 30,576 33,694 35,551 37,883
Net debt 6,786 11,718 16,673 18,861
Cash flow 2017 2018E 2019E 2020E

Net earnings 3,150 3,544 3,565 4,038
Non-cash items 2,006 2,823 3,026 3,409
Change in working capital 8,839 (1,522) (2,346) (2,221)
Other adjustments (9,346) 11 11 12
Capex (7,508) (7,641) (7,549) (5,768)
Free cash flow (2,858) (2,785) (3,295) (529)
Financing cash flow 2,190 5,573 1,793 793
33
Renaissance Capital
8 January 2019
Kenya – Safaricom EMEA telecoms
The stock’s performance in 2018 has been dismal and while we believe that c. KES22/sh
is the ‘consolidation’ level for the share price, we would prefer to see the shares lower
before adopting a more positive rating. Data revenues hardly grew in 1H19 and while that
was explained by a need to reduce prices to counter Airtel’s aggressive expansion, we
think 2H19 may be only slightly better, as Airtel continues with its aggressive pricing and
to take market share away from Safaricom, as it has been doing, with its share now above
21%. The new excise duties on data services and increase of duties on telecom service
to 15% may take a toll on ARPUs and subscriber usage as Safaricom opted to transfer
those to the consumer. There is also a risk of corporate taxation increasing by 5 ppts to
35%.
We are more confident in MPESA, the revenues of which re-accelerated to 17% YoY in
1H19 and which we believe can reach 20% in 2H19. The still lowly penetrated market for
e-cash payments between customers and mid-sized to smaller merchants is likely to
grow, in our view, due to the better interface of Safaricom’s LIPA-na-MPESA product and
its wider acceptance. Longer term, e-commerce remains an interesting opportunity, we
believe.
We have adjusted (upwards mostly) our forecasts on the back of 1H19 numbers.
Safaricom’s growth profile is looking better now than it did six months ago, but the trading
multiples of its peers in the fintech universe (PayPal, Square etc) have declined over the
past three months, which challenges the idea of paying a premium to fintech multiples for
Safaricom MPESA business which is denominated in KES and whose growth has fallen
from 30%+ in 2016-17 to less than 20% in 2018. Thus, we maintain our HOLD rating with
an unchanged TP of KES23.5. The one potential upside risk we see is the special
dividend that Safaricom might decide to pay in 2019 – the company usually reconsiders
its need for cash every three years and we believe the time has come for that.
34
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 69: SAFCOM financials, KESmn (unless otherwise stated), fiscal year March-March
Sales 233,720 248,662 268,763 289,399
Cash opex (120,890) (124,790) (134,073) (143,393)
EBITDA 112,830 123,872 134,690 146,006
EBITDA margin (%) 48.3% 49.8% 50.1% 50.5%
EBIT 79,270 88,523 97,248 106,899
Net interest 630 755 481 (115)
Associates 10 10 10 10
PBT 79,910 89,289 97,739 106,793
Tax (24,620) (28,572) (34,209) (37,378)
Tax rate 31% 32% 35% 35%
Net earnings 55,290 60,716 63,530 69,416
Shares, mn 40,065 40,065 40,065 40,065
EPS, KES 1.38 1.5 1.6 1.7
DPS, KES 1.1 2.3* 1.3 1.5

Current assets 15,568 16,564 17,903 19,277
Monetary assets 11,892 34,245 5,984 20,998
Associates 146 156 166 176
Total assets 167,440 193,247 167,864 185,671
Indebtedness 4,040 11,040 11,040 11,040
Equity 123,910 140,556 112,478 127,893
Total liabilities & shareholders’ equity 167,440 193,247 167,864 185,671
Net debt (7,852) (23,205) 5,056 (9,958)
Cash flow 2018 2019E 2020E 2021E

Net earnings 55,290 60,716 63,530 69,416
Non-cash items 33,550 35,339 37,432 39,097
Change in working capital 3,570 1,166 1,356 1,017
Other adjustments (450) (805) (381) 215
Capex (36,400) (37,797) (38,971) (40,516)
Free cash flow 55,560 58,618 62,967 69,230
Note: *Incl. KES1/sh special dividend
35
Renaissance Capital
8 January 2019
West Africa – Sonatel EMEA telecoms
According to GSMA, mobile revenue growth in West Africa will remain weak at a 2017-
22E CAGR of c. 1.7% as voice and messaging revenues continue to be under pressure
on the back of heightened competition from OTT services. Meanwhile, despite the highly
penetrated mobile market, mobile internet penetration remains low in the region (see
Figure 71) compared with the global average, with c. 100mn of new additions expected by
2025, according to GSMA, which would be a long-term growth driver for the industry, we
believe. GSMA expects total mobile additions to reach c. 72mn by 2025, though most of
them will come from lower income groups that are likely to spend less on mobile services
than early adopters.
Figure 70: West Africa mobile revenue dynamics Figure 71: Mobile internet penetration in West Africa
Revenue, $bn YoY, % (RHS)

17.5 18% 50%
16% 45%
17.0 40%
14%
35%
16.5 12%
30%
10% 25%
16.0
8% 20%
15.5 6% 15%
10%
4%
15.0 5%
2%
0%
14.5 0% Guinea- Guinea Mali Sierra Leone Senegal Global
2017 2018E 2019E 2020E 2021E 2022E Bissau average
Note: Unique subscribers
Sonatel’s share price decline by c. 25% in 2018, underperforming the MSCI frontier market
index and, we believe, such a big decline was related to its unimpressive performance over
the last 18 months on the back of high competition from both traditional telcos and OTT
players along with the margin-dilutive Sierra Leone business acquired in 2016 (consolidated
since 1H17).
In 1H18, revenue growth slowed to 4.7% YoY from 10.2% YoY (6.3% YoY excluding
Sierra Leone) in 1H17, while the EBITDA margin shrank by 1.7ppts YoY to 46%, hovering
around 50% before the acquisition. Additionally, pressure on margins was associated
with lower mobile voice and international incoming revenue as OTTs continued to eat into
them, while higher revenue from data had a margin-dilutive impact on the back of tough
competition from other telcos.
36
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 72: Sonatel vs MSCI FM index, % 2018 performance Figure 73: Sonatel’s revenue structure, %
MSCI FM SNTC Others International wholesale

10.0% Orange Money Mobile data
Mobile (excl. data and Orange Money) Fix
5.0%
100%
0.0%
12.8% 9.8%
-5.0% 17.7% 5.7%
3.0% 4.7%
-10.0% 9.1% 17.8%
13.9%
-15.0%
50%
-20.0%
-25.0% 58.1% 55.0% 55.3%
-30.0%
-35.0%
Jul-18
Jan-18
Mar-18
Apr-18
Jun-18
Oct-18
Feb-18
May-18
Aug-18
Sep-18
Nov-18
Dec-18
0%
2016 2017 1H18
Source: Bloomberg Source: Company data
Upside risks:
▪ Low mobile internet penetration across the countries of operation.
Sonatel continued to develop its 4G coverage in Senegal, Mali and Guinea-

Bissau, contributing to an increase in data revenue of which the share in total
revenue expanded to c. 18% in 1H18 vs 14% in 2017. We believe further
extension of 4G coverage may represent a good opportunity for top-line growth
given low mobile internet penetration among the operating footprint though
competition remains high in this field.
▪ Underpenetrated Guinea and Guinea-Bissau mobile markets
Mobile penetration remains low in these countries (c. 20% of total revenue in
2017) compared with regional peers, and this represents upside potential for the
company, in our view. For instance, mobile penetration printed at c. 90% in
Guinea and c. 70% in Guinea-Bissau vs 100-115% in Senegal and Mali in 2017.
▪ Mobile financial services
Orange money continued to get traction with 5.1mn active users in 1H18 vs
3.1mn in 2016 (Safaricom’s M-PESA active users amounted to 21mn as of
September 2018). Orange money is available in all of the company’s opcos and
recorded a total of 467mn transactions across its markets in 2017, amounting to
XOF5.2trn vs XOF1.8trn in 2015, but the contribution to total revenue was only
5.7% (M-PESA’s contribution to Safaricom’s revenue was 30% as of
September18). Competition in terms of mobile financial services remains high in
the SSA region, i.e. there were 57 live mobile deployments in West Africa and
Orange money’s share in total active subscribers was c. 12%, while M-PESA’s
was c. 28% in total active subscribers in East Africa. Aside from that, new
players continued to enter the market, i.e. Expresso launched mobile money
services in Senegal in February18 while Tigo and Orange already offer their
services in the county. As a result, we think Orange money may be a growth
driver for Sonatel in the long term, but we do not expect it to become a great
contributor to the company’s revenue in the near future.
37
Renaissance Capital
8 January 2019
EMEA telecoms
Downside risks:
▪ Increasing competition
Sonatel operates in historically highly competitive markets with several players

across the countries and new entrants continuing to tap into them in 2018, i.e.
Telcel started its operations in Mali in January 2018 and successfully covered
the southern part of the country, while QCell received a licence to operate mobile
services in Sierra Leone in 3Q18 and the process of establishing the company
will be completed soon, according to management. On top of that, telcos actively
invest in 4G – e.g. Tigo obtained a 4G licence in Senegal in December 2018,
while Malitel started offering its LTE-based services in November 2018. Thus,
we think the 4G rollout effect will be constrained by tight competition and ARPU
will remain under pressure.
▪ Unfavourable regulation
A new tax imposed on telecom sector by Senegal authority in 1H18 (the tax is
required to be paid by any operator with a public telecoms network and has been
set at 5% of an operator’s pre-tax turnover) may serve as an affordability barrier
limiting top-line growth. Any further extension of the tax burden could be a
significant risk for telcos, in our view.
▪ Sierra Leone operations
Currently there are four players on Sierra Leone’s mobile market including
Sonatel (c. 40% market share in 2017, according to the company) with one more
new entrant (QCell) looming on the horizon. In 2018, Africell and Sierratel
launched their LTE services, while obtaining 4G frequencies by Sonatel is
currently under question, representing a risk to further expansion. In 2017, the
EBITDA margin in Sierra-Leone was c. 17% vs a 40-60% range in the other
countries historically. It will be challenging to ramp up quickly given high
competition in the country and uncertainties around further growth.
Bottom line: We roll over our valuation to YE19, adjust our model on Sierra Leone
operations and use lower multiples due to the muted growth outlook and sector derating.
The company has a good dividend history and we expect a dividend yield of c. 9.5% at
current prices. We lower our TP to XOF19,153 (from XOF22,593) following the lowering
of our forecasts and maintain our HOLD rating.
Figure 74: Sonatel – YE19 TP calculation

WACC, % 14% 14%
Perpetuity growth rate, % 6% 6%
Target Mkt Cap, XOFbn 1,814 1,855
DCF price per share, XOF 18,143 18,547
Target EV/EBITDA, x 4.5 4.5

Target EV, XOFbn 2,173.14 2,155
Price per share, XOF 18,456 18,519
Target P/E, x 10.5 10.5

Price per share, XOF 16,361 15,502
Target, blended (average DCF, EV/EBITDA, P/E), XOF 17,653 17,523

DPS, FCFA 1,500 1,500
Target price per share plus DPS, XOF 19,153 19,023
38
Renaissance Capital
8 January 2019
EMEA telecoms
Figure 75: Sonatel financials, XOFbn (unless otherwise stated)

Sales 973 1,060 1,086 1,149
Cash opex (520) (588) (603) (644)
EBITDA 453 472 483 505
EBITDA margin (%) 46.5% 44.5% 44.5% 43.9%
Depreciation & amortisation (180) (196) (201) (213)
EBIT 308 276 282 292
Net interest (9) (13) (13) (12)
PBT 297 263 269 280
Tax (95) (84) (86) (90)
Tax rate (%) 32% 32% 32% 32%
Minorities 30 26 27 28
Net earnings 172 152 156 163
Shares (mm) 100 100 100 100
EPS, XOF 1,725 1,522 1,558 1,626
DPS per common share, XOF 1,500 1,500 1,500 1,500
Balance sheet 2017 2018E 2019 2020

Current assets 489 534 547 592
Monetary assets 231 254 260 288
Total assets 1,596 1,661 1,695 1,761
Current liabilities 661 715 733 775
Indebtedness 305 305 305 305
Minorities and other 90 116 143 171
Equity 626 612 601 597
Net debt 74 52 46 18
Cash flow 2017 2018E 2019 2020

Net earnings 172 152 156 163
Non-cash Items 161 196 201 213
Change in working capital 98 31 11 26
Other adjustments 30 26 27 28
Operating cash flow 461 406 395 429
Capex (378) (217) (222) (235)
Investing cash flows (368) (217) (222) (235)
Free cash flow 83 189 173 194
Financing cash flow (373) (167) (167) (167)
39
Renaissance Capital
8 January 2019
Telecoms
Figure 76: Telco valuation summary in $ terms

MktCap, EV/EBITDA EBITDA CAGR EV/(EBITDA – Capex – Tax) P/E EPS CAGR P/CE Div yield FCFF yield
$mn 2018E 2019E 2016-19E 2018E 2019E 2018E 2019E 2016-19E 2018E 2019E 2018E 2019E 2018E 2019E
Frontier
Telecom Egypt 1,203 2.7 3.2 -6.2% nm nm 6.0 6.0 -15.9% 3.4 3.3 8.0% 7.9% -15.7% -14.6%
Kcell 1,000 7.2 7.0 -2.5% 13.2 17.7 24.8 19.2 2.2% 8.6 8.2 3.1% 3.7% 3.5% 5.3%
Global Telecom Holding 1,012 3.6 3.8 -1.7% 21.2 11.5 52.6 26.2 -32.6% 1.9 1.9 0.0% 0.0% 0.3% 2.7%
Safaricom 8,438 7.1 6.6 9.1% 14.4 13.0 14.8 13.9 10.7% 9.3 8.8 9.1% 7.3% 6.8% 7.1%
Sonatel 2,962 4.0 3.9 5.4% 6.8 6.8 11.0 10.7 -3.7% 4.8 4.7 9.0% 9.0% 10.1% 9.2%
EM
MTS ADR 7,003 3.5 3.7 8.8% 8.9 7.9 6.7 7.6 8.2% 2.6 2.9 9.7% 7.5% 11.2% 4.6%
VEON 4,392 3.4 3.3 -3.1% 12.3 8.2 nm 20.9 nm 1.4 2.0 12.0% 13.2% 6.1% 7.7%
Rostelecom 2,988 3.5 3.5 0.7% 11.8 10.7 9.9 9.9 20.0% 2.4 2.6 7.3% 6.8% 6.6% 8.4%
Turkey
Turkcell ADR 4,884 3.5 3.5 2.4% 9.8 5.7 6.5 7.8 7.2% 4.0 3.7 3.9% 6.2% 5.7% 14.5%
Turk Telekom 2,433 3.4 3.4 -6.8% 6.4 8.5 2.5 4.3 na 14.0 2.5 0.0% 11.3% 13.2% 10.8%
Average 4.7 4.6 1.0% 11.9 10.3 15.5 13.3 3.0% 5.6 4.5 5.8% 6.8% 7.2% 8.1%
*MTS dividend for the calendar year
40
Disclosures appendix Renaissance Capital
8 January 2019
Telecoms
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Renaissance Capital
8 January 2019
Telecoms
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Investment Rating Distribution Investment Banking Relationships*

Renaissance Capital Research Renaissance Capital Research
Buy 144 47% Buy 5 63%
Hold 102 33% Hold 3 38%
Sell 42 14% Sell 0 0%
Under Review 3 1% Under Review 0 0%
Restricted 0 0% Restricted 0 0%
Cov. in Trans. 14 5% Cov. in Trans. 0 0%
305 8
*Companies from which RenCap has received compensation within the past 12 months.
NR – Not Rated
UR – Under Review
42
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Telecom 2019 Outlook 080119

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Sector update

EMEA telecoms Alexander Kazbegi

2019 outlook AKazbegi@rencap.com

Lukewarm growth at best Figure 1: Summary TP and ratings

Turkey – likely to enjoy fast growth again

Africa, Asia and elsewhere

Russia – market trends and company outlooks 12

Africa and Asia 31

In 2019, we expect the following trends to dominate the telco landscape:

▪ An unfavourable FX outlook with a globally stronger USD and rising interest

▪ 5G becoming a more visible theme and IoT emerging as a meaningful theme

In terms of stock picks going into 2019, we favour:

▪ From an operational standpoint, we continue to like MTS. Although its FCF

▪ Rostelecom (RTKM) stands out as a defensive story and is likely to play a

▪ Decrease TP of GTHE (by 4%) on the back of weaker exchange rate in

Figure 2: Telco sector summary ratings and TPs

Figure 3: Telco valuation summary in $ terms and main comparative metrics

Source: GSMA Intelligence Source: GSMA Intelligence

Source: GSMA Intelligence Source: GSMA Intelligence

Source: GSMA Intelligence Source: GSMA Intelligence

Figure 10: Growth in connections, 2017-2025 (mn)

Source: GSMA Intelligence

Markets under our coverage

Despite strong growth of 3G and 4G connections, smartphone adoption in Russia is

for smartphones is increasing, as a growing share of more affordable devices (Xiaomi,

2015 2016 2017 2018E 2015 2016 2017 2018E

Consolidated telecom EBITDA margins across selected countries stood at 35-50% in

2015 2016 2017 9M18 2015 2016 2017 9M18

2015 2016 2017 2018E 2015 2016 2017 2018E

company outlooks EMEA telecoms

▪ Regulatory risks have increased: 1) regional roaming has already been

Target 2019 EV/EBITDA, x (excl. MTS Bank) 4.5

Target 2019 P/E, x (excl. MTS Bank) 10

MTS Bank valuation

Fair value per GDR cum dividend, $ 10.9

Balance sheet 2017 2018E 2019E 2020E

Cash flow 2017 2018E 2019E 2020E

Figure 30: VEON ownership structure

Figure 31: Telenor convertible bond information

Figure 34: VEON valuation, $mn (unless otherwise stated)

Ukraine 384 4.0 1,536

Algeria 348 4.0 1,566

Kazakhstan 154 4.0 617

Equity value calculation

VEON total net debt 6,141

Figure 35: VEON key financials, $mn (unless otherwise stated)

Balance sheet 2017 2018E 2019E 2020E

Cash flow 2017 2018E 2019E 2020E

Source: TMT Consulting Source: TMT Consulting

Balance sheet 2017 2018E 2019E 2020E

Cash flow 2017 2018E 2019E 2020E

Figure 41: Sistema – valuations of individual companies

Figure 42: Sistema – calculation of TP

Kazakhstan’s mobile market backdrop remains bleak – a slow-growing customer base

Figure 46: Kcell key financials, KZTmn (unless otherwise stated)

Balance sheet 2017 2018E 2019E 2020E

Cash flow 2017 2018E 2019E 2020E

outlooks EMEA telecoms

▪ However, the government’s willingness to curb inflation has currently prompted

TCELL TTKOM* TCELL* TTKOM**

Note: Excl. new standards impact

TTKOM 1y fwd EV/EBITDA TCELL 1y fwd EV/EBITDA avg