VimpelCom: VIP

When investing it is ideal to find situations in which the share price of a business is depressed by short-term transitory events yet the long-term ability for the company to execute remains intact.VimpelCom (Trading under symbol VIP on the NASDAQ) the 10th largest global telecom company in the world fits this bill. I have taken a large position at a price of $3.88 USD last week. (Funded by borrowing in USD to avoid CAD/USD currency exposure and conversion fees)

download

As seen above VIP’s share price has been absolutely obliterated due to a perfect storm of events:

Headwind #1: FX Movement

VimpelCom derives all of their revenue from abroad. The depreciation in their operating currencies and the relative strength in the USD lead to a huge drop in earnings since VIP reports in USD.

capture

Including the Italian Joint Venture in the EBITDA breakdown Russia would only clock in at 36% with Italy in second coming in at 24%.

It appears as though the FX situation has stabilized and turned the corner as seen by this VIP coin (dollar weighted basket of their revenues) graph included in the company’s Q3 results:

capture

I anticipate this tread should continue in a positive direction given the USD appears to be topping out and the Ruble has been slowly grinding back from depressed levels

Headwind #2Uzbekistan Corruption Scandal

VimpelCom was fined $795million back in February by the department of justice for their participation in the scandal. With the caveat that it is quite possible that Vimpelcom has engaged in bribery in some of their other markets, this fine was a one time event and given it’s Uzbekistan…probably just the CODB.

Headwind #3: Persistently low dividend

Back in 2014 VimpelCom shocked the market with its decision to slash their dividend from 80 cents down to a pitiful 3.5 cents. The move was driven by a need to reduce their leverage and improve their balance sheet given as the bond rating agencies were applying pressure. At the time VimpelCom’s EBITDA to DEBT stood at 2.5x a number larger than their long-term average after some large acquisitions, VimpelCom stated their goal was to get this number sub 2x.

Today VimpelCom’s EBITDA to DEBT stands at 1.9x.after years of disciplined debt repayment.

Headwind #4: Telenor’s exit

VimpelCom’s second largest shareholder (33% control) announced in September that they would exit VimpelCom via selling 10% of their stake in the open market and the other 23% through convertible bonds. The announcement of the sale in September lead to an absolute torrent of selling this can be seen in the chart at the beginning of this post.

Telenor departure was necessary from an optics perspective given Telenor and VimpelCom are now competing in some of the same markets and conflict of interest accusations were bound to arise.

capture

Valuation

VimpleCom is dirt cheap.

VimpleCom’s entire marketcap at the moment is 6.66billion and in the previous four quarters they generated 0.968 billion in Free Cash Flow*

Q4 2015 Q1 2016 Q2 2016 Q3 2016
0.039B 0.237B 0.369B 0.323B

*Free Cash Flow = EBITDA-Capex-Interest Expense-Tax Expense+Exceptional Charges

This gives VimpleCom a very attractive current 14.5% FCF Yield.

Given that VimpleCom will have currency as a tailwind rather than a headwind, and given the synergies expected to be gained through this Italian joint venture (0.9billion by 2019), I think it is fair to assume FY 2017 FCF will be much higher than we saw in the latter quarters of 2016. None the less, we will be conservative and assume they come in somewhere north of 1.3billion (in line with Q2 and Q3 2016) giving VimpleCom a FCF ’17 yield of  21.2%+.

Near Term Catalyst #1 The Impending Large Dividend Hike:

VimpleCom has been foreshadowing a “meaningful increase” to their paltry dividend in both their Q3 conference call and presentation in “early 2017”.

capture

This dividend they mentioned will be transparently linked to the financial performance of the company (ie 50% of net income, 70% of FCF ect). Management has not given the exact figure but given where FCF stands today even a 50% payout of 17’s FCF would be somewhere around a 10% yield. Quite the jump for this beaten down giant which currently yields ~1%.

Near Term Catalyst #2: The Accounting P and L for the Italian JV

VimpleCom has indicated they believe they will book a significant capital gain on their closed Italian Joint venture in the Q4 earnings results. This should make Q4 2016 results look even more jaw dropping then they normally would be.

Bottom Line:

VimpleCom is a titan in the telecom market and it is trading at fire sale prices. Even if we assume the foreign currencies stay at depressed levels and the stock just trades to a reasonable 11x 2017’s FCF we are looking at a share price of 8.26 or a 114% increase from todays price of 3.85.

Advertisements

11 thoughts on “VimpelCom: VIP

  1. nice article, pulled the trigger at 4, for a half position. will add on weakness

    like the fishing company in your portfolio, seemed to have dropped quite a bit and am considering adding it to my portfolio. can’t seem to find your analysis on it

    nice blog

    Like

    • Appreciate the compliment.

      Yes Highliner is undervalued, I originally entered in the 14-15 range so I am still sitting on a nice gain, fair value is likley in the mid 20’s. It’s actually one of my smaller positions right now, I have many more compelling situations I have rotated into.

      I expect continued ‘weakness’ in this next quarter from a revenue perspective, so I would reccomend holding off until the subsequent quarter to enter (just going based on of what he heard in the last conference call).

      I will write them up when I get around to it though.

      Like

  2. Looking forward to your further Analysis on what you may see as future great potential investments. I have owned CAS for about 2 months now and happen to find you through a post on a blog about CAS.
    If you are looking for other ideas to research can I mention CAL on the Toronto Stock exchange for gold exposure.

    Like

    • Thanks Ron,

      I actally owned CAL back in the day when it was high 80c and yielded about ~8% sold out back last year @ 1.20ish. Has had a great run but don’t like the stock here on a risk reward basis. I keep about a 8% weighting to the Gold sector but I do it almost entirely through SSL which is my pick amoung the streamers. Red Eagle was my last individual miner position and I cashed out of that.

      Glad you enjoy the blog.

      Like

  3. VimpelCom just announced the strong quarter with a revised dividend policy that you accurately predicted, you even got the dividend correct at about 5%. Only thing not predicted was that the share price would not move after this release? Just wondering your thoughts as to why share price has not moved up significantly? By all accounts, the quarter was really good and the future plans they outlined seem like game changing.

    Like

    • Yeah it was certainty a profitable trade, no exposure now, I am a bit concerned about how they (and frankly every miner) perpetually pushes out commerical production. If you go back to Ian’s early interviews I remember him saying commerical production would be mid 2016 and we could expect profitable production by EOY 2016.

      Like

  4. Nice results on Cas and Vip, i think it’s selling on the news kind of thing but i’m expecting a gradual rise, accompanied by the nice dividends.

    Is it time already to complete my HLF trade, i’m eager to take at least half a position, but holding off for now based on your correct assumption and alert things would get worse for HLF before they get better. Has your assumption changed regarding this one following their quarterly report.

    Like

    • HLF I sold half of my remaining position pre-quarter as I expected weakness and I dumped the rest of my position when the quarter came. I made good money on it but the company’s y/y revenue was abysmal and the outlook mentioned on the CC was much worse than I expected

      Like

  5. I have been patient with Vimpelcom/Veon. Seems that market is starting to figure out how cheap the stock is and that they have cleaned up their operations. I see a nice breakout starting now. Thanks again for highlighting this stock..

    Any new ideas coming…

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s