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)
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.
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:
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 #2: Uzbekistan 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.
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|
*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”.
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.
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.