VEON: Too Many Red Flags (NASDAQ:VEON)


VEON Inc. (VEON) showed a poor performance in the first half of the year, as the majority of currencies from emerging markets in which the company operates depreciated. Even before the pandemic, the company was constantly failing to improve its bottom line, and it will be even harder to do so in the current environment. By having a leveraged balance sheet and poor growth perspectives, we believe that VEON stock is uninvestable at this stage, even though it trades at all-time low levels.

No Room for Growth

Despite being officially registered in the Netherlands, VEON conducts the majority of its operations in Russia, which is its biggest market, and in several other emerging markets, such as Ukraine, Kazakhstan, Pakistan, and others. As currencies of those countries have depreciated in the first half of the year due to the pandemic, VEON was unable to show a meaningful performance in the last few months. In addition, the company’s ARPU and margins were negatively affected by the closure of its stores in Russia in the last few months.

In Q2, VEON’s roaming profits have declined due to lockdowns, which brought the travel activity to distressed levels, as countries in which the it operates closed their borders and have not fully reopened them yet. While the operations in Kazakhstan and Ukraine experienced growth in Q2 in the local currencies, VEON’s total revenue from April to June was $1.89 billion, down 16.4% Y/Y. At the same time, the company’s total number of subscribers declined by 3.45% Y/Y to 205 million. While net income in Q2 increased over 124.8% Y/Y to $156 million, the growth came mostly thanks to the decrease of financial expenses and the refinancing of its debt and had little to do with the overall business operations.

One of the biggest disadvantages of VEON is its overleveraged balance sheet. With $2.5 billion in liquidity, the company’s debt stands at $7.6 billion. Its average debt maturity is only 2.8 years, and with an interest coverage ratio of less than 2x, there’s every reason to believe that VEON will take even more debt along the way to stay afloat. However, that additional liquidity will not help to solve its operations problems. In the last three years alone, VEON’s net income declined at a CAGR of 40%, while in the last five years, its revenues declined at a CAGR of nearly 6%. By showing such poor results, the company’s stock has been constantly depreciating, while the majority of its competitors were able to appreciate in value.

Source: Seeking Alpha

In addition, at the latest conference call, VEON said that it’s unlikely that the company will be able to pay dividends for the full year due to the weak cash flow generation in the first half of the year. At the same time, it has concerns regarding its performance in the second half of the year. While VEON is not overvalued to its peers, its poor performance in the past, along with the possibility of not receiving any dividends in the future, makes it hard to justify opening a position in the company.

Source: Capital IQ

There are also additional risks, which make us believe that VEON is uninvestable. First of all, the rise of MVNO services in Russia will hurt the company’s earnings. The majority of those MVNOs are owned by major banks, such as Sberbank (OTCPK:SBRCY) and Tinkoff, which provide services to the majority of the Russian population, and they could convince their customers to use their telecom services in the future. In addition, the 5G rollout has already begun in Russia and other markets in which VEON participates, but the company doesn’t have enough capital, as we’ve seen, to fund the creation of its own sophisticated infrastructure across all regions in which it operates. For that reason, its business will likely be acquired by a larger telecom with the greater financial flexibility to build the necessary infrastructure.

Another downside of VEON is its exposure to the emerging markets, which suffered the most at the beginning of the pandemic. As an oil and gas exporter, Russia has seen a drastic decline in demand for its commodities, and at one time, its currency depreciated by nearly 30% to the United States dollar. In addition, its GDP for the year is expected to be down 6%, and it’s unlikely that the company’s economy will recover in the near term. At the same time, it’s unknown when the borders of those emerging markets will reopen, and for that reason, it’s safe to say that VEON’s roaming income will stay at distressed levels.

Since there’s also a possibility that dividends will be cut in the future, it makes no sense to hold VEON stock, which has been depreciating all the time, and in addition, pay an ADR maintenance fee. Considering that there are too many uncertainties that are associated with the company, we believe that it’s better to avoid the stock and stick with telecom companies from developed countries, which have a successful track record of creating value.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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