We initiate coverage of VODUKR US$500mn 6.2% 2025 notes with a Hold. VF Ukraine, a leading mobile operator in Ukraine, has recently issued its maiden bonds at 485bps over mid swaps (YTM 6.2%) and c135bps over the sovereign, beating our most optimistic estimates. Since the issue date, the bonds have rallied and are indicated at c100.7 (z-spread +480bps, YTM 6.0%). VF Ukraine, rated B by S&P and Fitch, offers non-cyclical exposure to Ukrainian corporate credit, and has high profitability and moderate pro-forma leverage after refinancing. Given its small size relative to Ukrainian corporate issuers, FX risks and potentially increasing leverage (driven by capex), VODUKR 25s’ current levels seem ambitiously tight. In the world of EM telcos, however, VODUKR has an attractive combination of moderate leverage and high yield (Figure 2). We expect VODUKR to perform in line with the Ukrainian corporate space and initiate coverage with a Hold recommendation.
VF Ukraine is the second-largest mobile operator in the country, with 19.8mn subscribers and c37% market share in 9M 19. The company provides mobile services, including voice and broadband, with data emerging as the main revenue driver, supported by the rollout of the company’s 4G/LTE network, which covers 66% of Ukraine’s population. Development of 4G/LTE will remain the key investment priority in 2020-21. Together with increasing smartphone penetration, it will be the key growth driver.
Change in ownership increased net leverage to c2x. Up until December 2019, VF Ukraine was indirectly owned by MTS, the biggest telecommunications company in Russia. Last year, MTS sold its entire 100% stake in the Ukrainian operator for US$734mn to NEQSOL Holding, the company ultimately beneficially owned by Nasib Hasanov. The acquisition was partially funded with bridge loans raised at the shareholder level and secured by VF Ukraine shares. The purpose of the recent bond transaction was to refinance the acquisition debt and to move it from the shareholder to company level. We estimate that, on a pro forma basis, VF Ukraine’s leverage increased to 2.x.
Solid growth potential. In 9M 19, VF Ukraine reported US$436mn in revenues, posting a 23% yoy increase (in UAH terms), generated US$230mn in EBITDA, up 20% yoy (in UAH terms), and achieved an EBITDA margin of 53%. The company’s debt was insignificant before the change of ownership but, according to our estimates, came to cUS$640mn after debut bonds were issued. Impressive revenue and EBITDA growth are a result of the rapid rollout of 3G and 4G LTE networks in the market, which is still underpenetrated by mobile data services compared with neighbouring countries. With the Ukrainian economy growing at 3.1% per annum in 2019, UAH appreciating and real disposable incomes rising, the rollout of high-speed networks translates into rapidly increasing average revenue per user (ARPU), a traditional growth and efficiency measure in the industry. In 2020-21, VF Ukraine will continue to invest in the LTE network. Capex is likely to remain at 2018-19 levels, which, if measured as a percentage of revenues (a standard approach in the telco industry), could translate into US$150mn-170mn per year – c25% of revenues.