Reiterate Hold. The company reported Q1 19 financial results and pro-forma debt after using the proceeds from US$200mn of bonds for refinancing. Silknet is a leading telco in Georgia, with somewhat elevated leverage on the back of its recent acquisition of Geocell. The company has strong liquidity with no debt repayments until 2024, amplified by unutilised US$36mn cash on the balance sheet and access to funding from local banks. FX risk, albeit partially hedged, remains our main credit concern in the absence of high organic growth rates to offset the depreciation of GEL. We believe the bonds’ credit premium addresses the inherent risks and reiterate our Hold recommendation.
Revenue decrease on lower termination rates and GEL depreciation. In Q1, Silknet reported US$34mn in revenue – a 12% yoy decrease – due to a reduction in call termination rates and GEL depreciation. The termination rate reached its target level in January 2019 and will no longer affect revenue and profitability. In Q2, Silknet has reshuffled its bundled offers to eliminate the lower-priced and promotional packages, leading to an overall increase in prices, which should support revenue towards year-end. However, the slow depreciation of GEL will take a toll on revenue growth in US$ terms in H1.
Synergies increase EBITDA. In Q1, EBITDA came to US$15mn, increasing by 15% yoy. Call termination rates would have reduced it by cGEL6mn, but the first opex synergies realised from the Geocell acquisition and a change in the accounting treatment of leases (a change in IFRS 16 affecting all companies in 2019) would have increased EBITDA. Despite the highly concentrated and competitive market environment, Silknet was able to deliver a 50% EBITDA margin – a high level by industry standards.
Net debt/EBITDA at 2.5x, with c33% of US$-denominated debt hedged. After the reporting date, Silknet issued US$200mn of eurobonds, using the proceeds to refinance most of its bank loans. In addition, a shareholder loan was partially repaid and partially converted into equity. Pro-forma reconciliation provided by management suggests Silknet’s total debt stood at US$218mn and net debt at US$181mn at end-Q1. The company hedged its FX exposure to the tune of US$70mn and plans to maintain it at this level. It hedged half the amount with a Georgian bank and covered the rest through US$-denominated cash balances. Besides US$36mn in cash, the company may have access to US$50mn senior secured facilities.
Capex at 25-28% of revenues in 2019, as guided on the conference call, is a lower estimate than what we assumed in the initiation report. The company is in control of its investments, which can be adjusted subject to market conditions. We think that, if capex stays within the guided range, Silknet could be free cash flow neutral in 2019, other things being equal (mainly, the GEL exchange rate).