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A Sleeping Gem on the New Silk Road

Updated: Oct 31, 2023

VEON US, is one of Nutstuff “sleeping gems”, at $3.5bn few own and is a great EM proxy

and benefits from Russian Rouble and other EM currency reflation, it has again finally woken up and some clear catalysts to come.

Yesterday Bank of America “upgraded VEON with a price target of $2.70, up from $1.60,

implying a 46.7%?! upside. Stronger conviction regarding the company's operational recovery following $5.5 billion of cumulative Capex in 2019-2021 led to the re-rating. They see catalysts for VEON coming from the company's "significant" balance sheet unlock potential via tower monetisation and Algeria sale, estimating that its free cash flow could rise from negative $58 million in 2022 to $624 million in 2023. *At 3.4x expected 2022 EBITDA, VEON is the"cheapest mobile stock globally."

Nutstuff believes it is just the start here and the stock could treble in the next year with very limited downside risk.


It is absurdly cheap and totally below mosts radar screens: *The current EV is $9.5bn ($11.5bn including leases) which comprises $3.5bn equity and $6n in debt. It is trading on just $40 a sub and EV/EBITDA of 2.5x. This for one of the largest telcos in world.

Veon has 210m mobile subscribers (and growing now after recent clean up), 5m fixed line

subscribers and 6m TV subs. The latter two are growing fast and Veon also has Jazz cash (one of the largest online finance companies) with c15m subs. Veon is dominant number one in Pakistan (220m people), Ukraine (50m people), Uzbekistan (35m people) and Kazakhstan (18m people).

It is top 3 in Russia (145m people), Bangladesh (180m people) and Algeria (45m people). It

covers 9 percent of world population. To put this in context MTS has 85m subs ($14bn EV or $170 a sub), China Unicom has 284m subs ($37bn EV or $150 a sub), Reliance Jio has 410m subs ($80bn EV or $200 a sub) Vodafone has 290m suns (Ev of $180bn or $500 a sub) and America Movil 380m (EV is $105bn or $210 a sub).

Why has it underperformed?

1. The central reason is the collapse in its currencies by 70-80 percent over the last 5/6 years. This has taken ARPUS to $1.5 to $4.

2. It underinvested in capex. It was run for cash. It consequently lost its leading position in

Russia and also Algeria and underlying growth stagnated.

3. License fees, taxes and buy-in of minorities (Orascom and Jazz) consumed its cash over last 5 years.

4. It built up a huge cost base in Amsterdam.

5. It wasn’t in any major index (this can be corrected at any time but to date hasn’t been and has been over-exaggerated as a reason for underperformance.

Why will it perform?

1. The currencies have bottomed and bouncing (turn positive in H2). Nutstuff readers will know that Rouble is 20 per cent undervalued v oil. But the rest of markets are also at very low PPP and set for multi year dollar growth (its the cycle!).

2. Veon is investing again. Capex to sales is back up to 25 per cent and organic growth is set to accelerate.

3. Demand for emerging market telco dataservices is exploding especially when combined with post-covid bounceback. While base rates might not grow, arpus should grow from the absurdly low rates as customers trade up to 4G.

4. As Veon is showing with Jazzcash and Toffee TV, EM telcos are much better positioned than developed market counterparts in providing digital services. They have best customer access and data in these markets and limited competition.

5. Splitting of its Tower Assets. Veon has over 50k towers set to spun out - investor day in


6. Reinstatement of dividend. Veon should produce $500-700m of cash a year (c30c) and grow from there. With licenses predominantly paid, minorities bought in and debt sensibly structured (note Veon borrows at mid single digits), dividends can start flowing again.

What is the upside?

Due to the uptick in capex the growth dynamics for the business should be good especially with stable exchange rates and rapid increases in underlying demand. Veon can grow underlying EBITDA 5-10 per annum plus pay 20-30c in dividend, Nutstuff sees $5-6 being easily achievable and that is still only $80 a sub and doesn’t take into account tower spin-off and market waking up to Jazzcash.

What are the risks?

1. Many will point to Alfa group control. There has been no outward abuse of minorities (the

struggle with Telenor was a simple fight for control and Russians rightly won). If Alfa were guilty of anything it was for overrunning for cash and dividends something many in West do.

2. Emerging markets risk. Telcos are vulnerable to political taxes and license fees. Nutstuff view is that this tends to happen when strip too much cash and don’t invest. Veon got this balance wrong and has corrected it.

3. The market has a view that Veon debt makes it risky. This possibly was the case back in early 2010s but not now. Debt is split nearly evenly between ruble and dollar. Interest costs are low and currencies are already on floor. Importantly, Veon has 7 markets and multiple other assets (Jazzcash and Towers) if needs to get cash. Any market should get at $100-150 a sub at the minimum. Which is $10 to $15 a share!

So, key Catalyst is: EM demand is turning up again. Big short interest and currencies turning neutral to positive. RUBL +ve proxy. $624m FCF at 10 per cent FCF yield is $3.70. 1st stop! ;)

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