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KazAtomProm - «BUY» recommendation

Altynay IbraimovaMarch 20, 2019

We updated the KAP operating and financial indicators for 2018FY and added to the calculation of the target price a share of participation in associates and joint ventures whose profits are not included in the operating component of the company. Our target price has changed slightly, reaching $16.55/share versus the previous $16.50/share. Assessing the company's financial condition as stable and noting that our forecasts correspond to the company's plans, we expect positive cash flows over the next five years. We are also optimistic about the company paying a dividend in the amount of T266/share and recommend to Buy KAP shares, waiting for the quotes to strengthen in anticipation of dividend fixation.

2018FY results. The company's revenue is above our expectations by 0.4%. The unit cash cost corresponds to the levels declared by the company, despite the fact that high sales of uranium contributed to a more rapid increase in total cost and sales costs compared to our expectations. Noting the main reason for the high costs of increased sales, we estimate the change in the specific cash cost as neutral. Due to higher physical sales and sales prices, as well as due to the strengthening of the dollar, operating profit amounted to 77.5bn tenge, exceeding the figure for 2017 by 138%. Adjusted EBITDA (attributable) rose by 9% to 140bn tenge.

Dividend attractiveness persists. According to the dividend policy for 2018, based on 75% of the FCF, KAP may send 12.8bn tenge or 37tenge/share to dividends. However, we believe such a scenario is less likely and we expect the company to follow the scenario of paying an amount equivalent to $200 million. We expect the company to pay about 69bn tenge and the dividend will be T266/share with a dividend yield of 5%.

Forecasts do not introduce strong changes. Since December last year, there have been no significant changes in the uranium market. UX Consulting's forecasts, which are the main benchmark in forecasting uranium prices, remain at an average level of $27- $28/lb in 2019 at current $27/lb and do not exceed $30/lb in the next five years. We proceed from the average selling price of uranium for all mining assets at around $29/lb in 2019-2024 and $31/lb in 2025. Our production forecast (by shares) for 2019 is 13.7ths tons of uranium, and we expect the volume of uranium sales at the level of 16.5ths tons. We include the cash cost of $12/lb and revenue for 2019 in the amount of 407bn tenge. We have updated our expectations for the costs of implementation and general and administrative costs based on the projected level of inflation in Kazakhstan in the range of 4% -5%.

BUY recommendation with 12M TP $16.5/share. Our new target price amounts $16.55/share for KAP LI and T6 205/share for KAP KZ. We assess the company's financial position as stable and note the “currency” nature of revenue at the current tenge rate as a strong base for the company's cash flow. We do not see any prerequisites for a weak pricing environment on the company's financial condition, focusing on low production costs. Noting the strategic role of the KAP for the global uranium industry, we do not see significant risks that can put pressure on sales: about a third of the demand for KAP products is provided by China, which is rather aggressive in its expansion of nuclear energy. From the point of view of short-term investment attractiveness, we consider dividends as the main trigger. Summarizing the updated analysis of 2018, we recommend “Buy” shares of KAP.