VEON: Strong Buy For Ukrainian Rebuilding and Pakistani GrowthMy Thesis
VEON Ltd. (VEON) is a Seeking Alpha Quant “Strong Buy” currently trading at what I believe is a discounted valuation of just $3.3 billion in market cap and $6.2 billion in EV. VEON is a multinational telecommunications and digital services operator serving customers in five frontier markets that collectively represent about 7% of the world’s population, according to the Company. The focus of this analysis is on VEON’s two largest markets: Ukraine and Pakistan.
I believe the valuation discount to the frontier markets telecom sector multiple reflects dated and distorted misperceptions about Russia and the Ukraine-Russia war. In particular, investors have feared the destruction of telecommunications infrastructure in the region and the Company’s former ties to a sanctioned Russian economy. If and when United States President Donald Trump is successful in bringing a resolution to the conflict, I expect VEON’s share price to react positively and Wall Street to resume their bullish stance prior to the complications of the Russia-Ukraine war.
I am separately bullish on Pakistan, as it is one of the youngest and most populated countries in the world with a population of 241 million and GDP per capita of under $1,500. Economic forecasts are cautiously optimistic, and I believe that telecommunications is a logical macroeconomic investment need facing the nation, which it has addressed by forming a government office, The Pakistan Telecommunications Authority. I subscribe to economic convergence theory, whereby the best secular macroeconomic growth plays come from frontier and emerging markets. In my opinion, Pakistan is the epitome of a frontier market with enough progress thus far to warrant future investment.
Turning the Page on Russia
Investors penalized VEON shares in February 2022 when Russia invaded Ukraine. At the time, 65% of VEON’s revenue was generated in these two countries. A soon-to-be sanctioned Russian oligarch sat on the supervisory board of directors, and the largest shareholder, London-based LetterOne, was effectively controlled by the same Russian oligarch and his business partner. Also, in 2023, the Ukrainian court imposed restrictions on VEON’s corporate rights in Kyivstar and its other Ukrainian subsidiaries. Importantly, during no time were either VEON or LetterOne themselves ever sanctioned.
Lost Wall Street coverage was also collateral damage from the conflict. There were 11 analysts actively covering VEON shares at the time of the war’s outbreak, with 8 “Buys” and an average target price of $63.10. That all went away when Russia invaded Ukraine. VEON has started to rebuild equity research coverage to three analysts: New Street Research, Inam, and as of November 2024, Benchmark, but research coverage still remains sparse. The debt is covered by Barclays, JP Morgan and Imperial Capital.
Importantly, however, over the past three years, VEON has strategically sold off all of its Russian assets, removed Russian oligarchs from its board, and invested significantly in Ukrainian infrastructure to ensure uninterrupted connectivity for its people. The restrictions on VEON’s corporate rights in Kyivstar and its other Ukrainian subsidiaries have been lifted. Today, all that is left of VEON’s former ties to Russia is outdated market perception, a lack of awareness across the investment community, and a discounted valuation.
Today: Growing in Key Frontier Markets
Simultaneously, VEON aggressively invested to increase its presence in frontier markets, diversifying beyond Ukraine, and growing its non-telco digital services (e.g., financial services, media, health, education).
The Pakistan Opportunity
Pakistan is VEON’s largest market with 35% of revenue in Q3 2024. Jazz is the relevant subsidiary, which offers cellular services to 72 million subscribers throughout Pakistan. Jazz won the World Best Operator in a Growth Market Award in December of 2024 for its work bringing access to healthcare, entertainment, and banking to underserved Pakistanis. The World Bank points to Pakistan’s economic progress despite its challenges. Real GDP growth rebounded to 2.5% in FY24 from a contraction in FY23 thanks in part to newly introduced liquidity in global currency markets. GDP growth is projected to reach 2.8% in FY25. Main challenges include education, nutrition, inflation, natural disaster, and protectionist policies.
Telecommunications revenues are largely increasing beyond GDP growth rates. Data from the Pakistan Telecommunications Authority shows that total industry revenues were projected to grow 17% to 955 billion Rupees or about $11 billion from 817 billion Rupees in 2023. The same authority points to Jazz as the leader in the national market, with 37% market share, trailed in order by competitors of Zong, Telenor, and Ufone. Jazz has a double-digit percentage lead on Zong, and I suspect this lead is even larger when looking at 4G, because these other operators provide the lower quality 2G and 3G assets that comprise most of Pakistan’s current telecom infrastructure. Billions of dollars have been invested in Pakistani telecommunications over the past five years, and I believe investment will continue given the projected accelerations in economic growth. Over 60% of the population is under 30-years-old, meaning the market is ripe with young people who value local and global connectivity more so than older citizens who have lived without it.
In Pakistan, the Company operates a fintech company called JazzCash that is helping Pakistan transition to a cashless economy by providing mobile wallet, payments, microlending, and card acceptance. The business serves over 19 million MAUs and facilitated nearly 2.6 billion LTM total transactions as of September 2024.
To me, this looks and feels like a unicorn buried within VEON, yet given the current stock price of VEON, it’s clear that the market isn’t assigning much if any value to JazzCash. However, the
Company is evaluating IPO-ing JazzCash, which I think would be a catalyst for the market to re-rate VEON higher.
Ukrainian Resilience and Reopening
Ukraine accounts for about 24% of VEON’s revenue and 33% of EBITDA in Q3 2024 through Kyivstar, which has 50% share in the national market according to VEON presentations. Kyivstar’s performance in keeping Ukraine connected throughout the war has been nothing short of remarkable, and we are most bullish on Kyivstar’s market share to grow as Ukraine reopens, with the Company pledging more than half a billion USD to rebuild Ukraine.
We are also bullish on 4G user penetration rates, which represent an opportunity to upsell to a superior product. 4G penetration rates have grown from 46% in 2021 to 60% in 2023 with further room to go. Revenue grew through 2023 and EBITDA and margins have remained stable in the mid double digits.
I am also particularly excited about the Starlink partnership. As all the markets that VEON services are at high risk for physical conflict, satellite deals ensure uninterrupted, economical connectivity if 4G infrastructure is destroyed. One may also wonder about population losses and customer churn due to the immigration of Ukrainian civilians. Roam Like Home was introduced in 2022 in partnership with mobile operators in 30 European countries and enables displaced Ukrainians to access Kyivstar communications and digital services as if they were still in Ukraine.
Many of those who stayed in Ukraine and fought benefitted from Helsi Healthcare, the largest digital healthcare platform in the country. Helsi has over 28 million users registered in its system as of September 2024 in a country that has 38 million people, helping them find connectivity to over 1,600 healthcare institutions.
Looking to the future, VEON announced that it intends to spin off Kyivstar by listing it separately on the Nasdaq. This should further help separate Kyivstar as a pure play on the Ukrainian economy and will provide a vehicle for investors who support Ukraine’s rebuilding and reopening through VEON’s continued investment in Ukraine.
The Discounted Valuation
Seeking Alpha Quant rates VEON’s valuation grade A+. GAAP P/E is just 5.5 relative to the communications sector median of approximately 14, and non-GAAP PEG is 0.34 relative to a sector median of 1.44. EV/EBITDA is at a 64% discount to the sector median. Price/OCF is at an even more significant discount of approximately 69%. Of course, these comparisons are imperfect because the communications sector is a broad classification, and VEON is diversified into the broader technology space operating a major fintech and a healthcare platform.
I believe the key differentiator and one explanation for the compressed multiples is VEON’s frontier market status. More developed economies earn the status of emerging markets, still behind developed or mature nations like the United States. Due to lower household incomes and political and economic instability, frontier and emerging markets are riskier investments that warrant caution and generally lead to lower multiples. Again, because Seeking Alpha Quant lumps together companies like Disney, Google, and Facebook in the communications sector, the sector median comparisons are somewhat skewed. The following table was recently generated by a colleague with access to Bloomberg data and shows some comparisons to frontier market peers.
EV/EBITDA
Ticker Name CY23 CY24E CY25E
VEON US VEON Ltd 4.3 3.7 3.4
CNVRG PM Converge ICT Solutions 6.5 6.1 5.5
MTELEKOM HB Magyar Telekom Telecommunications 5.6 5.1 5.0
TIGO SS Millicom International Cellular 5.2 4.4 4.1
OTEL OM Oman Telecommunications Co SAO 5.1 5.2 5.0
OPL PW Orange Polska SA 5.5 5.2 5.1
ROUTE IN Route Mobile Ltd 15.2 13.5 11.3
SAFCOM Safaricom PLC 6.4 5.9 4.3
MTNGH GN Scancom PLC 3.5 4.1 3.3
TEL2B SS Tele2 AB 8.8 9.2 9.1
ETEL EY Telecom Egypt Co 3.6 4.3 3.7
TKA AV Telekom Austria AG 4.0 4.0 3.9
TTKOM TI Turk Telekomunikasyon AS 4.2 3.6 2.6
TCELL TI Turkcell Iletisim Hizmetleri AS 3.4 3.3 2.5
EXCL IJ XL Axiata Tbk PT 4.6 4.4 4.1
Synthesizing the data, I suggest that VEON trades at approximately a 30% discount on EV/EBITDA when you split the median and average calculations. That tells me that, despite the recent appreciation, VEON shares still trade at a meaningful discount to its EM telco peers, and that’s before giving credit to the Company’s non-telco assets.
Risks to Thesis
There are several key risks that may hinder VEON’s multiple expansion. The first is simply stagnant economic growth in key markets of Ukraine and Pakistan and/or inflation that cannot be passed through to the consumer. In my view, it is likely that Ukraine specifically will experience accelerated inflation rates as economic activity picks up and the population rebounds if and when the war ends. It is furthermore possible that Ukraine concedes large swaths of land to Russia in a peace deal, in which case Kyivstar may be covering newly Russian citizens and thus complicating the prior divestments from Russia.
Separately, geopolitical conflicts in the region are rampant beyond the Ukraine-Russia war, with several high profile terrorist organizations governing key trade partners of Pakistan. I believe there is potential for a smaller-scale, yet similar sort of situation between Ukraine and Russia to occur between Pakistan and Afghanistan, as reports suggest tensions are on the rise. Moreover, VEON operates in Bangladesh, which recently experienced a coup d’é·tat, which exemplifies the political risks associated with the region.
More microeconomic risks include less than expected growth and adoption of digital services of JazzCash and Helsi Healthcare, the fact the ladder is still in the early stages of monetization, and the potential for a failed listing of Kyivstar, which could be specifically detrimental to share prices if news of the potential listing has been a driving factor in the recent price momentum.
Concluding Remarks
My analysis supports Quant’s Strong Buy rating of VEON. I am bullish on Pakistan and Ukraine according to my macroeconomic analysis, which highlights concentrated investments in telecommunications, healthcare, and banking in these frontier markets to bolster their GDP per Capita growth and transcend their political instability. Most importantly, I believe in President Trump’s campaign promise to end the Ukraine-Russia war, and that VEON will react to catalytic news events building up to a peace deal. If and when Kyivstar is listed separately, I suspect U.S. investor sentiment for Ukraine will propel VEON’s prices higher. VEON has demonstrated impressive resilience, pivoting its capital structure to align with U.S interests by divesting from Russia and committing to Ukraine. Digital service subsidiaries such as JazzCash have significant potential to bolster the valuation of VEON once they are recognized by investors. I reiterate my agreement with Quant’s Strong Buy rating of VEON.
Disclosure: This piece reflects my honest market outlook on 01/26/2025 and is subject to revision or change at any time. I/we have a current ownership stake in VEON. I have no business relationship with the Company.
Long
