VEON Ltd (NASDAQ:VEON) is a company I’ve been following for a while, and although it’s currently trading below its fair value, I have reasons to believe it may not actually reach this figure. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
Firstly, a quick intro on the company – VEON Ltd., through its subsidiaries, provides mobile and fixed-line telecommunications services. Since starting in 1992 in Netherlands, the company has now grown to a market cap of US$4.69B.
The first thing that struck me was the pessimistic outlook for VEON. A consensus of 14 US wireless telecommunication services analysts covering the stock indicates that its revenue level is expected to decline by 0.82% over the next financial year. As VEON is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -US$483.00M to US$400.75M over the same time period.
VEON’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. A major red flag for VEON is its high level of debt, which has been increasing over the past five years, exceeding its total level of equity. Furthermore, its interest payments as a result of this high level of debt, is not adequately covered by EBIT, at 2.04x. However, its cash generated from its core activities makes up a reasonable portion of debt (0.21x). There’s room for improvement on the debt level front, which could be lowered to a more prudent amount. The current state of VEON’s financial health lowers my conviction around the sustainability of the business going forward. VEON has poor liquidity management. Firstly, its cash and other liquid assets are not sufficient to meet its upcoming liabilities within the year, let alone its longer term liabilities. Secondly, more than a fifth of its total assets are physical and illiquid, such as inventory. Keeping in mind the downside risk, if we think about the worst case scenario, such as a downturn or bankruptcy, a non-trivial portion of its assets will be hard to liquidate and redistribute back to investors.
VEON is now trading at US$2.68 per share. At 1.75 billion shares, that’s a US$4.69B market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 1.08x vs. the industry average of 2.7x.
VEON is a fast-fail research for me. Good companies should have good financials to match, which isn’t the case here. Given investors have limited time to analyze a universe of stocks, VEON doesn’t make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.