Network Damage Highlights Negative Internet Outlook

Ukrtelecom reported that several of its key telecommunications nodes in Crimea were repeatedly blocked and switched off on March 1 2014. This left many subscribers without access to fixed phone, internet and mobile services throughout the day, severing voice and data connectivity between Crimea and the rest of the Ukraine. Although it has since been restored, BMI believes this confirms our view for a slowdown in broadband internet subscribers and revenue in 2014 and have downgraded our forecasts to reflect this outlook. Further damage to infrastructure can also be expected if the Crimean crisis escalates and this will weigh on mobile, fixed and broadband service providers, as evidenced by examples in Thailand, Syria and Egypt.

Ukrtelecom is the country's incumbent fixed-line provider, with approximately 77% of the fixed telephony market and claims to have been operating 9.015mn local access lines at the end of 2012. Ukrtelecom is the largest provider in the country, with its 'OGO' branded broadband service totalling 1.626mn subscribers at the end of Q313, up from 1.493mn in Q312. This accounts for a market share of around 29%, with multiple other players making up the rest of the market. The company also has a small mobile unit, TriMob. Ukrtelecom was bought from Austrian Epic Group in October 2013, by Ukrainian conglomerate SCM Group, owned by Ukraine's richest businessman, Rinat Akhmetov.

Ukrtelecom has claimed that the blocks were carried out by unspecified persons wearing military uniform and also reported damage to its equipment and zonal fibre-optic network on February 28. The connection was restored during March 1, but the ongoing Russian control of Crimea has raised political risks in the Ukraine, and poses downside risks for the telecoms sector, as evidenced by the Ukrtelecom example. In January 2014, BMI highlighted our bearish outlook for the Ukrainian broadband sector in the wake of the political protests, with potential downgrades to our forecast to follow. Although the extent of the damage to Ukrtelecom's network and blocked service is believed to be minimal, we have modified our forecasts to reflect the increased negative outlook. The recent developments have caused some volatility in Ukrtelecom's share price, although we note that low trading volumes create certain distortions on the Ukraine PFTS Index.

Volatility Following Blocked Network & Infrastructure Damage
Ukrtelecom Share Price, UAH

Ukrtelecom reported that several of its key telecommunications nodes in Crimea were repeatedly blocked and switched off on March 1 2014. This left many subscribers without access to fixed phone, internet and mobile services throughout the day, severing voice and data connectivity between Crimea and the rest of the Ukraine. Although it has since been restored, BMI believes this confirms our view for a slowdown in broadband internet subscribers and revenue in 2014 and have downgraded our forecasts to reflect this outlook. Further damage to infrastructure can also be expected if the Crimean crisis escalates and this will weigh on mobile, fixed and broadband service providers, as evidenced by examples in Thailand, Syria and Egypt.

Ukrtelecom is the country's incumbent fixed-line provider, with approximately 77% of the fixed telephony market and claims to have been operating 9.015mn local access lines at the end of 2012. Ukrtelecom is the largest provider in the country, with its 'OGO' branded broadband service totalling 1.626mn subscribers at the end of Q313, up from 1.493mn in Q312. This accounts for a market share of around 29%, with multiple other players making up the rest of the market. The company also has a small mobile unit, TriMob. Ukrtelecom was bought from Austrian Epic Group in October 2013, by Ukrainian conglomerate SCM Group, owned by Ukraine's richest businessman, Rinat Akhmetov.

Volatility Following Blocked Network & Infrastructure Damage
Ukrtelecom Share Price, UAH

Ukrtelecom has claimed that the blocks were carried out by unspecified persons wearing military uniform and also reported damage to its equipment and zonal fibre-optic network on February 28. The connection was restored during March 1, but the ongoing Russian control of Crimea has raised political risks in the Ukraine, and poses downside risks for the telecoms sector, as evidenced by the Ukrtelecom example. In January 2014, BMI highlighted our bearish outlook for the Ukrainian broadband sector in the wake of the political protests, with potential downgrades to our forecast to follow. Although the extent of the damage to Ukrtelecom's network and blocked service is believed to be minimal, we have modified our forecasts to reflect the increased negative outlook. The recent developments have caused some volatility in Ukrtelecom's share price, although we note that low trading volumes create certain distortions on the Ukraine PFTS Index.

Ukraine's broadband market suffers from a lack of investment, many small operators and no real competition from mobile broadband services. The country ranks near the bottom of the region for broadband penetration as years of neglect by the incumbent have taken their toll. Despite a low broadband internet penetration of just 15.8%, the market is not experiencing strong growth to match the opportunities. Revenues from internet access services grew by 5% in 2013 according to the State Statistics office, down from 9.7% in 2012 and 12% in 2011. With such uncertainty in the country, we believe investment will remain limited in the Ukraine telecoms market during 2014, particularly for Ukrtelecom, which may need to fix damaged infrastructure. We therefore expect revenues from internet services to slowdown again in 2014, as a result of this lack of investment and our forecast for slower broadband internet take-up.

This is particularly damaging for Ukrtelecom, which planned to use bonds worth a total of UAH1.4bn in March 2014 for network investment. The proceeds were to be used for the expansion of broadband Internet access segment, capacity expansion of urban Ethernet-rings, modernization of optical backbone network (DWDM), continuation of the development of medium area networks and of modernization of central and regional transit nodes of data transmission network. We now forecast the market to grow from 8.055mn in 2013 to 8.458mn in 2014, down from our original 8.844mn projection. With a lack of 3G licences to major mobile operators, this is unlikely to be mitigated with a rise in mobile broadband.

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