VEON has run into fresh problems in Uzbekistan where a huge currency devaluation threatens to wipe 5.5% off underlying annual profits for the entire group.
Following the currency move by Uzbek authorities, VEON has slashed profit guidance for the year, warning investors that it may see no improvement in underlying profitability after previously guiding for "low single digit" growth in its EBITDA margin.
Uzbek authorities have moved to liberalize currency exchange rules and reset the official exchange rate at 8,100 Uzbek som per US dollar, representing a devaluation of as much as 92%.
The world's seventh-biggest telco by customer numbers, VEON says it may not able to repatriate cash from its Unitel subsidiary in Uzbekistan under the new rules. Its cash balances in the country are now valued at approximately $350 million.
The devaluation is expected to have a direct impact on VEON's results this year partly because Unitel's results will be converted into US dollars at a higher exchange rate. However, VEON says it will also experience an erosion in earnings (before interest, tax, depreciation and amortization) because tariffs have been fixed at the old exchange rate.
It expects Group revenues this year to fall by $300 million to $350 million and underlying EBITDA to take a hit of between $175 million and $225 million.
Based on figures last year, when VEON made about $9 billion in revenues and around $3.6 billion in underlying EBITDA, the impact of the currency devaluation works out to be approximately 3.5% of revenues and 5.5% of underlying EBITDA.
It will also affect the company's balance sheet, increasing its ratio of net debt to underlying EBITDA by 0.1 and lowering the value of net assets by $485 million. VEON reported a net-debt-to-EBITDA ratio of 2 at the end of 2016 and had total assets worth $21.3 billion.
Revising its financial guidance for 2017, VEON said it was now expecting "flat to low single digit growth" in its underlying EBITDA margin, compared with an earlier forecast of low single digit growth.
It also anticipates underlying equity free cash flow of between $850 million and $950 million this year, down from a previous target of between $900 million and $1 billion.
Operating a telecom business in Uzbekistan has become an unexpectedly costly affair for VEON, which was formerly known as VimpelCom until a rebranding earlier this year.
Last year, the Amsterdam-headquartered company was fined $795 million by US and Dutch authorities after admitting it had bribed Uzbek officials to secure an operating license in the country. (See VimpelCom's Russian Boss Makes Beeline for Exit.)
In 2016, Uzbekistan accounted for about 7.5% of revenues and 12.2% of EBITDA reported by VEON, which counts Russia as its biggest market in terms of sales.
The operator has been investing in new software and virtualization technologies as it tries to improve digital engagement with its customers. (See VEON's Digital Overhaul Much More Than Rebranding.)
— Iain Morris, News Editor, Light Reading