Ukrtelecom [UTEL UZ, U/R] has announced its plans to establish a 3G network covering the entire territory of Ukraine. As a major telecommunications company and Ukraine’s incumbent fixed line operator, Ukrtelecom has drafted plans for the construction and operation of its third generation (3G) mobile communications network.
The project is estimated to require USD 687.22 mln, while Ukrtelecom plans to raise USD 250 mln from private investors towards its implementation. According to experts’ calculations, the project’s profitability will be 34% per annum if Utel’s mobile network reaches 9 mln subscribers, with the average annual revenue to be USD 550 mln and its operating cost at USD 292.24 mln.
According to Igor Sirotenko, the Deputy Chairman of the Board for Ukrtelecom, the existing network established by Utel is already at a capacity to serve 1 mln clients. He noted that while Utel’s 3G client base currently stands at 60,000 people, it is on the rise.
“Sales in this segment have recently increased and we plan to have more than 200,000 customers by the end of the year,” explained Sirotenko. “Of course, by next year our capacities will already not be enough, and we will increase the number of access points. Admittedly, the situation in the world right now is such that it is disadvantageous to borrow money for investment projects”.
As previously noted by Sokrat, the only 3G license of the UMTS communications standard in Ukraine so far was awarded to the fixed-line incumbent Ukrtelecom, under the “Utel” brand (trademark). That issuance was not subject to a tender process. While that decision was made back in December 2005, the operator finally launched 3G services under the "Utel" brand in November 2007. It ambitiously aims to achieve a total of 200,000 3G service subscribers by the end of 2008.
At present, Ukrtelecom controls 78.5% of the fixed line telecommunications market in the country and has more than 10.1 mln clients.
Our view: It remains highly doubtful that Utel can achieve its target subscriber level by year end. At the end of 1H2008, it had only 25,700 clients, which supposes an average growth of 9,800 clients per month from that time until the mid-October level of 60,000. Given this rate of growth, reaching 200,000 clients would take just over 14 months; otherwise, according to Utel’s announced targets, the company will have to attract 56,000 new customers per month on average for its 3G services.
Regarding Utel’s plans to raise USD 250 mln from private investors towards its 3G network’s expansion, it is worth considering that, in August 2008, Ukrtelecom issued bonds in order to obtain funds for the development of its Internet networks and mobile communications, as well as the difficulties the company may experience in accessing loans during the current financial crisis.
As the only company to have received a 3G communication license in Ukraine, Ukrtelecom is in a privileged position on the telecommunications market. It has also just had its monopolistic position extended until at least next spring, thanks to a recent announcement by the National Communications Regulation Commission (see related story in today’s news bulletin). This buys Utel some time (at least five months) to get a head-start in developing its 3G network and secure this market and expand its client base.
Once 3G licenses are awarded to other operators, which may occur as soon as March 2009 according to the NCRC’s decision, Ukrtelecom may find itself in a tight squeeze to secure this market before other operators present consumers with competitive alternatives. Utel has the unique opportunity to secure this niche by offering a ‘one stop shop’ for telecommunications services to its clients – including Internet, fixed line, 3G mobile, and other services. By successfully marketing package services, the company will increase its chances of attracting business and customer loyalty, which will be increasingly important as other more affordable 3G operators gradually enter this market.
With the awarding of 3G licenses to other operators having been postponed three times now, it is quite possible that the state is waiting for Ukrtelecom to finally undergo privatization in order to use the funds from that sale to convert the spectrum for 3G use.
Ukrtelecom securities remain attractive due to enduring hope that this telecommunications giant will eventually be privatized in 2010. We are skeptical about privatization in 2009, because it will be the year of the President election in Ukraine and due to political issues. At present, 92.79% of Ukrtelecom is owned by the state, with the other 7.14% having been sold to the company’s staff members. We currently have Ukrtelecom’s stock under review and will keep investors posted as to important developments concerning this company as they arise.