10 things you need to know about Georgia’s telecom sector and Silknet 1. Georgia was one of the first post-Soviet countries to liberalize the telecom market. The country’s telecom industry has seen a number of mergers and acquisitions in recent years, enabling original operators to maintain the dominant market positions. In Georgia’s three-carrier mobile industry, Magticom and Silknet are the only full-service telecom operators, while Veon is focused on the mobile industry.
2. We find both the mobile and fixed market in Georgia to be attractive especially when compared to European markets. We believe that Georgia’s telecom market will benefit from rising urbanization, changing lifestyle and increased mobile data usage.
3. Mobile segment expected to grow from mobile migration and increased data usage as Georgians use low levels of mobile internet compared to EU and CIS countries
4. Fixed broadband segment expected to benefit from increasing penetration in rural parts and shrinking household size in Georgia. After record breaking growth levels, we expect fixed broadband market to shift to steady growth path as penetration is still low in Georgia vs. EU.
5. Pay-TV sector was the fastest growing segment, with penetration reaching 56.5% of the Georgia’s households. Despite the trend, Pay TV penetration still low in Georgia, particularly in rural parts. We estimate, urbanization trend and growing number of households to support the sector going forward. However, we acknowledge that the prevalent content piracy in Georgia hinders the sector’s growth outlook.
6. Fixed voice segment expected to continue decline, reflecting global trend of fixed-to-mobile substitution. Not surprising that more and more people, especially young Georgian families, do not have a fixed phone line at home.
7. We initiate coverage of JSC Silknet, the largest fixed voice and second largest fixed broadband, Pay TV and mobile operator in Georgia. Silknet has transformed into a fully four-play-enabled telecom operator with the acquisition of Geocell in March 2018, then second largest mobile operator in Georgia. We believe that this acquisition enhances company’s market position and product profile, and better equips Silknet to compete with its rival.
8. Silknet placed its debut US$ 200mn Eurobond on 2 April 2019, with 5-year tenor and 11% coupon rate. Major portion of the Eurobond proceeds was used to refinance the obligations incurred for Geocell acquisition and the remainder improved company’s liquidity profile.
9. Geocell acquisition almost doubled Silknet’s revenue as mobile sector became the largest and most profitable business line for the company. Silknet expected to benefit from the surge in mobile data traffic as well as growing fixed segment penetration in Georgia.
10. We believe that Silknet’s financial metrics will remain at comfortable levels compared to the Eurobond covenants in the medium term. Silknet’s credit profile is backed by robust profitability, moderate leverage and strong growth prospects, while key risks facing the company are related to competition in the sector and FX exposure.
