UPDATE 2-Russia's Vimpelcom cuts core profit outlook

Wed May 14, 2014 1:11pm EDT

* Revises net debt to EBITDA target to 2.4 from 2.3

* First-quarter EBITDA down 11 pct

* Net profit tumbles 90 pct to $39 mln

* Shares recover a little after early fall (Adds share price, CEO comment on Canada, analysts)

By Maria Kiselyova

MOSCOW, May 14 (Reuters) - Russia's No.3 mobile group Vimpelcom said it expected sales and core profit to fall this year, as it struggles to defend its market share in Russia while resisting cut-price competition in Italy and a weak economy in Ukraine.

Vimpelcom, which assumed more than $20 billion of debt as it expanded into foreign markets in 2010, has been struggling with weak economies and regulatory pressure abroad, while losing customers at home to rivals MTS and Megafon.

Russia is still the biggest market for Vimpelcom, which had 218 million mobile subscribers at the end of March spread across a dozen countries in the CIS, Europe, Asia and Africa.

"Italy is still very competitive. We are also going through a transition in Russia, so we think this year is a transition year for us," CEO Jo Lunder told Reuters after the company announced revised targets for 2014.

He said political turmoil in Ukraine had no direct impact on Vimpelcom's performance in the first quarter. The company in March took an impairment charge of $2.1 billion on assets in the country, where it is the top operator with its Kyivstar brand.

Vimpelcom now expects "low to mid single digit" declines this year in revenue and core profit, or EBITDA, compared with earlier guidance for flat revenue and EBITDA. It revised its net debt to EBITDA ratio target to around 2.4 from 2.3.

"I think Vimpelcom continues to lose market share in Russia and it's early to say that it recovered its position in Ukraine, so it's too early to talk about the company reversing the trend," said Anna Lepetukhina, an analyst at Sberbank Investment Research.

Analysts at Credit Suisse and Otkritie said the new guidance was more reasonable given weak first-quarter results and reiterated their ratings of Underperform and Hold respectively, while JP Morgan downgraded it to Underweight.

Vimpelcom cut dividends in January to free up cash for debt repayments and said the new policy would remain in place until it has a net debt to EBITDA ratio of 2 times.

Vimpelcom's Nasdaq-listed shares dived by almost 7 percent in early trade on Wednesday but later recovered some of the losses and traded down 4.6 percent by 1500 GMT.

For the first quarter, Vimpelcom reported a 10 percent year-on-year fall in revenues to $5 billion and an 11 percent decline in earnings before interest, taxation, depreciation and amortisation to $2.1 billion. EBITDA was only moderately below analysts' expectations.

Net profit fell 90 percent to $39 million due to a higher effective tax rate and a $92 million foreign exchange loss. Analysts tend to concentrate more on the core figures, which strip out volatile items.

UNDER PRESSURE

Vimpelcom said its Russian business unit continued to see pressure as it fought for customer loyalty by adjusting tariffs and reducing non-requested services, with mobile revenues down 3 percent in rouble terms.

Vimpelcom also said mobile revenues at its Italian unit Wind fell 11 percent in euros in the first quarter as a result of heavy price competition, and its businesses in Africa and Asia had been squeezed by tough regulations.

Lunder said the recent refinancing within Wind strengthened its financial position and it could "easily stand on its own feet in competition" but said he remained in favour of in-market consolidation.

Vimpelcom has been rumoured to be seeking a merger of Wind with Hong Kong-based Hutchison Whampoa's 3 Italia unit and the refinancing of Wind's most expensive debt last month fuelled speculation about a possible deal.

Lunder said it would be difficult for the industry to roll out several parallel high-speed networks and that network-sharing arrangements and consolidation "make a lot of sense" for a market like Italy where data traffic is growing.

Lunder declined to comment on a possible deal with 3 Italia.

Vimpelcom's biggest shareholders are Russian billionaire Mikhail Fridman's Alfa Group and Norwegian telecoms group Telenor, while 10.8 percent is traded on Nasdaq. (Editing by Tom Pfeiffer and Keiron Henderson)

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