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Telekom Slovenije Group 2017: Guidance delivery spoiled not only by provisioning, but margin issues.

Sales revenues continued its positive momentum, as revenues grew by 2.1% in 2017 to EUR 716.2m. Growth derives mostly from strong wholesale market and a boost in new (other) segments. On the other hand mobile market revenues continued its downward trajectory. Total revenues of EUR 726.0m surpassed our expectations of EUR 713.6m, but mostly due to consolidation of Antenna TV SL. Reported EBITDA was only at EUR 168.7m, down 15.3% YoY and significantly below EUR 206m mark. However Telekom Slovenije mostly related this miss to provisioning and other one-offs. Nevertheless from our point of view, even adjusted EBITDA level and EBITDA margin disappointed (albeit less than headline suggests). Partially due to opex surge tied to new services, partially due to Antenna TV SL consolidation (which operates at a significant loss). Also mobile price pressures are substantial. All in all this then translated into profit of EUR 11.2m, down 72% YoY and below our expectations and guidance. On the bright side, balance sheet remains healthy with net debt to adjusted EBITDA ratio of 1.5x, while Telekom management proposal indicates a nice raise of dividends from EUR 5.0 to EUR 6.3, calculating into attractive 7.6% gross dividend yield.

We have adjusted our investment thesis based on this dividend increase on one hand, and higher level of lawsuits outstanding on the other. Namely a key item last year for our buy rating was Macedonian cash flow which could turn into higher dividend expectations (even up to additional EUR 5.0 per share; last year dividend at EUR 5.0). Due to lawsuits and provisioning the mentioned upside seems to have somewhat balanced out. Our target price has lowered to EUR 86 as we became more cautious, warranting only a hold rating. Investors should look upon further few quarters to see how margins play out. It’s true however Telekom Slovenije should be seen mostly as a dividend play and not a growth stock, until management starts delivering margin expansion. And as stated, dividend yield is attractive.