Magyar Telekom - Broke The Gentlemen’s Agreement…

MTELEKOM - Instant Earnings Comment

Recommendation: BUY (unch.)

Target price (12-month): HUF 545 (unch.)

 

• Summary:

1. Lower than promised shareholder remuneration: Despite better than expected EBITDA (+2% vs consensus; beating FY EBITDA guidance by 3%) management failed to live up to their promise of DPS 27 they indicated last year. Instead they propose DPS 20 (DY: 4.5%) with an HUF 5.2 bn share buyback meaning a total shareholder remuneration of ca. 25 per share vs. DPS 27 per share. We did not receive any explanation for the change in dividend “policy” the only think that may explain is that MTEL generated less FCF than (HUF 65bn vs. 71bn) guided due to timing issues in real estate divestments. However, proceeds from the real estate sale should arrive in 2020 anyway, so this reason is not solid. Although HUF 2 per share is not a game changer but message it conveys does reflect serious corporate governance deficiencies, in our view.
2. Deterioration in FCF guidance for 2021 probably due to working capital. Management implicitly cut its FCF guidance for 202. Initially FCF should have increased by 5% CAGR until 2022 implying HUF 78.7bn (1.05^3*HUF68bn) FCF for 2021,while the recent guidance implies much lower HUF 65bn FCF in 2021, a drop of HUF 13bn which is probably related to higher working capital – (as CAPEX remains stable). It is not entirely clear for us, why should swell that much, and why it could not have foreseen that a year ago when management gave the guidance.
3. The decision about the buyback is positive (ca.22x AVG daily turnover), as long as MTEL purchase the shares below BVPS (572 per share), the EPS will increase via lower number of shares (share price discount to BVPS currently is at 22%).
4. Underlying operation is strong, despite the miss in FCFF. The latter is attributable to time mismatch of the real estate sale, which would arrive in 2020 anyway so it is not a real miss in our view. Q4 EBITDA excluding IFRS 16 effects and the gain on sales increased by 5% y-o-y to HUF 49bn vs 46.6bn as a result of top-line growth and cost discipline.