Magyar Telekom - Severance Cost Took Its Toll On Profit

 

 

Magyar Telekom – Instant Earnings Comment

Recommendation:  BUY

Target price (12M): HUF 545

 

Severance cost took its toll on profit

• Summary: MTEL implemented a new accounting standards (IFRS 16), which makes y-o-y comparison difficult, however the company gave a few financial figures which exclude the effect in order to see the dynamics. Excluding the IFRS 16 effect, EBITDA arrived to HUF 41.3 billion, ca. 3.5% below consensus and 1% below our estimates, and 3% lower compared to last year due to severance expenses in a tune of HUF 3 billion. Excluding this non-recurring item, EBITDA would have been 7% higher at HUF 44.3 billion (+4% y-o-y). Q1 profit came to HUF 4 billion 33% below the consensus and 5% lower compared to our estimates, and lower by 54% on yearly comparison.
• Operation: Quarterly revenue reached HUF 158.9 billion implying a 5.5% y-o-y growth which yearly growth rate decelerated from 9% in 2018 Q4. This should turn even to negative territory as the year progresses, in line with management guidance. The growth rate slowed the most in the SI / IT segment from 12% to a low single digit of 3%. As for the other segments, revenue’s growth rate were 8.4% y-o-y in the mobile segment and 2.1% y-o-y in the fixed line segment, the slowdown in growth rates were visible here too as equipment sales were not able to grow on a quarterly basis.
• On an operational level, group EBITDA excluding IFRS 16 came to HUF 41.3 billion lower by 3% as savings (HUF 1.3 billion) were not able to offset the severance expense (HUF 3 billion) booked in Q1. EBITDA margin was under pressure due to the latter and arrived to 26% vs. 28% in last year Q1. In North Macedonia, EBITDA was rather flattish (+1.3% y-o-y). SI / IT gross margin further declined to 30% from 32% last year as the share of low margin project’s share increased, but management indicated that this may bottomed out and demand for higher margin SI projects start to increase.
• Profit excluding the accounting effect was HUF 4 billion (- 54% y-o-y), the decline on a yearly basis was due three reasons, 1,) HUF 3 billion severance expenses; 2) higher DD&A in an extent of HUF 2 billion; 3), normalised tax expenses + HUF 0.7 billion y-o-y. The miss in estimates probably due to one of the above mentioned.

 

• Underlying trends: In general, customer base increased (+ 4% y-o-y) thanks to the moderated decline in ARPU’s (-3% y-o-y). As an exception, mobile segment’s ARPU climbed by 4% y-o-y and was flattish on a quarterly basis while customer base remained broadly unchanged. It is also positive that fixed line multiplay revenues per households increased by 3% y-o-y (magenta package’s ARPU).
• There was no change in management FY guidance, net debt level temporarily increase by HUF 18 billion to HUF 291 billion (net debt ratio of 32%) due to negative WC movements and slightly higher CAPEX. Addition of fiber optic connections accelerated (20k vs. avg of 2018 14k) as a strategy to provide better quality service and later on cut indirect costs.
• Recommendation: Excluding the one-off, EBITDA would have been higher by 4% y-o-y, and will help to rein inflation in personal expense going forward. This cost optimization is part of MTEL strategy to increase EBITDA by 1-2% on a yearly basis. Since the underlying operation remain broadly in line with our expectation we reiterate our TP and BUY recommendation.

 

Appendix

1. Simplified P&L excluding IFRS 16 effects
2. P&L and other KPI’s
3. MTEL’s historical valuation
4. Peer Group Valuation

 

Simplified P&L excluding IFRS 16 effects

 

P&L and other KPI’s

Source: Concorde, MTEL

 

 

MTEL’s historical valuation

Source: Concorde, Bloomberg

Notes: Still below the average by ca. 10% - please note that we have calculated with end-of-year debt level including ca. HUF 30 billion additional debt after the spectrum auction. HUF 72 billion (guided FCF) – HUF 26 billion (dividend) – HUF 76 billion (forecasted spectrum CAPEX)

 

 

Peer Group Valuation

Source: Concorde, Bloomberg best forecast

Notes: Still below the average by ca. 20% for P/E and for EV / EBITDA

 

 

 

Gellert Gaál
Equity analyst

CONCORDE SECURITIES LTD.

Alkotás Point
50 Alkotás street, H-1123 Budapest.
Phone:
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MEMBER OF THE CONCORDE GROUP

 

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