Magyar Telekom - Strong Q4; DPS lift for 2019 and +14 bn FCF in 2019 (!) - Instant Earnings comment from Concorde Ltd. (Hungary)

Magyar Telekom – Instant Earnings Comment

Recommendation:  Buy

Target price (12M): HUF 510

 

 Strong Q4; DPS lift for 2019; +14 bn FCF in 2019

 

• Summary: The most important takeaway from the results is the guidance in which MTEL has finally lift the DPS guidance from 2019 profit to 27 while leaving current year’s DPS at 25. The dividend proposal reflects MTEL conservative stance, as they expect next year FCF to increase by 5% from 2018 FY level to HUF 71.4 billion (+HUF 3.4 bn) while lifting the dividend only by ca. HUF 2 bn (FCF pay-out for 2019 is expected to be 38% vs. 2018: 43% / excluding one-off)

 

Although we expected larger dividend hike for 2019, namely to DPS 30 we would like to highlight that Bloomberg consensus for 2019 DPS is 25 only which will climb to 27 only by 2020.

 

As for the other part of the 2019 guidance, we see it rather strong. Management expect EBITDA to increase by 1-2% to HUF 195 bn which is higher compared to our (HUF 185bn) and to Bloomberg consensus (HUF 190 bn) for 2019. But most importantly next year’s FCF, it is very ambitious, as mentioned mgmt. expect it to increase to HUF 71.4 bn from FY 2018 HUF 68bn which was supported by a significant one off (asset sale), in a tune of HUF 10.5bn. Thus excluding the non-recurring one off, MTEL’s FCF should climb by HUF 14 bn while keeping CAPEX stable (excluding spectrum fees). In our view this should come from 1) higher EBITDA ca. HUF 4 – 5 bn; 2), optimisation of working capital. We expect further information about it tomorrow during the conference, tomorrow.

 

        FY management guidance

Source: MTEL, Concorde

 

Regarding to Q4 figures, they came in line with our estimates and ca. 1% higher compared to the consensus for Revenue and EBITDA and met the profit expectation. 

 

2018 guidance: Despite the fact that CAPEX came (HUF 92bn) bit above of FY guidance of HUF 90 bn, MTEL free cash flow arrived to HUF 68 bn +13% higher compared to its guidance. This may stem from better EBITDA +3 bn vs. guidance and probably higher price tag for the sold office in Q4.

 

• Revenue increased to HUF 175 bn (+8.5% y-o-y) fuelled by again strong equipment sale (+50% y-o-y in both mobile and fixed line segments) and albeit slowing but still robust SI / IT revenue (+12% y-o-y).
• EBITDA came to HUF 46.7 bn (+10.5% y-o-y; EBITDA margin of 26.7%) on the back of one – off realized gain on sale (+3.7 bn) and improved margins at SI/IT. Excluding the former, EBITDA would have arrived to ca. 43 bn (+2% higher compared to last year’s same period). On the cost side, bad debt expenses swelled by ca HUF 2 bn (+280% y-o-y), employee –related expenses went up by HUF 1 bn (+4% y-o-y), other related cost increased on the back of higher equipment sale by HUF 6 bn (+16% y-o-y). As for the country breakdown, Hungarian operation’s EBITDA was flat at HUF 42 bn on a yearly comparison while Macedonian operation managed to slightly improve to HUF 4.3 bn (+5% y-o-(+5% y-o-y).
• As a result of the above mentioned profit jumped by 60% to 7.5 bn from 4.7 bn in 2017 Q4.
• Underlying operation: The picture has remained broadly unchanged RGU and ARPU have continued to grow nicely. KPI’s were strong in the last quarter, 1), RGU’s grew by an avg. of 6% y-o-y (except fixed line subscribers -2% y-o-y); 2), ARPU’s climbed as well but a more moderate pace at 3% on avg. (see our detailed numbers below).
• Although FCF was extremely strong debt level did not manage to go below 30% net debt level as we had expected, it arrived to 30.5%.
• Recommendation: In light of the result we reiterate our recommendation and our target price. Additionally, we believe that the dividend guidance upgrade and the remarkably strong FCF generation capability in 2019 may prompt analysts to update their DPS forecast as they lag by ca. 1 year – They expect DPS 27 only from the profit of 2020 according to Bloomberg.

 

With the new DPS proposal for 2019 dividend yield came to 5.7%, while FCF yield to 15% vs. CEE peers of 9%. 
Using the new EBITDA guidance (HUF 195 bn) and the lower debt level, is trading at a 4.1x EV to EBITDA ’19 ca. 20% below its peers.

 

Net debt development & EBITDA quarterly develoment

Source: Telekom, Concorde

 

Operational KPI’s

 

Source: Telekom, Concorde

 

MTELEKOM’s quaterly p&L [HUF million]

	4Q 2018	4Q 2017	Ch. (y-o-y)	FY 2018	FY 2017	Ch. (y-o-y)
Revenues	175,134	161,442	8.5%	657,104	610,851	7.6%
Mobile revenues	91,545	83,258	10.0%	343,145	322,656	6.4%
Fixed line revenues	53,994	51,488	4.9%	206,901	196,108	5.5%
SI/IT	29,595	26,368	12.2%	107,058	87,485	22.4%
Energy services	0	328	-100.0%	0	4,602	-100.0%
OPEX	-164,351	-149,515	9.9%	-589,343	-540,109	9.1%
Direct costs	-82,240	-72,094	14.1%	-286,931	-245,777	16.7%
Employee-related expenses	-23,050	-22,068	4.4%	-82,968	-80,240	3.4%
Depreciation and amortization	-29,735	-27,839	6.8%	-115,529	-108,174	6.8%
Utility tax	0	0		-7,159	-7,418
Other operating expenses	-29,326	-27,514	6.6%	-96,756	-98,500	-1.8%
Other operating income	6,189	2,486	149.0%	9,217	6,746	36.6%
EBITDA	46,707	42,252	10.5%	192,507	185,662	3.7%
EBIT	16,972	14,413	17.8%	76,978	77,488	-0.7%
Net financial result	-5,177	-4,701	10.1%	-17,784	-21,627	-17.8%
associates' and joint ventures' losses	258	159	62.3%	588	343	71.4%
EBT	12,053	9,871	22.1%	59,782	56,204	6.4%
Income tax	-4,349	-4,708	-7.6%	-13,333	-15,958	-16.4%
Non-controlling interests	239	477	-49.9%	3,131	3,007	4.1%
Net profit	7,465	4,686	59.3%	43,318	37,239	16.3%
KPI's
RGU
Customer base (m)	3,011,938	2,845,079	5.9%
Fixed telephony access	1,383,293	1,411,972	-2.0%
Fixed broadband access	1,147,728	1,073,583	6.9%
TV	1,087,724	1,026,532	6.0%
ARPU
Blended Mobile	3,624	3,392	6.8%
Fixed telephony	2,267	2,395	-5.3%
Fixed broadband	3,537	3,497	1.1%
TV	3,479	3,480	0.0%
Net debt ratio	30.7%	34.8%	-4.1%
cum. capex per sales	0.0%	18%	-18.3%
EBITDA margin	26.7%	26.2%	0.5%

 

Source: Telekom, Concorde

                                                              

 

 

 

 

 

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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