Magyar Telekom - Strong Result, Beats On All Lines

Magyar Telekom – Instant Earnings Comment

Recommendation:  BUY

Target price (12M): HUF 545

 

Strong result, beats on all lines

• Summary: MTEL reported a strong Q2 results, beating all of the major lines in analyst estimates. Profit, EBIT, EBITDA were better than analysts forecast by 23%, 12% and 3%. In a nutshell, core operation continued to grow (ca. 2% y-o-y) while direct cost was kept under control – employee expenses decreased (-2% y-o-y) driven by lower headcount.  Guidance remained unchanged.

 

• Operation: Quarterly revenue reached HUF 160.7 billion implying a 4.1% y-o-y contraction mainly due to the drop in SI/IT revenue (-30% y-o-y). This was a result of the absence of a big project completed last year Q2. Apart from that, core revenues remained on the growth trend, mobile segment and fixed line segment revenues increased by a 1.8% and 3.1% respectively. Mobile segment revenue could have been higher, but mobile equipment sales was hit (-4.5% y-o-y) by the delay of handset purchase due to Huawei sanctions. On a fixed line segment, broadband was especially strong exhibiting 9.5% y-o-y growth on the back higher number of customers (+8% y-o-y) and ARPU (+1% y-o-y).

 

• On an operational level, group EBITDA excluding IFRS 16 came to HUF 52.3 billion implying a growth of 4% y-o-y on the back of savings on employee cost (+HUF 0.5 billion y-o-y) and inflated headlines and with a help of a one-off item (+0.7 billion non-recurring income related to a legal case). On a country breakdown, looking the operation at gross profit level (excludes the IFRS 16 effect), Hungarian operation was flat despite the significant fall in SI/IT business, while North Macedonian improved significantly by 5% on a yearly comparison. Last but not least, the real help to lift EBITDA came on the indirect cost level which decreased by 3% y-o-y, thanks to lower employee expenses (-2% y-o-y) and higher level of provision reversal. As a result of the above mentioned EBITDA margin improved to 33% from last years of 30%.

 

• Profit excluding the accounting effect was HUF 14.2billion (+ 3% y-o-y). Financial expenses was significantly higher compared to last year (+HUF 6.5 billion; +118% y-o-y) because of the adoption of IFRS 16 (+HUF 1.4 billion) and absence of FX one-off.

 

• Underlying trends: In general, customer base increased (+ 2% y-o-y) despite the fact that weighted avg. ARPU increased (+1% y-o-y). The striking exception from the nice result is the fixed voice segment, where number of customers and ARPU both declined by 1.4% y-o-y and -7% y-o-y respectively, however this is generally a low margin segment. On the other hand, blended mobile ARPU improved (mainly as a result of termination of discount in prepaid segment) by 3% y-o-y, coupled with increase in number of customers (+1% y-o-y). It is also positive that fixed line multiplay revenues per households increased by 3.5% y-o-y (magenta package’s ARPU).

 

• There was no change in management FY guidance, debt level slightly increased (+9.5% y-o-y) driven by higher than usual CAPEX (+51% y-o-y on a cumulative basis). 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. Despite the fact that year-to-date MTEL have divested ca. HUF 8 billion worth of property, FCF ended up at – HUF 1 billion as a result of unfavourable WC movements (+56% y-o-y) and significantly higher CAPEX (+51% y-o-y). We expect lower level of CAPEX in H2 as CAPEX was guided to remain broadly stable y-o-y.

 

• Recommendation: EBITDA increased nicely (+4% y-o-y), as a combination of cost optimization and unbroken trend of growing top line. Compared to last year cumulative EBITDA is up by 1%, which will further improve as the year progresses (Q3 is the strongest quarter) in line with management forecast of 1-2% increase in EBITDA (excluding IFRS 16 impact). We had not expected any deterioration in the KPI’s as a result of DIGI’s entry into the mobile segment, which was confirmed by the results – pre paid mobile ARPU increased, churn rate remained at a comfortable level.

 

• MTEL is relatively cheap compared to its own valuation (4x EV/EBITDA vs. 4.5x EV/EBITDA), to its regional peers (5x EV/EBITDA), on an operational level it is gradually improving, DIGI’s mobile entry should not have material financial effect, it has a sound balance sheet, risk free rates are dropping all over the world, therefore we see no reason not to BUY MTEL. We reiterate our TP and 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 excluding the IFRS 16 effects

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

Also please note, EV / EBITDA multiples increased as a result of proportionally higher debt compared to EBITDA

 

 

 

Gellert Gaál
Equity analyst

CONCORDE SECURITIES LTD.

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

 

This message and its attachments contain confidential information, and their disclosure is restricted by law and the relevant regulations. If you are not the intended recipient, it may be forbidden and illegal to disclose, copy, distribute or use the information in this message. If you are not the intended recipient, please notify the sender immediately and delete this message and its attachments. If you are a client of Concorde Securities Ltd., the standpoints and suggestions described in the message should be interpreted in accordance with the relevant parts of the agreement in effect between us.