MTEL - Q3: Upside risk to FY EBITDA guidance - Instant Earnings Comment from Concorde Securities Ltd. (Hungary)

• Summary: Short term outlook: There is an upside risk to the management FY EBITDA guidance, if MTEL’s Q4 EBITDA will not exhibit any growth, FY EBITDA will meet the midpoint of the guidance, in our view. However, we believe that the MTEL could easily reach the upper range of EBITDA guidance and have a decent chance to surpass it (for more detail please see the second table in the appendix). MTEL declared an 1-2% increase in FY EBITDA for 2019 which in absolute term implied HUF 2.9 billion increase, in 9 months MTEL EBITDA grew by HUF 2.7 billion (including a HUF 1.2 billion decline in EBITDA due to the severance cost of HUF 3 billion in Q1).
• Summary: Q3 results: MTEL posted very robust underlying results (EBITDA increased by ca. 4% y-o-y) but ca. HUF 2 billion FX loss and temporarily higher tax expense (+0.5 billion) took its toll on profit and declined by 16% on a yearly basis. In a nutshell, gross profit increased by 2% y-o-y on the back of benign Hungarian economy while indirect cost declined by 1% resulting in an EBITDA increase of 4%.

 

 

MTELEKOM - Instant Earnings Comment

Recommendation: BUY (unch.)

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

 

 

• Summary: Short term outlook: There is an upside risk to the management FY EBITDA guidance, if MTEL’s Q4 EBITDA will not exhibit any growth, FY EBITDA will meet the midpoint of the guidance, in our view. However, we believe that the MTEL could easily reach the upper range of EBITDA guidance and have a decent chance to surpass it (for more detail please see the second table in the appendix). MTEL declared an 1-2% increase in FY EBITDA for 2019 which in absolute term implied HUF 2.9 billion increase, in 9 months MTEL EBITDA grew by HUF 2.7 billion (including a HUF 1.2 billion decline in EBITDA due to the severance cost of HUF 3 billion in Q1).
• Summary: Q3 results: MTEL posted very robust underlying results (EBITDA increased by ca. 4% y-o-y) but ca. HUF 2 billion FX loss and temporarily higher tax expense (+0.5 billion) took its toll on profit and declined by 16% on a yearly basis. In a nutshell, gross profit increased by 2% y-o-y on the back of benign Hungarian economy while indirect cost declined by 1% resulting in an EBITDA increase of 4%.
• Operation: Quarterly revenue reached HUF 164.6 billion implying a 0.6% y-o-y growth which is considered strong given the 6% drop in SI/IT revenues. Mobile segment revenue remained flattish on a yearly basis, while fixed lines revenues managed to grow by 4.1% y-o-y. If we dig deeper into the numbers we can identify the familiar trends, namely that the decline in voice revenues (both in fixed line (-5% y-o-y) and mobile (-5% y-o-y)) were more than offset by increase in data revenues (+14% y-o-y) in mobile segment and increase in internet (+10% y-o-y), TV (+6% y-o-y) and equipment (+37% y-o-y) revenue in the fixed line segment.
• On an operational level, group EBITDA excluding IFRS 16 came to HUF 54.9 billion implying a growth of 3.6% y-o-y on the lower indirect costs (+HUF 0.5 billion) supported by the savings on employee cost, and better gross profit (+HUF 1.5 billion). As a result of the above-mentioned EBITDA margin improved to 33% from last years of 32%.
• Profit – including IFRS 16 - came to HUF 11.8 billion (- 16 % y-o-y) as financial expenses inflated by ca 70% due to FX losses recorded in relation to lease liabilities driven by the 3.4% weakening of the EUR-HUF exchange rate in the period, and tax expense came higher as well on the back of higher effective tax rate of 23% vs. 19% (higher deferred tax expenses related to subsidiaries).
• Underlying trends: In general, customer base increased by ca. + 2% y-o-y, the growth was particularly strong in TV (+ 5% y-o-y; +1.5% q-o-q) and broadband segment (+5% y-o-y; +1.7% q-o-q). On the ARPU’s side, blended mobile ARPU improved by 3% y-o-y, TV declined by (-3% y-o-y) which explains the growth in costumer numbers in that segment. All in all, fixed line multiplay revenues per households increased by 2.6% y-o-y (magenta package’s ARPU).

 

• There was no change in management FY guidance, despite the strong year-to-date performance. Debt level slightly increased (+2.7% y-o-y) as 9M CAPEX was higher than last year (+10% y-o-y on a cumulative basis). Despite the fact that year-to-date MTEL have divested ca. HUF 4.7 billion worth of property, Free cash flow (FCF) decreased from an inflow of HUF 28.6 billion to an inflow of HUF 16.9 billion.
• 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 (excluding IFRS 16) is up by 1.9%, which should further improve in the last quarter as well and will probably end up above the management guidance.
• MTEL is relatively cheap compared to its own valuation (4.1x EV/EBITDA vs. 4.5x EV/EBITDA), to its regional peers (5x EV/EBITDA), on an operation level it is gradually improving, DIGI’s mobile entry should not have material financial effect even if DIGI will have the opportunity to participate in the 5G auction. In light of the result we would remain on the buying side for MTEL.

 

 

Gellert Gaál
Senior Equity analyst

CONCORDE SECURITIES LTD.

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