EUR 850.00 For Business Accounts Only

Morningstar | Deutsche Telekom Reports Strong 1Q Revenue; Shares Slightly Undervalued

Deutsche Telekom reported strong first-quarter revenue, but we don’t anticipate any significant changes to our EUR 17 fair value estimate for the local shares. We continue to believe that the firm doesn’t have a moat and that the stock is slightly undervalued.

The firm reported revenue grew 8.7% year over year versus our full-year projection of 6.1%. DT benefited from the continued success of T-Mobile US, where revenue grew 7%. (For more on the U.S. division, please see our April 26 note). It was also helped by the acquisition of UPC Austria, which allowed its European division to grow 2.8%. Without the acquisition, European revenue would have grown only 0.4%. However, convergent offerings of fixed-line and mobile telephony along with broadband and pay TV are starting to show significant growth. In the Europe area, convergent customers jumped 54% to 3.8 million, and 42% of broadband subscribers are now on such a package.

Convergence is also driving growth in DT's home country of Germany, where 4.4 million customers are now signed up. This is a 17.1% increase from last year and means that 53% of its branded mobile contract subscribers are on a convergent offer. In addition, DT is having success pushing fibre-based broadband services, which now total 12.9 million customers. The growth of fibre and convergence led to service revenue growth of 2.8%, though this was partially offset by lower handset sales, pushing total revenue growth in Germany down to just 0.6%. We expect convergence and fibre to continue to drive revenue growth in Germany and the rest of Europe.

DT continues to control costs, which allowed its EBITDA margin to reach 30.5%, spot on with our full-year forecast. We anticipate the firm will be able to reduce costs further and slowly increase its EBITDA margin.