Magyar Telekom: Magenta is the new black (BUY – transfer of coverage)

We transfer coverage of Magyar Telekom (MTEL) with a BUY rating and a price target (PT) of HUF 600, offering 22% upside. Despite the stock’s ytd rally of 21%, we still believe there is a space for growth, due mainly to the company’s ability to pay significant remuneration to its investors – on our forecasts, MTEL should pay out a DPS of HUF 35-40 in 2017-18E, implying dividend yields of 7.1-8.1% (far above its peers’ consensus medians of 5.2-5.8%). We see this as a completely achievable level for MTEL as capex should be winding down in the mid-term (c.10% yoy in 2016-17E), which, paired with its improving operating results, should result in deleveraging and significant FCF yields of 10.7-10.5% in 2017-18E, the highest value among its European peers (on the Bloomberg consensus). We appreciate the favourable market environment (decent GDP growth, the recent updated credit ratings by all agencies, and positive tax changes ahead), which could improve investors’ sentiment on Hungarian equities, in our view. Also, in valuation terms, MTEL still looks attractive: at our 2016-18E average EV/EBITDA of 4.5x, the stock trades 22% below its peers’ median. Magyar Telecom is our top pick in our telco coverage space.