E R S T E G R O U P 1 June 2008June 2008 ERSTE GROUP RESEARCH 1 ERSTE GROUP RESEARCH CEE Telecoms: Safe haven Vera Sutedja, CFA Thomas Unger
Feb 02, 2016
E R S T E G R O U P
1June 2008June 2008 ERSTE GROUP RESEARCH 1ERSTE GROUP RESEARCH
CEE Telecoms: Safe haven
Vera Sutedja, CFA
Thomas Unger
E R S T E G R O U P
2June 2008June 2008 ERSTE GROUP RESEARCH
Overview
Valuation p. 3
Top pick: T-Hrvatski Telekom p. 5
Telecom stocks offer resiliency p. 6
Factors behind resiliency p. 7
Resilient but not immune p. 8
Regulatory pressure increases p. 9
Competitive landscape p. 10-13
Companies: Telekom Austria, Telefónica O2 CR, T-HT, Magyar Telekom, TP SA, Telekom Slovenije p. 14-19
Summary p. 20
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Valuation: at premium to western peers
CEE incumbents are traded at 31% premium in terms of P/E 2009e and 7% discount in terms of EV/EBITDA 2009e to Western European peers.
FCF and dividend yield for 2009e are 68% and 35% higher, respectively.
The difference in margins are narrowing.
CEE incumbents are no longer favourably valued compared to Western European peers, especially considering the macro risks for the CEE region.
P/E FCF yield
2009e 2010e 2011e 2009e 2010e 2011e 2009e 2010e 2011e 2009e 2010e 2011e
CEE incumbents 12.1 11.1 10.2 4.4 4.4 4.4 12.0% 11.3% 11.3% 10.1% 10.1% 10.1%
Western European incumbents 9.2 8.6 7.9 4.7 4.5 4.2 7.2% 7.6% 8.7% 7.5% 8.1% 8.8%
Discount/premium 31% 29% 29% -7% -2% 4% 68% 49% 30% 35% 24% 15%
EV/EBITDA Dividend Yield
2009e 2010e 2011e 2009e 2010e 2011e 2009e 2010e 2011e
CEE incumbents 38.7% 39.1% 39.3% 19.0% 19.3% 19.5% 11.7% 11.8% 12.3%
Western European incumbents 35.6% 35.6% 35.8% 19.5% 19.4% 20.3% 9.5% 9.7% 11.0%
Discount/premium 8.9% 9.9% 9.6% -2.4% -0.6% -4.2% 23.2% 21.9% 11.5%
Net marginEBITDA margin EBIT margin
Source: Erste Group estimates, Factset
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Valuation: cheaper than other sectors
Not only cheaper,..
Valuation comparison across sectorsSectors
2009e 2010e 2009e 2010e
EuroStoxx Basic Resources 49.5 14.4 10.0 6.8
EuroStoxx Chemicals 15.8 12.9 6.7 5.7
EuroStoxx Healthcare 15.6 13.9 9.1 8.4
EuroStoxx Banks 13.8 11.9 na. na.
EuroStoxx Technology 12.9 12.6 8.3 6.3
EuroStoxx Food & Beverages 12.9 11.0 7.3 6.6
EuroStoxx Utilities 11.9 11.3 7.3 6.7
EuroStoxx Construction Material 11.8 11.8 7.3 6.9
EuroStoxx Industrials 11.9 12.1 6.6 6.4
EuroStoxx Oil/Gas 11.4 11.1 5.1 5.5
EuroStoxx Telecom 10.0 9.0 4.7 4.5
CEE Telecoms 12.1 11.1 4.4 4.4
Source: Factset, Erste Group estimates for CEE Telecoms
P/E EV/EBITDAMargin comparison across sectorsSectors
2009e 2010e 2009e 2010e
EuroStoxx Basic Resources 6.3% 12.5% -0.4% 3.8%
EuroStoxx Technology 10.5% 13.4% 5.0% 6.9%
EuroStoxx Industrials 12.7% 12.2% 4.9% 4.9%
EuroStoxx Chemicals 13.9% 15.9% 4.7% 5.7%
EuroStoxx Construction Material 13.9% 14.3% 3.9% 3.6%
EuroStoxx Food & Beverages 14.9% 14.6% 6.0% 5.9%
EuroStoxx Oil/Gas 16.7% 18.0% 5.8% 6.2%
EuroStoxx Healthcare 19.7% 20.0% 7.9% 10.4%
EuroStoxx Utilities 26.1% 25.8% 8.7% 8.4%
EuroStoxx Telecom 36.5% 36.7% 10.5% 10.6%
CEE Telecoms 38.7% 39.1% 19.0% 19.3%
Source: Factset, Erste Group estimates for CEE Telecoms
EBITDA Net profit
.. but also more profitable
These factors make an attractive and defensive investment, especially during the current recession.
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Top pick: T-Hrvatski Telekom
Dirt cheap, 38% and 26% discount in terms of P/E and EV/EBITDA for 2009e, respectively.
High dividend yield at above 13%, and FCF yield of around 12% for 2009e.
Best-in-class margins, with net margin above 26% for 2009e-2011e.
Large net cash of 28.8% of assets in 1Q09 should boost financial results and enable share buyback.
Conservative 2009 outlook, likely to be upgraded.
Limited regulatory pressure.
P/E FCF yield
2009e 2010e 2011e 2009e 2010e 2011e 2009e 2010e 2011e 2009e 2010e 2011e
T-Hrvatski Telekom 7.4 7.4 7.4 3.3 3.3 3.2 13.6% 14.0% 15.2% 13.4% 13.5% 13.5%
CEE incumbents 12.1 11.1 10.2 4.4 4.4 4.4 12.0% 11.3% 11.3% 10.1% 10.1% 10.1%
Discount/premium -38% -33% -27% -26% -25% -26% 13% 24% 35% 33% 33% 33%
Source: Erste Group estimates
EV/EBITDA Dividend Yield
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Telecom stocks offer resiliency
Supported by low debt levels
T-HT and Telefónica O2 have net cash
TP SA and Telekom Austria have BBB+ rating
Limited revenue, EBITDA and FCF decline
FCF and EBITDA growth for CEE incumbents
2009e 2010e 2009e 2010e
Telekom Austria -7.2% -1.0% -4.6% -0.6%
Telefónica O2 CR -4.5% -6.6% -3.5% -2.5%
T-Hrvatski Telekom -3.5% 5.3% -2.0% 0.8%
Magyar Telekom -9.4% -4.2% -7.1% -3.6%
TP SA -11.5% 0.8% -11.9% 1.0%
Source: Erste Group estimates
FCF growth EBITDA growth
Comparison of EBITDA growth for other sectors
Companies Sector 2009e 2010e
A-Tec Industrial 63.5% -16.1%
Andritz Industrial -29.1% -7.5%
Palfinger Industrial -74.9% 133.9%
Winterthur Industrial -47.8% 10.5%
SBO Industrial -38.6% -27.0%
OMV Oil/gas -8.2% 8.6%
INA Oil/gas 10.6% 17.4%
PKN Orlen Oil/gas 10.3% 6.6%
Unipetrol Oil/gas 27.9% 26.0%
SNP Petrom Oil/gas -10.4% 55.3%
Asseco Poland Technology -14.4% 5.0%
ComArch Technology -4.3% 17.5%
Ericsson Nikola Tesla Technology -10.4% 1.9%
Sygnity Technology -26.2% -8.3%
Kapsch TrafficCom Technology -3.6% 27.6%
Bank Pekao Banking -36.0% -16.5%
PKO BP Banking -25.1% -20.1%
Raiffeisen International Banking -50.3% 0.4%
Komercni banka Banking -35.5% 6.6%
OTP Banking -1.6% 20.4%
Source: Erste Group estimates
EBITDA growth
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Factors behind resiliency
Basic services for households and corporates
Prices come down, yet the quality improves
Low telecom spending (3.3% of household’s expenditure, 1.5% of monthly earnings)
New services (mobile internet, IPTV, bundled products) to retain customers
70
75
80
85
90
95
100
105
110
115
2003 2004 2005 2006 2007 2008
Inflation
Retail fixed prices (3 min national call EU average)
Retail mobile prices (medium user)
Inflation and retail telephony price evolution
Source: EU Commission
Average monthly telecom expenditure for residential*EUR/month, incl. VAT 2000 2001 2002 2003 2004 2005 2006 2007 2008 CAGR
Telekom Austria 46.6 47.4 37.4 37.4 37.6 34.3 34.7 34.1 34.6 -3.7%
Telefónica O2 CR 50.7 49.1 43.6 43.1 40.0 43.6 46.0 46.0 46.0 -1.2%
Magyar Telekom 41.1 40.2 40.7 48.7 48.8 31.1 38.7 37.6 38.1 -0.9%
TP SA 62.3 60.5 62.3 61.4 54.6 43.8 47.2 47.2 52.4 -2.2%
Telekom Slovenije 25.2 25.0 31.5 33.4 34.1 31.2 28.4 30.7 29.2 1.9%
EU 27 44.7 42.4 41.6 41.2 38.8 36.6 37.8 38.3 38.4 -1.9%
Source: Report on Telecom Price Developments for EU Commission, Dec 2008
*) incl. national fixed/mobile calls, international calls. Standard tariffs are used, excl. any discount packages.
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Resilient but not immune
Outlook for 2009e are lower than for 2008. CEE incumbents within our coverage expect declining revenues and EBITDA in 2009e, except for Telekom Austria.
Rising cost of debts due to higher interest rates and widening credit spread
Currency depreciation leads to higher operating costs (handsets, IT/network equipments, international traffic) and lower reported figures
TP SA, Telekom Austria and Magyar Telekom are the most affected by the economic downturn within our coverage
Incumbents' 2009 outlookRevenue EBITDA
Telekom Austria Slight decline Stable
Magyar Telekom Decline by 1% Decline by 1% to 2%
Telefónica O2 CR Decline by 3% to 0% Decline by 4% to 0%
TPSA Decline Decline
T-HT Decline Decline
Source: Companies data
JP Morgan Telecom Spread to Government Bond Index
0
50
100
150
200
250
300
350
400
21/0
2/20
07
21/0
4/20
07
21/0
6/20
07
21/0
8/20
07
21/1
0/20
07
21/1
2/20
07
21/0
2/20
08
21/0
4/20
08
21/0
6/20
08
21/0
8/20
08
21/1
0/20
08
21/1
2/20
08
21/0
2/20
09
21/0
4/20
09
Source: Bloomberg
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Regulatory pressure increases
Extension of EU roaming tariffs (Eurotariff) to affect Telekom Austria the most
More aggressive mobile termination rate (MTR) reduction
MTR is still 4-5x costs and 10x higher than the fixed termination
Current average 8.55 eurocents, to be brought down to 1.5-3 eurocents by 2012
Reduce mobile interconnection revenues, mobile interconnection costs and fixed-to-mobile interconnection costs
Negative impact on revenue and EBITDA
Functional separation is a threat for TP SA
Eurotariff regulation
Euro cents 30-Aug-07 30-Aug-08 30-Aug-09* 01-Jul-09 01-Jul-10 01-Jul-11
Calls made from abroad 49 46 43 43 39 35
Receive calls whilst abroad 24 22 19 19 15 11
Source: EU Commission
*) superseded by new EU roaming rules 2009
EU roaming rules 2007 New EU roaming rules 2009
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Competitive Landscape Overview
− CEE Incumbents continue to dominate fixed and mobile markets− Fixed-to-mobile substitution still strong, elevating mobile penetration rate further− Postpaid subscribers dominate in Austria (65%) and Slovenia (63%), while the majority were
prepaid customers in Croatia (about 70%), Hungary (59%), Poland (58%) and Czech Republic (53%)
− Fixed broadband penetration remains below EU-27 average with Croatia having the lowest (11.8%) and Austria the highest (21.4%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Tele
kom
Aust
ria
TP
SA
Magya
rT
ele
kom
Tele
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2
Tele
kom
Slo
venije
T-H
rvats
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ele
kom
Fixed lines Fixed broadband Mobile connections
Mobile Penetration 2007, 2008CEE Incumbents market shares (2008)
0%
20%
40%
60%
80%
100%
120%
140%
160%
Austria Poland Hungary CzechRepublic
Slovenia Croatia
2007 2008
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Competitive Landscape Austria, Poland
Austria
- Telekom Austria leads all markets: 87.3% share of fixed lines, 44.8% fixed broadband, 42.5% mobile connections
- Intense competition on mobile market, pressure on revenues
- Strong mobile broadband growth, now leading broadband access technology
Poland
- Fixed-line controlled by TP SA, mobile market evenly split
- After Tele2 acquisition, Netia new number 2 on fixed voice market
- 4th player (Play) grabbing market share with aggressive pricing on mobile market, Polkomtel new market leader
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Competitive Landscape Czech Republic, Hungary
Hungary
- Magyar Telekom holds 74% of fixed lines, main competition from second incumbent (HTCC) and cable operators (UPC is the largest) offering product bundles
- To slow line loss Magyar Telekom rolls out fibre network, launches satellite TV
- Little movement in mobile market, 4th UMTS license tender called off
Czech Republic
- Telefónica O2 clear market leader in fixed-line market (86% share of total lines)
- Strong fixed-to-mobile substitution (81% of total traffic on mobile networks from 76% in 2007)
- Broadband connections rising by 24.7% y/y in 2008, wireless local loops popular
- Mobile market controlled by T-Mobile and Telefónica O2 (together almost 80%)
E R S T E G R O U P
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Competitive Landscape Slovenia, Croatia
Slovenia
- Telekom Slovenije dominates all markets: 85.6% share of fixed accesses, 49.1% share of fixed broadband connections, 58.9% share of mobile subscribers
- Voice-over-IP connections emerging rapidly (+91.2% y/y in 2008)
- Active user mobile penetration surpassed 100% in 2008
- Competition hurting Mobitel and Si.Mobil in mobile market
Croatia
- T-Hrvatski Telekom the clear leader in all segments, commanding a 82% market share in fixed voice, 90.1% share in fixed broadband and 45.9% of mobile connections
- Fixed broadband rising sharply
- Mobile penetration reached 133.6% in 2008, market dominated by prepaid customers
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Stock overviewTelekom Austria (Hold, target EUR 11)
Investment case- Major international wireless operations under pressure: Intensifying competition and threat of
currency devaluation (as seen with the Belarusian ruble) - Regulatory pressure increases- Civil servants reduction implemented in 4Q08- Shares not a bargain, traded at a 6% premium in terms of 2009e P/E
Outlook
Telekom Austria expects revenues to be slightly weaker than EUR 5.1bn, EBITDA at around EUR 1.9bn, CAPEX around EUR 800mn, operating FCF at EUR 1.1bn and a dividend of EUR 0.75 minimum or 65% of net income
Cash distribution policy
Rating floor BBB, threshold 1.8-2x net debt/EBITDA, share buyback on hold, 65% payout ratio
Valuation and recommendation- Maintain target price at EUR 11- Shares traded at 6% premium (both P/E and EV/EBITDA for 2009e) in CEE peer group- We consider EBITDA outlook for 2009 as best case scenario
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Stock overviewTelefónica O2 CR (Buy, target CZK 550)
Investment case- Above average margins, stable earnings growth- Start-up operation in Slovakia under control- Resilience during recession period- Premium justified
Outlook
The company expects business revenues to fall by -3% to 0% y/y, OIBDA to decline by -4% to 0% y/y, operating cash flow to increase by +2% to +5% y/y
Cash distribution policy
The aim is to distribute as much as possible, capped by its parent company’s retained earnings. We expect a dividend/share of CZK 47 in 2009e.
Valuation and recommendation- Confirm Buy recommendation and target price of CZK 550- Shares are not the cheapest, but supported by strong fundamentals- Double digit dividend yield (ex date on Sept 7, 2009) should support the share price
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Stock overviewT-Hrvatski Telekom (Buy, target HRK 300)
Investment case- Above average margins, but limited growth- Resilience during recession period- High net cash- Share overhang issue has subsided - Integration of T-Com and T-Mobile
Outlook
Fixed-line and wholesale revenues are expected to decline, mobile revenues to remain stable and internet revenues to grow significantly. EBITDA and EBITDA margin are expected to decrease, CAPEX to remain stable at 2008 level
Cash distribution policy
The dividend payout policy is 50-100% of distributable profits. We assume a 100% payout ratio.
Valuation and recommendation- Reiterate Buy recommendation and maintain target price of HRK 300- Share are cheap, with a discount of 38% (P/E 2009e) and 26% (EV/EBITDA 2009e)- Steep discount is unjustified, in our opinion, given best-in-class and resilience
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Stock overviewMagyar Telekom (Hold, target HUF 625)
Investment case- Suffering from economic downturn- Attractive dividend yield, but so is the government yield - Cheap stock, mixed fundamentals
Outlook
The company expects a revenue decline of 1%, EBITDA decline of 1% to 2% and CAPEX to remain flat. We think this is too aggressive and that a downgrade is looming.
Cash distribution policy
Dividends are paid as long as net gearing remains between 30%-40%. A payout ratio of above 100% is possible.
Valuation and recommendation- We downgrade Magyar Telekom from Accumulate to Hold and reduce the target price from
HUF 635 to HUF 625- A lowering of the 2009 guidance is expected, due to the deteriorating economic situation- Peer group comparison is favourable, but other stocks are more resilient
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Stock overviewTPSA (Accumulate, target PLN 20.5)
Investment case- Hit by economic downturn- Regulatory risks remain high- Price war in mobile segment- Broadband as the growth driver
Outlook
TPSA expects CAPEX to arrive between 12-14% of revenues and NetFCF to reach a minimum target of PLN 3bn. Revenues are expected to decline and profitability is anticipated to be under pressure.
Cash distribution policy
In distributing dividends, the company aims to keep its current BBB+/A3 rating. Last year’s dividend should serve as a floor to this year’s dividend.
Valuation and recommendation- Reduce target price from PLN 21.6 to PLN 20.5, upgrade from Hold to Accumulate- Shares should rebound after the ex-dividend event- Current share price has priced-in risks
E R S T E G R O U P
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Stock overviewTelekom Slovenije (Reduce, target EUR 160)
Investment case- Dominant position in Slovenia, leading ISP and mobile player in some Balkan states- Substantial investments in FTTH- Government still controls 74.14%
Outlook
The company will publish its guidance with 2Q09 results (August 28, 2009). We expect revenues to rise by 9.2% y/y, boosted by the Cosmofon acquisition, EBITDA should remain stable and net income is projected to drop by 25% y/y.
Cash distribution policy
Despite stable dividend policy, 2008 dividend was 53% lower than the previous year. Priority is given to investments and acquisitions such as Cosmofon.
Valuation and recommendation- We downgrade Telekom Slovenije from Hold to Reduce and lower the target price from EUR
270 to EUR 160- Unattractive peer group valuation with a 25% premium in terms of EV/EBITDA 2009e and a
44% premium in terms of P/E 2009e- Margins and dividend yield below CEE average
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SummaryOverview of target price and recommendations
Companies Currency Current price Target pricePotential
upside Recommendation
T-Hrvatski Telekom HRK 214.0 300.0 40% Buy
Telefónica O2 CR CZK 424.0 550.0 30% Buy
TP SA PLN 17.6 20.5 16% Accumulate
Telekom Austria EUR 10.5 11.0 5% Hold
Magyar Telekom HUF 611.0 625.0 2% Hold
Telekom Slovenije EUR 172.1 160.0 -7% Reduce
Source: Erste Group estimates
Downgrade Magyar Telekom from Accumulate to Hold, reduce target price from HUF 635 to HUF 625
Downgrade Telekom Slovenije from Hold to Reduce, lower target price from EUR 270 to EUR 160
Upgrade TP SA from Hold to Accumulate, lower target price from PLN 21.6 to PLN
No rating/target price changes for Telekom Austria, T-HT and Telefónica O2 CR
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Disclosures