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4iG’s H123 results reflect the inclusion of Vodafone Hungary (VH) since its acquisition on 31 January. Since then, 4iG has been working through its integration plan, which includes monetising the DIGI mobile network infrastructure and launching a strategic review to consider carve-out options and further asset optimisation (the scope is Hungarian fixed and Albanian/Montenegrin passive mobile infrastructure). After a multi-year series of telco and IT acquisitions in Hungary and the Western Balkans, 4iG is focused on realising revenue and cost synergies from the combined businesses.
4iG |
Record results; integration plan well under way |
H123 results |
Telecoms |
5 September 2023 |
Share price performance
Business description
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Analyst
4iG is a research client of Edison Investment Research Limited |
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4iG’s H123 results reflect the inclusion of Vodafone Hungary (VH) since its acquisition on 31 January. Since then, 4iG has been working through its integration plan, which includes monetising the DIGI mobile network infrastructure and launching a strategic review to consider carve-out options and further asset optimisation (the scope is Hungarian fixed and Albanian/Montenegrin passive mobile infrastructure). After a multi-year series of telco and IT acquisitions in Hungary and the Western Balkans, 4iG is focused on realising revenue and cost synergies from the combined businesses.
Year |
Revenue |
PBT |
EPS |
DPS |
P/E |
Yield |
12/19 |
41.1 |
3.3 |
30.8 |
22.0 |
27.6 |
2.6 |
12/20 |
57.3 |
4.2 |
37.7 |
22.5 |
22.6 |
2.6 |
12/21* |
93.7 |
8.1 |
68.6 |
29.0 |
12.4 |
3.4 |
12/22* |
277.4 |
(15.2) |
(67.5) |
0.0 |
N/A |
0.0 |
Note: *Restated for finalised purchase price accounting.
Vodafone Hungary drives record performance
4iG reported H123 revenue of HUF266.2bn (+119% y-o-y) and EBITDA of HUF95.3bn (+190% y-o-y, 35.8% margin), which included a five-month contribution from VH. Pro forma revenue was HUF292.2bn (+2% y-o-y) and pro forma EBITDA was HUF100.3bn (+19% y-o-y, 34.3% margin). Profit after tax of HUF7.8bn (FY22: -HUF2.8bn) benefited from a one-off gain on disposal of certain DIGI assets as well as unrealised FX gains, partially offset by acquisition and restructuring costs and the impact of higher lease depreciation and interest charges and amortisation of acquired intangibles relating to the VH and earlier acquisitions.
Ongoing integration the focus for FY23
The company has already made progress integrating VH into the business and has just announced changes to the management team to support this. It has shifted DIGI subscribers over to the VH mobile network and sold certain DIGI mobile assets to Pro-M for HUF68bn. 4iG is also reviewing other infrastructure (Hungarian fixed line, Albanian/Montenegrin passive mobile) with a view to unlocking the value of its infrastructure portfolio to improve asset utilisation and optimise capital allocation. Having recently rebranded its Albanian operations as ONE Albania, it is planning to introduce the ONE brand in Hungary.
Valuation: Synergies key to upside
4iG has made substantial progress with its strategy to create a converged telco-IT group with attractive (30%+) EBITDA margins and high recurring revenues. Post the Vodafone Hungary acquisition, it now has the number two position in mobile and fixed line telephony and leading positions in fixed broadband and TV services in Hungary, along with market-leading positions in Albania and a robust presence in Montenegro. As 4iG works through its integration plan, there is scope for substantial synergies to be realised, boosting EBITDA profitability and reducing debt.
Business update
4iG completed the acquisition of a 51% stake in Vodafone Hungary on 31 January. As we wrote on 22 March, 4iG swapped its indirect stake in Yettel for an additional 19.5% stake in Vodafone Hungary, taking its effective ownership to 70.5%. Since then, the company has been focused on integrating the business and optimising cost and revenue synergies from the deal.
Post-acquisition performance
The company provided details on the standalone performance of Vodafone Hungary in the year to 31 March 2023 (its fiscal year when owned by Vodafone) – see Exhibit 1, explaining the effect that certain items had on profit before tax and providing normalised profitability metrics.
Exhibit 1: Vodafone Hungary standalone performance 1 April 2022 to 31 March 2023
HUFm |
FY23 actual |
FY23 normalised |
Difference |
Net sales revenue (HAL) |
295,263 |
295,263 |
0 |
EBITDA (IFRS) |
92,158 |
106,217 |
14,059 |
Financial income/(expense) (HAL) |
(37,791) |
831 |
38,622 |
Profit before tax (HAL) |
(50,963) |
1,718 |
52,681 |
Source: 4iG. Note: Vodafone Hungary’s full year reported results based on standalone financial statements, reported in line with Hungarian Accounting Law (HAL) covering the period 1 April 2022 to 31 March 2023.
The adjustments to arrive at normalised results include:
■
telecommunications windfall tax of HUF10.3bn;
■
higher energy costs and other one-off items of HUF3.8bn; and
■
an interest charge of HUF38.6bn on an intercompany loan from Vodafone group. The loan was dissolved when the acquisition closed and is therefore not an expense for 4iG.
Since the date of acquisition, VH has contributed revenue of HUF123.2bn and EBITDA of HUF42.5bn (34.5% margin). The company noted that for the five months of ownership, VH profit before tax was HUF17.1bn higher year-on-year.
Disposal of certain DIGI assets for HUF68bn
On 13 April, 4iG announced it was considering the sale of certain mobile network infrastructure elements (including more than 2,500 base stations) and spectrum from the DIGI business. On 31 May, the company announced the DIGI assets had been transferred to a new subsidiary called MIS Omega Mobilhálózat Korlátolt Felelősségű Társaság (MIS Omega) in preparation for its demerger from the group. On 1 June, all DIGI subscribers were switched over to the VH mobile network. On 30 June, the company announced that MIS Omega had been sold to Pro-M for HUF68bn. Pro-M is the telecom operator for the Hungarian emergency services network – through this acquisition Pro-M is gaining access to infrastructure to support broadband data transmission for law enforcement agencies, the Hungarian Defence Forces and Disaster Management services. The consideration is to be paid in three instalments by 31 July 2024. The total transaction value includes the cost of one-year operation by 4iG for Pro-M and the costs of building the new core network for the tower infrastructure. The deal boosts 4iG’s return on its investment in the company and should enhance DIGI’s operating efficiency and EBITDA-generating capacity. The plan is to use the sale proceeds to reduce debt and to invest in the development of 4iG’s fixed and mobile network infrastructure.
Strategic review of other telecom assets
On 31 May, the company announced it has launched a strategic review of its infrastructure assets, with a view to a potential carve-out. The assets in question are the fixed-line infrastructure in Hungary and passive mobile infrastructure in Albania and Montenegro. The company is seeking to unlock the value of the infrastructure portfolio to improve asset utilisation and optimise capital allocation.
|
|
|
|
Source: 4iG |
Reshaping the management team
On 31 August, the company announced changes to the management team. Effective 1 September, Tamás Bányai was appointed CEO of VH. He joined Vodafone in April from Epic Malta, where he had been CEO. He has been focused on the separation of VH from Vodafone’s global systems. The resigning VH CEO, László Blénessy, will be responsible for developing and implementing the strategy of the space and defence business in addition to running the business IT and network infrastructure as deputy CTO for the group. Tamás Bányai will be supported by deputy VH CEO Tamás Tábori, who also holds the role of managing director of DIGI. Mohamed ElSayad was appointed as the new group commercial strategy director, responsible for developing the commercial strategy of the group’s domestic and international telecoms companies and managing the brand transition in Hungary.
Agreement signed with government of Montenegro
In July, the company announced that it had signed a memorandum of understanding with the government of Montenegro. Both parties declared a shared commitment to fast-track the digital transition in Montenegro, including 5G network and infrastructure and the development and introduction of innovative solutions.
Share buybacks and changes to major shareholdings
Since the end of May, the company has bought back 1.81m shares, taking the percentage of treasury shares held from 0.93% to 1.53% of outstanding shares. Since the end of June, the chairman of 4iG, Gellért Jászai, purchased 3.3m shares via his investment vehicle, taking his stake in the company from 51.22% to 52.33%.
Review of H123 results
4iG’s H123 results reflect the inclusion of VH since 1 February. The table below summarises the divisional performance at a revenue and EBITDA level and includes pro forma data to adjust for acquisitions. The valuation of the assets and liabilities of Vodafone Hungary at the time of the acquisition is still in progress, in accordance with IFRS 3 Business Combinations.
Exhibit 3: H1 divisional performance
HUFbn |
H123 |
H122 |
y-o-y |
Revenue |
266.2 |
121.9 |
119% |
IT |
33.8 |
33.2 |
2% |
Telecoms |
235.2 |
88.7 |
165% |
Holding & elimination |
(2.8) |
0.0 |
N/A |
Pro forma revenue |
292.2 |
286.1 |
2% |
IT |
33.8 |
33.2 |
2% |
Telecoms |
261.2 |
252.9 |
3% |
Holding & elimination |
(2.8) |
0.0 |
N/A |
EBITDA |
95.3 |
32.8 |
190% |
IT |
2.3 |
1.6 |
43% |
Telecoms |
83.0 |
28.4 |
192% |
Holding & elimination |
9.9 |
2.8 |
N/A |
EBITDA margin |
35.8% |
27.0% |
|
IT |
6.9% |
4.9% |
|
Telecoms |
35.3% |
32.1% |
|
Pro forma EBITDA |
100.3 |
84.2 |
19% |
IT |
2.3 |
1.6 |
43% |
Telecoms |
88.1 |
79.8 |
10% |
Holding & elimination |
9.9 |
2.8 |
N/A |
Pro forma EBITDA margin |
34.3% |
29.4% |
|
IT |
6.9% |
4.9% |
|
Telecoms |
33.7% |
31.5% |
Source: 4iG
The IT business now makes up only 11% of pro forma revenue and 3% of pro forma EBITDA (pre-central costs). IT revenue increased marginally year-on-year, with growth held back by the lower level of public sector tenders. The company noted that the Rheinmetall-4iG joint venture (R4) launched its first service, supporting the Rheinmetall factory in Zalaegerszeg where the Lynx infantry fighting vehicle is made.
The Telecoms business included VH for five months. On a pro forma basis, Telecoms revenue increased 3% y-o-y and EBITDA increased 10%, with the margin increasing 2.2pp to 33.7%.
■
In Hungary: the company noted that VH enacted a CPI-driven price increase for B2C and B2B mobile as well as B2C fixed services during Q1. VH also saw increased sales of equipment and from wholesale MVNO (mobile virtual network operator). DIGI also put through a CPI-driven price increase that helped revenue growth and, combined with cost savings, improved operational efficiency. Invitech saw robust growth in monthly recurring revenue (MRR) from the connectivity, cloud and IT security segments.
■
In Albania: with ONE Telecommunications and ALBtelecom formally merged from 1 January 2023, the ONE brand was launched in Albania. The business has started to extend its fibre-to-the-home (FTTH) coverage. A recent benchmarking assessment by Finnish analyst firm Omnitele ranked the ONE Albania network as the highest scoring mobile network in the country.
■
In Montenegro: B2C was the key driver of growth, particularly from the post-paid segment. ONE Montenegro received a 5G spectrum licence in Q123 and launched its 5G rollout and deployed 5G networks across all major coastal destinations in time for the summer tourist season.
At the EBITDA level, the holding company line reported a positive contribution of HUF10.0bn in H123. This includes the gain on disposal of MIS Omega offset by acquisition and restructuring costs (net HUF12.2bn). Taking group pro forma EBITDA and adjusting for these one-offs and supplementary telecoms taxes of HUF5.1bn in H123, group pro forma normalised EBITDA was HUF93.3bn (31.9% margin).
Exhibit 4: H123 results highlights
HUFbn |
H123 |
H122 |
y-o-y |
Operating profit |
22.08 |
2.37 |
830% |
PBT |
9.31 |
(2.29) |
N/A |
PAT |
7.79 |
(2.75) |
N/A |
Minority interest |
(4.51) |
(0.81) |
N/A |
Net income to shareholders |
3.28 |
(3.56) |
N/A |
Net debt (company)* |
846.9 |
456.0 |
86% |
Source: 4iG. Note: *Also includes provisions (short and long term) and other long-term liabilities.
Exhibit 4 summarises 4iG’s performance in H123. Operating profit increased significantly year-on-year, benefiting from the VH contribution for five months and the gain on disposal of MIS Omega. Combined depreciation and amortisation increased from HUF30.5bn in H122 to HUF73.2bn in H123, reflecting the higher level of leases acquired with VH as well as amortisation of acquired intangibles. Finance costs increased from HUF15.6bn to HUF37.5bn reflecting debt used to fund the VH acquisition and interest charges linked to the higher level of leases. Finance income of HUF24.7bn in H123 benefited from a HUF9.3bn non-realised exchange gain on the long-term loan that financed the VH acquisition. After deducting the minority interest, net income attributable to shareholders was HUF3.3bn compared to a loss of HUF3.6m a year ago.
4iG closed FY22 with a company reported net debt position of HUF451bn (this includes certain provisions and other long-term liabilities). By the end of H123, this had increased to HUF847bn. The table below shows the movement from FY22 to H123, with the main changes being an increase in long-term debt of HUF313bn (to fund the VH acquisition) and leases increasing by HUF85bn (from VH and earlier acquisitions).
Exhibit 5: Net debt reconciliation
Q123 |
Q422 |
q-o-q |
|
Short-term debt |
11.1 |
7.7 |
43% |
Long-term debt |
737.0 |
424.3 |
74% |
Short-term leases |
23.7 |
9.1 |
162% |
Long-term leases |
104.6 |
34.5 |
203% |
Provisions |
11.5 |
9.7 |
19% |
Other long-term liabilities |
6.0 |
11.9 |
-50% |
Cash and cash equivalents |
(47.0) |
(46.0) |
2% |
Net debt |
846.9 |
451.2 |
88% |
Source: 4iG
Exhibit 6: Financial summary
31-December |
HUFm |
2018 |
2019 |
2020 |
2021* |
2022* |
|
INCOME STATEMENT |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
Revenue |
|
|
14,007 |
41,129 |
57,300 |
93,653 |
277,421 |
Cost of Sales |
(8,938) |
(30,126) |
(41,372) |
(59,090) |
(93,466) |
||
Gross Profit |
5,070 |
11,003 |
15,928 |
34,563 |
183,955 |
||
EBITDA |
|
|
842 |
4,075 |
5,047 |
11,793 |
74,054 |
Normalised operating profit |
|
|
240 |
3,332 |
4,211 |
7,043 |
(773) |
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
0 |
||
Reported operating profit |
240 |
3,332 |
4,211 |
7,043 |
(773) |
||
Net Interest |
(21) |
(18) |
(36) |
1,059 |
(14,474) |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
219 |
3,314 |
4,175 |
8,102 |
(15,247) |
Profit Before Tax (reported) |
|
|
219 |
3,314 |
4,175 |
8,102 |
(15,247) |
Reported tax |
(117) |
(488) |
(736) |
(1,518) |
(3,585) |
||
Profit After Tax (norm) |
102 |
2,827 |
3,439 |
6,584 |
(18,832) |
||
Profit After Tax (reported) |
102 |
2,827 |
3,439 |
6,584 |
(18,832) |
||
Minority interests |
0 |
66 |
(46) |
(185) |
(2,052) |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
102 |
2,893 |
3,393 |
6,399 |
(20,884) |
||
Net income (reported) |
102 |
2,893 |
3,393 |
6,399 |
(20,884) |
||
Basic average number of shares outstanding (m) |
91.6 |
91.7 |
91.3 |
96.0 |
278.8 |
||
EPS - basic normalised (HUF) |
|
|
1.11 |
30.82 |
37.68 |
68.61 |
(67.54) |
EPS - diluted normalised (HUF) |
|
|
1.08 |
30.07 |
36.58 |
67.60 |
(67.54) |
EPS - basic reported (HUF) |
|
|
1.11 |
30.82 |
37.68 |
68.61 |
(67.54) |
Dividend (HUF) |
0.00 |
22.00 |
22.49 |
29.00 |
0.00 |
||
Revenue growth (%) |
(17.2) |
193.6 |
39.3 |
63.4 |
196.2 |
||
Gross Margin (%) |
36.2 |
26.8 |
27.8 |
36.9 |
66.3 |
||
EBITDA Margin (%) |
6.0 |
9.9 |
8.8 |
12.6 |
26.7 |
||
Normalised Operating Margin |
1.7 |
8.1 |
7.3 |
7.5 |
(0.3) |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
1,571 |
1,948 |
3,989 |
187,703 |
618,121 |
Intangible Assets |
1,221 |
890 |
2,043 |
123,923 |
288,935 |
||
Tangible Assets |
140 |
322 |
777 |
43,189 |
281,690 |
||
Lease rights |
0 |
636 |
966 |
19,957 |
43,937 |
||
Investments & other |
210 |
101 |
203 |
634 |
3,559 |
||
Current Assets |
|
|
6,824 |
22,161 |
33,874 |
315,677 |
134,634 |
Stocks |
242 |
523 |
3,360 |
2,300 |
10,727 |
||
Debtors |
4,306 |
12,892 |
17,494 |
35,798 |
58,910 |
||
Cash & cash equivalents |
176 |
6,238 |
7,205 |
266,547 |
46,079 |
||
Other |
2,101 |
2,508 |
5,815 |
11,032 |
18,918 |
||
Current Liabilities |
|
|
(5,657) |
(18,225) |
(29,117) |
(58,944) |
(156,336) |
Creditors |
(3,894) |
(16,361) |
(25,628) |
(55,160) |
(139,568) |
||
Tax and social security |
0 |
0 |
0 |
0 |
0 |
||
Short term borrowings |
(1,758) |
(1,500) |
(3,019) |
0 |
(7,713) |
||
Other (including finance lease liabilities) |
(5) |
(364) |
(470) |
(3,784) |
(9,055) |
||
Long Term Liabilities |
|
|
(18) |
(392) |
(1,067) |
(426,910) |
(488,724) |
Long term borrowings |
0 |
0 |
0 |
(407,739) |
(424,320) |
||
Other long term liabilities |
(18) |
(392) |
(1,067) |
(19,171) |
(64,404) |
||
Net Assets |
|
|
2,720 |
5,493 |
7,679 |
17,526 |
107,695 |
Minority interests |
0 |
64 |
(376) |
(1,623) |
(102,520) |
||
Shareholders' equity |
|
|
2,720 |
5,556 |
7,303 |
15,903 |
5,175 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
842 |
4,075 |
5,047 |
11,793 |
74,054 |
||
Working capital |
(1,369) |
3,587 |
(797) |
5,766 |
(16,615) |
||
Exceptional & other |
(26) |
(5) |
91 |
2,894 |
3,854 |
||
Tax |
(117) |
(415) |
(773) |
(4,738) |
(4,002) |
||
Net operating cash flow |
|
|
(671) |
7,243 |
3,568 |
15,715 |
57,291 |
Capex |
(120) |
(1,471) |
(1,230) |
(4,412) |
(25,978) |
||
Acquisitions/disposals |
0 |
3 |
(383) |
(167,182) |
(256,940) |
||
Net interest |
(11) |
(13) |
(42) |
(2,110) |
(24,568) |
||
Equity financing |
0 |
185 |
(495) |
(243) |
110,898 |
||
Change in finance lease |
9 |
(356) |
28 |
878 |
(1,299) |
||
Dividends |
0 |
0 |
(2,001) |
(2,212) |
(2,960) |
||
Other |
(3) |
36 |
(858) |
(70) |
2,673 |
||
Net Cash Flow |
(795) |
5,626 |
(1,413) |
(159,636) |
(140,883) |
||
Opening net debt/(cash) |
|
|
792 |
1,587 |
(4,039) |
(3,192) |
160,572 |
FX |
0 |
0 |
30 |
8 |
104 |
||
Other non-cash movements |
0 |
0 |
536 |
(4,136) |
(128,180) |
||
Closing net debt/(cash) |
|
|
1,587 |
(4,039) |
(3,192) |
160,572 |
429,531 |
Source: 4iG. Note: *Restated for finalised purchase price accounting.
|
|
Research: Financials
In its H123 results, Secure Trust Bank (STB) delivered an 11% y o y increase in operating income, overcoming margin pressure on rising interest rates. However, PBT was £16.5m, 4% lower than in H122 as the bank incurred a one-off impairment charge of £7.0m stemming from a long-standing debt case in Commercial Finance. Excluding this charge, PBT was £23.5m, which implies a 6% beat on our estimates on an annualised basis. Across the group, underlying impairments are resilient, especially in Vehicle Finance where impairments fell to 2.4% (H122: 8.0%) as lending shifted to prime borrowers. We have increased our FY23 and FY24 continuing PBT forecasts to £45m and £55m respectively, leaving the stock trading at P/E ratios of only 4.0x in FY23 and 3.1x in FY24.