Hrvatski Telekom — Update 10 December 2015

Hrvatski Telekom — Update 10 December 2015

Hrvatski Telekom

Analyst avatar placeholder

Written by

Hrvatski Telekom

Quality at a (low) price

Telecommunications

QuickView

10 December 2015

Price

HRK144.99

Market cap

HRK11,875

Share price graph

Share details

Code

HT-R-A

Listing

Zagreb

Shares in issue

81.9m

Business description

Hrvatski Telekom (HT) is the incumbent telecom operator in the Republic of Croatia. It leads in all its markets with shares of 44% in mobile, 70% in fixed voice and 72% in broadband. Subscriber numbers total 2.3m mobile, 1.0m fixed line, 0.6m broadband and 0.4m TV. Deutsche Telekom owns a 51% stake.

Bull

Superior network quality and efficiency: HT is the third operator in the EU to launch an all-IP network. 60% of the population has 4G indoor coverage.

Fast-growing ICT business helping to offset decline in fixed-line telecoms revenues.

Strong, cash-positive balance sheet with net cash of HRK41 per share at end Q315. Clear dividend payout policy.

Bear

Local listing only. Average daily trading of $197k over last 52 weeks.

Robustly competitive three-player cellular market gives potential for bouts of earnings volatility.

Deutsche Telekom as parent company limits cross-border growth potential.

Analysts

Anna Bossong

+44 (0)20 3077 5737

Bridie Barrett

+44 (0)20 3077 5757

Hrvatski Telekom (HT) is a full service telecoms operator in Croatia, an EU country that benefits from strong tourism and is currently emerging from a six-year recession. HT shares have fallen 31% since the start of 2013, underperforming parent Deutsche Telekom (DT) and the MSCI European telecoms index by 53% and 62% respectively, partly because of a cut in the dividend payout ratio in 2013 from 100% to c 50%. HT is a well-run company with a modern IP-based network, dominant market positions and a cash-rich balance sheet with stabilising revenues. On a 2015e dividend yield of 5.9% and EV/EBITDA of 3.0x (a 36% discount to the sector), HT’s potential appears to be overlooked by the market.

Declining fixed voice a fact, but less of a burden

Stripping out the impact of the acquisition of wholesale operator Optima in 2014, HT’s revenues fell 2.0% y-o-y in 9M15 (9M14: -3.6% y-o-y), primarily due to a 13.3% decline in fixed-line revenues on line losses and lower ARPA. Mobile revenues also fell, but by only 2.7%, on consumers switching to cheaper packages. Fixed line revenues remain very vulnerable, but at now only 15.5% of the group total (vs cellular at 39.5%), the group should be able to stabilise revenues as their impact lessens.

ICT growth and efficiency are the way forward

HT had two impressive wins in 2015: the completed migration of its customer base to a low-cost, all-IP platform (so far one of only three in the EU to do so) and strong expansion in its ICT business. ICT revenues increased 19.6% y-o-y in 9M15 to 9.1% of total, helped by pent-up demand in IP communications and ICT solutions. With a large war chest we expect HT to continue to lead consolidation of the sector.

Consensus estimates reflect stabilising revenues

We see the current consensus earnings numbers as conservative, assuming stabilising revenues in 2015 and mild margin erosion in 2016. Consensus dividend forecasts assume an increase in the payout ratio from 50% in 2014 to 75%, but this is at the mid-point of the 50-100% guidance range and so still looks reasonable.

Valuation: Deep discount to peers hard to justify

HT’s 2015e EV/EBITDA of 3.0x and P/E of 11.4x are respectively 36% and 39% below CEE sector averages. With a modern network, leading market positions, strong management and stable country backdrop, we see HT as a good-quality/
value mix for income investors not constrained by high stock liquidity requirements.

Consensus estimates

Year
end

Revenue
(HRKm)

PBT
(HRKm)

EPS
(HRK)

DPS
(HRK)

EV/EBITDA
(x)

Yield
(%)

12/13

7,042

1,629

17.6

9.0

2.8

6.2

12/14

6,908

1,185

14.0

7.0

3.2

4.8

12/15e

6,845

1,256

12.7

8.5

3.0

5.9

12/16e

6,893

1,213

12.4

8.8

2.8

6.1

Source: Bloomberg

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2015]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Financials

Numis Corporation — Update 10 December 2015

Numis Corporation

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free