Hungary Magyar Telekom raises profit target - What about the dividend?
All of Magyar Telekom's key Q1 results exceeded the consensus estimates of analysts. The growth story continues at the group, with revenues up nearly 15% and EBITDA, a key metric of telecoms companies, jumping nearly 50% year-on-year. After-tax profit set a quarterly record, and further good news is that management has raised its net profit expectations for this year, the earnings category that forms the basis for dividend payments.
Revenue
MTel closed the January-March period with HUF 224 billion revenue, up 14.5% year on year. This owes to continued growth in mobile data and fixed broadband service uptake and the positive effects of inflation-based fee adjustments in the Hungarian operation, the company said. Similarly to its sector peers, MTel raised its tariffs by 15% from March this year, in light of last year's 17.6% annual average inflation.
Mobile revenue rose by 16.6% year-on-year to HUF 130.9 billion in Q1, driven by the continued growth in mobile data revenue (+25%) and higher equipment sales (+17%).
Fixed line revenue increased by 15.0% yr/yr, to HUF 72.6 billion, thanks primarily to increases in fixed broadband and TV revenue driven by the customer base expansions as well as the favourable impact of the inflation-based fee adjustment applied to the Hungarian subscription fees.
System Integration and IT (‘SI/IT’) revenue remained broadly stable (+1.5% yr/yr), amounting to HUF 20.7 billion, as customer customer demand was similar than in the base period on MTel's key markets
Earnings
As regards operating expenses, the increase in direct costs was smaller than that of revenues, as the telecom tax accounted here did not change compared to the base period, while interconnection costs declined by nearly 22%, reflecting the cut in the Hungarian mobile termination rates, effective from January 1, 2024.
Indirect costs dropped by more than 9%, reflecting of more favourable energy costs coupled with the positive impact from the elimination of the utility tax which together offset the increases in employee related expenses, and the supplementary telecommunication tax.
the utility tax was scrapped as of 1 january 2024, resulting in a huf 7.8 billion yr/yr inmprovement.
In previous years, utility tax for the full year had to be accounted for in the first quarter in line with relevant IFRS accounting rules. Supplementary telecommunication tax was up by HUF 1.6 billion, amounting to HUF 8.9 billion in Q1, reflecting the revenue increase.
Employee-related expenses increased by 10.9% yr/yr, reflecting primarily the wage increase in effect from 1 July, 2023 at the Hungarian operation. Other operating expenses (excluding the utility tax and the supplementary telecommunication tax) decreased by 4.2% yr/yr, driven by lower energy costs that could offset inflation-driven cost pressures on other expenses.
EBITDA increased by 45.8% yr/yr to HUF 84.6 billion in Q1, driven by the improvement in gross profit coupled with the positive impact of the elimination of the utility tax. MTel's EBITDA margin went up by more than 8% yr/yr to 37.7%. EBITDA AL was up by 51.4% yr/yr to HUF 77.0 billion.
Net financial result improved from a loss of HUF 8.7 billion in Q1 2023 to a loss of HUF 7.8 billion in Q1 2024. Improvement in net interest expense was driven by lower overall loan balances more and favourable liquidity positions leading to lower related costs. The unfavourable change in other finance expense primarily reflects the different quarterly movements of the HUF during the period resulting in higher FX losses in Q1 2024 vs Q1 2023. These were partially offset by unrealized gains on derivative positions.
Net income in Q1 amounted to HUF 33.7 billion, against HUF 10.5 billion in the base period, reflecting EBITDA growth partly mitigated by higher D&A and income tax expense. Adjusted net income was HUF 38.1 billion, representing a HUF 25.9 billion yr/yr increase, in line withimprovements in underlying profitability.
Capex after lease (CAPEX AL) excluding spectrum licenses was down 16.1% year-on-year, amounting to HUF 19.7 billion in Q1 2024, driven by different within-year dynamic of the annual CPE procurements in Hungary and the absence of accelerated investments to RAN modernization and seasonally lower TV content capitalization costs in North Macedonia.
Free cash flow, excluding spectrum license fees, amounted to cash outflow of HUF 0.9 billion in Q1, representing an improvement of HUF 9.8 billion year-on-year. Improvements driven by the profitability growth was partially mitigated by higher working capital needs related to the expanding revenue base and different vendor outpayment dynamics.
Outlook
in a positive development management has revised upwards this year's targets for adjusted net income and free cash flow.
Similar to the forecast given in February, Magyar Telekom expects 5-10% revenue growth and 20-25% EBITDA AL increase for 2024, while the adjusted net income, which is the basis for dividend calculation, could be HUF 140 billion instead of the HUF 130 billion previously forecast. The management has also increased its free cash flow target by HUF 10 billion, currently expected to be around HUF 130 billion.
Tibor Rékasi, CEO of Magyar Telekom said that "operationally, we continued to progress our key strategic initiative, the Digitization of Hungary, adding new gigabit-capable access points to our fixed network to reach over 3.7 million households and businesses with this technology. We also made good progress in the radio network modernization of our mobile network, reaching an 82% readiness by the end of March 2024."
As for the outlook, the CEO said "we remain committed to maintaining our solid market positions and operational momentum, allowing us to meet our public targets for Revenue and EBITDA AL. Whilst with regards to adjusted net income we now target to reach ca. HUF 140 billion and with regards to the free cashflow to reach ca. HUF 130 billion thanks to the more favourable than anticipated yield environment and the lower deterioration in working capital.”
Magyar Telekom shares closed Wednesday's trading with a nearly 1% gain, outperforming the BUX index. In our view, the positive sentiment surrounding the share could be buoyed by the better-than-expected numbers published in the earnings report, the higher targets for this year and thus the improved dividend outlook.
After the huge rally seen last year, there is still strength left in Telekom's shares this year, the second best performing stock among European telecoms companies since the beginning of the year, up more than 38%. This makes Telekom a high outperformer on the Hungarian stock market this year, even compared to the BUX index.
Based on a 12-month forward dividend yield, Magyar Telekom shares currently offer a small premium to the benchmark 10-year Hungarian government bond yield.
Analysts are bullish on Magyar Telekom shares, with all analysts following the company currently having a 'Buy' recommendation.
There are several target prices for MTel north of the HUF 1,000 mark, with the median target price currently at 969 forints, which implies minimal upside potential to the current share price.
Cover photo: Getty Images
