ANALYST VIEW - Erste ups target price, keeps 'Hold' rating for Hungary's Magyar Telekom

“We assume a higher risk-free rate, from 7.35% (as of September 2011) to the current 9%," said Veronika Sutedja, analyst at Erste in Vienna.

As Hungary was downgraded to BB+ from BBB, she upped her equity risk premium accordingly.

Sutedja expects MTel to maintain its dividend, despite the payment for the SEC settlement and spectrum in 1Q12. “This is because the resulted net gearing remains within the 30-40% range," she said in a research note on Thursday.

New entrant on Hungary’s mobile market

The Hungarian mobile market has officially welcomed a new entrant, the fourth mobile operator. It is a consortium of state-owned companies: Hungarian Post, utility firm MVM and state development bank MFB.The consortium won the 5MHz of 900 MHz spectrum in the recent auction and should start service in Budapest by end-2012.

“The previous cases show that new entrants (as third mobile operators) could build a 15- 25% market share within five years," Sutedja said.

Erste’s example for a fourth mobile operator is limited to Play/P4 in Poland, with a 13.4% market share within five years. “We can therefore assume that the new entrant in Hungary would reach around a 10-15% market share within five years, i.e. by 2017. We expect all existing mobile operators to lose some market share to the new entrant over the long term."

The analyst lowered her mobile revenue growth assumption for 2013 onwards to a low single-digit decline, driven by the new mobile player.

Sutedja maintains her ‘Hold’ recommendation for MTel, but raised her target price to HUF 580 from HUF 550 previously, as Hungary will abolish sectoral taxes, including the crisis tax on the telecom sector, from 2013 onwards.

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