Equity 13 May 2015, 11:34am

Hungary Magyar Telekom throws in the towel due to utility tariff cuts

Portfolio

Hungary’s Magyar Telekom posted nice revenues from residential and small and medium business customers in the first quarter of 2015. Revenues from mobile and fixed-line services also increased. There was a rise in the number of mobile subscribers; the average revenue per user (ARPU) also grew and mobile data services boomed. There are, however, problems in the corporate segment where strong competition eroded both mobile and fixed-line revenues. Energy service revenues rose significantly, but this segment has become non-essential as business customers will be serviced via a joint company established together with MET Holding AG and these figures will not be consolidated, and MTel is exiting the residential segment of the gas market as of the end of July.

Larger revenues, smaller profits

Revenues in the first quarter of 2015 rose 3.3% yr/yr to HUF 157.0 billion, primarily driven by higher mobile and energy revenues.

Q1 EBITDA improved by 4.8% to HUF 42.5 bn, owing to a higher overall gross margin driven by increased postpaid customer base and ARPU, lower energy discounts, as well as savings in employee related expenses.

After-tax profit, however, decreased by almost its half to HUF 2.5 bn from HUF 4.8 bn, largely due to higher depreciation and amortization and net financial expenses offsetting the improvement in EBITDA.

Revenues and EBITDA beat expectations, but MTel’s operating and net profits came in below the respective consensus forecasts.

Exiting the residential gas market

Magyar Telekom has announced its exit from the residential segment of the gas market with effect from July 31, 2015, following changes in the energy market environment.

The announcement should not surprise anyone, as Portfolio repeatedly warned that it was only a matter of time before MTel threw in the towel due to the government-mandated utility tariff cuts.

Retail energy services were designed not to increase profitability, but to maintain customers, reduce churn and boost revenues. However, the segment has been in the red even at operating level for some time now. The service was not advertised actively already in 2013, and it is more interesting that MTel did not give up on this sooner.

A solution for the business segment was found as these clients (natural gas and electricity users) will be served by a joint venture set up by MTel and MET Holding AG.Targets revised

“In terms of our financial targets, we maintain our EBITDA and Capex guidance. However, due to the planned exit from the residential gas market in August this year and the previously announced decision to set-up a JV in respect of energy services to our business customers in the second half of 2015 - implying that its results will no longer be consolidated -, we are now expecting roughly stable revenues in 2015 compared to a year earlier," commented CEO Christopher Mattheisen. MTel currently expects group revenues to remain roughly stable this year, versus its previous guidance for 0-3% growth.

Revenues up, profit down

As regards the 3.3% yr/yr rise in revenues MTl said: “Higher mobile equipment and data revenues were only partly offset by the lower mobile voice and SMS revenues. Energy revenue growth was due to the increased gas and electricity revenues in the business segment. Fixed broadband and TV revenue increases were driven by successful customer acquisition and upgrade campaigns as well."

Looking at MTel’s segments, Telekom Hungary (services to SMEs) was the primary growth driver for the revenue, recording a 6.9% yr/yr increase. The company further increased its mobile customer base by 2% and ARPU by 4% among the Hungarian residential and small-medium business subscribers. In the meantime, revenues from large enterprises decreased by 14% compared to Q1 2014; fixed churn increased further and ARPU at mobile services fell. Revenues in Macedonia went down 6.6% and the Montenegrin unit recorded a 7.7% decrease in sales, although the decrease of revenues and EBITDA decelerated somewhat.

EBITDA increased by 4.8% yr/yr to HUF 42.5 bn in Q1, primarily due to higher gross margin coupled with lower employee related expenses in the first quarter. Operating profit, however, decreased by 8.1% to HUF 14.8 bn, mainly over the frequency license payments and the capitalization of the present value of the future annual frequency in Q4 2014.

Profit attributable to owners of the parent company (net income) decreased to HUF 2.5 billion from HUF 4.8 billion, largely due to higher depreciation and amortization and net financial expenses offsetting the improvement in EBITDA. This occured despite the fact that income tax expenses have decreased by HUF 2.2 bn yr/yr.

Net debt, which is closely watched as a key item for dividend, rose to HUF 446.2 bn in Q1 from HUF 382.3 bn a year earlier, but remained broadly stable (up HUF 4 bn) compared to end-2014. The net debt ratio (net debt to total capital)slightly increased to 46.2%, outside the target range of 30-40%. It was worth keeping a close eye on this indicator before because whenever the debt ratio was persistently north of the target range, dividend turned out to be than expected. In fact, MTel did not pay dividend in the last two years. At the end of February, however, management announced that owing to an improvement in the operating environment it will pay dividend per share of at least HUF 15 from this year’s profit.