Equity 9 May 2019, 3:40pm

Magyar Telekom records splendid first-quarter revenues

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Magyar Telekom, Hungary’s leading telecommunications group, had a great start in 2019, as regards its revenues. It has recorded growth in every segment, driven mainly by equipment sales and mobile data revenues. And, at last, MTel booked growth even at its northern Macedonian subsidiary, as well. Costs, however, have risen substantially. Expenditures related to equipment sales jumped, there were major severance expenses incurred, and the group also had a frequency licence extension. Free cash flow declined but the management guidance on HUF 27 dividend per share from 2019 profits remain intact.

Total sales came in largely as expected, while EBITDA greatly beat the consensus forecast, and MTel’s operating and after-tax profits undershot the market’s call in the first quarter. EBITDA overshot analysts’ median estimate mainly due to a technical effect, as EBITDA, excluding the impacts of IFRS 16 adoption, would have been only HUF 41.3 bn, down 3.5% from the consensus. In this respect, revenues matched expectations, but key earnings all caused major disappointment.

Total revenues rose 5.5% yr/yr to nearly HUF 159 bn in January-March, although management expect a moderate yr/yr decline for the whole year. Every key segment expanded: mobile revenues were up 8.4%, fixed-line revenues increased by 2.1% and revenues in System Integration / IT were up by 3.1%.

The main drivers were equipment sales and mobile data revenues. Total revenues in North Macedonia increased by 2.6% yr/yr to HUF 13.1 billion in Q1. For the sake of comparison note that revenues of this operation were largely the same as revenues generated by broadband Internet services in Hungary.

Mobile equipment revenues increased by 23.5% year-on-year to HUF 21.4 billion, and fixed equipment revenues leaped by 39% to HUF 5.7 billion in Q1, contributing nearly one sixth of total group revenues. MTel said the sharp rise in this segment was attributable to a growing proportion of higher-end handsets within the sales mix in Hungary and a higher volume of smartphone sales in North Macedonia. We would not be surprised - and, frankly, it would be a most logical move - if MTel was trying to commit the highest number of customers with discount-priced equipment and 1-2-year loyalty contracts ahead of the entry of Digi onto the local mobile market. Last year, MTel was the largest online seller of mobile phones and tablets, taking a third of the Hungarian market in 2018, according to GKI Digital’s market analysis.

The rate of SI/IT revenue growth moderated someone, but MTel explains this by different project seasonality and a high base. There is no sign just yet of the project draining impact of public procurement tender winnings by 4iG, an interest of Lőrinc Mészáros, a billionaire ally of Prime Minister Viktor Orbán. In any case, events there started to heat up only in the last few weeks. SI/IT revenues increased by 3.2% yr/yr to HUF 21.2 billion in Q1, as demand for hardware and software deliveries remained strong. This segment provided more than 13% of consolidated revenues in the first quarter.

EBITDA needs some explanation. It grew 9% yr/yr to HUF 46.4 bn, with IFRS 16 adoption accounting for HUF 5.1 billion. Once we remove this impact, EBITDA would have been down 2.9% at HUF 42.3 bn. This decline reflects higher employee-related expenses, reflecting HUF 3.0 bn severance expenses in Hungary. The group paid HUF 6.2 bn telecom tax in Q1, largely the same as in the base period, whereas other direct costs increased by 16.4% yr/yr to HUF 38.6 billion in Q1, primarily due to an increase in the cost of equipment sales in line with higher sales, and an increase in TV content outpayments.

Free cash flow (FCF) decreased overall, from an outflow of HUF 9.9 billion to an outflow of HUF 25.9, mainly due to the payment of the 2100 MHz frequency license extension fee (HUF 11 bn) along with some deterioration of working capital developments.

Despite the robust revenue growth in Q1, management project a slight decline for 2019, with 1-2% EBITDA increase and the payment of HUF 27 dividend per share after HUF 25 paid this year.