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CEE Telecoms: Safe haven. Vera Sutedja, CFA Thomas Unger. ERSTE GROUP RESEARCH. 1. Overview. Valuation p. 3 Top pick: T-Hrvatski Telekom p. 5 Telecom stocks offer resiliency p. 6 Factors behind resiliency p. 7 Resilient but not immune p. 8 Regulatory pressure increases p. 9

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CEE Telecoms: Safe haven

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cee telecoms safe haven

CEE Telecoms: Safe haven

Vera Sutedja, CFA

Thomas Unger





Valuationp. 3

Top pick: T-Hrvatski Telekom p. 5

Telecom stocks offer resiliency p. 6

Factors behind resiliency p. 7

Resilient but not immune p. 8

Regulatory pressure increases p. 9

Competitive landscape p. 10-13

Companies: Telekom Austria, Telefónica O2 CR, T-HT, Magyar Telekom, TP SA, Telekom Slovenije p. 14-19

Summary p. 20


valuation at premium to western peers
Valuation: at premium to western peers
  • CEE incumbents are traded at 31% premium in terms of P/E 2009e and 7% discount in terms of EV/EBITDA 2009e to Western European peers.
  • FCF and dividend yield for 2009e are 68% and 35% higher, respectively.
  • The difference in margins are narrowing.
  • CEE incumbents are no longer favourably valued compared to Western European peers, especially considering the macro risks for the CEE region.

Source: Erste Group estimates, Factset


valuation cheaper than other sectors
Valuation: cheaper than other sectors

Not only cheaper,..

.. but also more profitable

These factors make an attractive and defensive investment, especially during the current recession.


top pick t hrvatski telekom
Top pick: T-Hrvatski Telekom
  • Dirt cheap, 38% and 26% discount in terms of P/E and EV/EBITDA for 2009e, respectively.
  • High dividend yield at above 13%, and FCF yield of around 12% for 2009e.
  • Best-in-class margins, with net margin above 26% for 2009e-2011e.
  • Large net cash of 28.8% of assets in 1Q09 should boost financial results and enable share buyback.
  • Conservative 2009 outlook, likely to be upgraded.
  • Limited regulatory pressure.



Telecom stocks offer resiliency

  • Supported by low debt levels
    • T-HT and Telefónica O2 have net cash
    • TP SA and Telekom Austria have BBB+ rating
  • Limited revenue, EBITDA and FCF decline



Factors behind resiliency

  • Basic services for households and corporates
  • Prices come down, yet the quality improves
  • Low telecom spending (3.3% of household’s expenditure, 1.5% of monthly earnings)
  • New services (mobile internet, IPTV, bundled products) to retain customers

Inflation and retail telephony price evolution

Source: EU Commission



Resilient but not immune

  • Outlook for 2009e are lower than for 2008. CEE incumbents within our coverage expect declining revenues and EBITDA in 2009e, except for Telekom Austria.
  • Rising cost of debts due to higher interest rates and widening credit spread
  • Currency depreciation leads to higher operating costs (handsets, IT/network equipments, international traffic) and lower reported figures
  • TP SA, Telekom Austria and Magyar Telekom are the most affected by the economic downturn within our coverage

Source: Bloomberg



Regulatory pressure increases

  • Extension of EU roaming tariffs (Eurotariff) to affect Telekom Austria the most
  • More aggressive mobile termination rate (MTR) reduction
    • MTR is still 4-5x costs and 10x higher than the fixed termination
    • Current average 8.55 eurocents, to be brought down to 1.5-3 eurocents by 2012
    • Reduce mobile interconnection revenues, mobile interconnection costs and fixed-to-mobile interconnection costs
    • Negative impact on revenue and EBITDA
  • Functional separation is a threat for TP SA


competitive landscape overview
Competitive Landscape Overview
  • CEE Incumbents continue to dominate fixed and mobile markets
  • Fixed-to-mobile substitution still strong, elevating mobile penetration rate further
  • Postpaid subscribers dominate in Austria (65%) and Slovenia (63%), while the majority were prepaid customers in Croatia (about 70%), Hungary (59%), Poland (58%) and Czech Republic (53%)
  • Fixed broadband penetration remains below EU-27 average with Croatia having the lowest (11.8%) and Austria the highest (21.4%)

Mobile Penetration 2007, 2008

CEE Incumbents market shares (2008)


competitive landscape austria poland
Competitive Landscape Austria, Poland
  • Austria
    • Telekom Austria leads all markets: 87.3% share of fixed lines, 44.8% fixed broadband, 42.5% mobile connections
    • Intense competition on mobile market, pressure on revenues
    • Strong mobile broadband growth, now leading broadband access technology
  • Poland
    • Fixed-line controlled by TP SA, mobile market evenly split
    • After Tele2 acquisition, Netia new number 2 on fixed voice market
    • 4th player (Play) grabbing market share with aggressive pricing on mobile market, Polkomtel new market leader


competitive landscape czech republic hungary
Competitive Landscape Czech Republic, Hungary
  • Hungary
    • Magyar Telekom holds 74% of fixed lines, main competition from second incumbent (HTCC) and cable operators (UPC is the largest) offering product bundles
    • To slow line loss Magyar Telekom rolls out fibre network, launches satellite TV
    • Little movement in mobile market, 4th UMTS license tender called off
  • Czech Republic
    • Telefónica O2 clear market leader in fixed-line market (86% share of total lines)
    • Strong fixed-to-mobile substitution (81% of total traffic on mobile networks from 76% in 2007)
    • Broadband connections rising by 24.7% y/y in 2008, wireless local loops popular
    • Mobile market controlled by T-Mobile and Telefónica O2 (together almost 80%)


competitive landscape slovenia croatia
Competitive Landscape Slovenia, Croatia
  • Slovenia
    • Telekom Slovenije dominates all markets: 85.6% share of fixed accesses, 49.1% share of fixed broadband connections, 58.9% share of mobile subscribers
    • Voice-over-IP connections emerging rapidly (+91.2% y/y in 2008)
    • Active user mobile penetration surpassed 100% in 2008
    • Competition hurting Mobitel and Si.Mobil in mobile market
  • Croatia
    • T-Hrvatski Telekom the clear leader in all segments, commanding a 82% market share in fixed voice, 90.1% share in fixed broadband and 45.9% of mobile connections
    • Fixed broadband rising sharply
    • Mobile penetration reached 133.6% in 2008, market dominated by prepaid customers


stock overview telekom austria hold target eur 11
Stock overviewTelekom Austria (Hold, target EUR 11)
  • Investment case
    • Major international wireless operations under pressure: Intensifying competition and threat of currency devaluation (as seen with the Belarusian ruble)
    • Regulatory pressure increases
    • Civil servants reduction implemented in 4Q08
    • Shares not a bargain, traded at a 6% premium in terms of 2009e P/E
  • Outlook

Telekom Austria expects revenues to be slightly weaker than EUR 5.1bn, EBITDA at around EUR 1.9bn, CAPEX around EUR 800mn, operating FCF at EUR 1.1bn and a dividend of EUR 0.75 minimum or 65% of net income

  • Cash distribution policy

Rating floor BBB, threshold 1.8-2x net debt/EBITDA, share buyback on hold, 65% payout ratio

  • Valuation and recommendation
    • Maintain target price at EUR 11
    • Shares traded at 6% premium (both P/E and EV/EBITDA for 2009e) in CEE peer group
    • We consider EBITDA outlook for 2009 as best case scenario


stock overview telef nica o2 cr buy target czk 550
Stock overviewTelefónica O2 CR (Buy, target CZK 550)
  • Investment case
    • Above average margins, stable earnings growth
    • Start-up operation in Slovakia under control
    • Resilience during recession period
    • Premium justified
  • Outlook

The company expects business revenues to fall by -3% to 0% y/y, OIBDA to decline by -4% to 0% y/y, operating cash flow to increase by +2% to +5% y/y

  • Cash distribution policy

The aim is to distribute as much as possible, capped by its parent company’s retained earnings. We expect a dividend/share of CZK 47 in 2009e.

  • Valuation and recommendation
    • Confirm Buy recommendation and target price of CZK 550
    • Shares are not the cheapest, but supported by strong fundamentals
    • Double digit dividend yield (ex date on Sept 7, 2009) should support the share price


stock overview t hrvatski telekom buy target hrk 300
Stock overviewT-Hrvatski Telekom (Buy, target HRK 300)
  • Investment case
    • Above average margins, but limited growth
    • Resilience during recession period
    • High net cash
    • Share overhang issue has subsided
    • Integration of T-Com and T-Mobile
  • Outlook

Fixed-line and wholesale revenues are expected to decline, mobile revenues to remain stable and internet revenues to grow significantly. EBITDA and EBITDA margin are expected to decrease, CAPEX to remain stable at 2008 level

  • Cash distribution policy

The dividend payout policy is 50-100% of distributable profits. We assume a 100% payout ratio.

  • Valuation and recommendation
    • Reiterate Buy recommendation and maintain target price of HRK 300
    • Share are cheap, with a discount of 38% (P/E 2009e) and 26% (EV/EBITDA 2009e)
    • Steep discount is unjustified, in our opinion, given best-in-class and resilience


stock overview magyar telekom hold target huf 625
Stock overviewMagyar Telekom (Hold, target HUF 625)
  • Investment case
    • Suffering from economic downturn
    • Attractive dividend yield, but so is the government yield
    • Cheap stock, mixed fundamentals
  • Outlook

The company expects a revenue decline of 1%, EBITDA decline of 1% to 2% and CAPEX to remain flat. We think this is too aggressive and that a downgrade is looming.

  • Cash distribution policy

Dividends are paid as long as net gearing remains between 30%-40%. A payout ratio of above 100% is possible.

  • Valuation and recommendation
    • We downgrade Magyar Telekom from Accumulate to Hold and reduce the target price from HUF 635 to HUF 625
    • A lowering of the 2009 guidance is expected, due to the deteriorating economic situation
    • Peer group comparison is favourable, but other stocks are more resilient


stock overview tpsa accumulate target pln 20 5
Stock overviewTPSA (Accumulate, target PLN 20.5)
  • Investment case
    • Hit by economic downturn
    • Regulatory risks remain high
    • Price war in mobile segment
    • Broadband as the growth driver
  • Outlook

TPSA expects CAPEX to arrive between 12-14% of revenues and NetFCF to reach a minimum target of PLN 3bn. Revenues are expected to decline and profitability is anticipated to be under pressure.

  • Cash distribution policy

In distributing dividends, the company aims to keep its current BBB+/A3 rating. Last year’s dividend should serve as a floor to this year’s dividend.

  • Valuation and recommendation
    • Reduce target price from PLN 21.6 to PLN 20.5, upgrade from Hold to Accumulate
    • Shares should rebound after the ex-dividend event
    • Current share price has priced-in risks


stock overview telekom slovenije reduce target eur 160
Stock overviewTelekom Slovenije (Reduce, target EUR 160)
  • Investment case
    • Dominant position in Slovenia, leading ISP and mobile player in some Balkan states
    • Substantial investments in FTTH
    • Government still controls 74.14%
  • Outlook

The company will publish its guidance with 2Q09 results (August 28, 2009). We expect revenues to rise by 9.2% y/y, boosted by the Cosmofon acquisition, EBITDA should remain stable and net income is projected to drop by 25% y/y.

  • Cash distribution policy

Despite stable dividend policy, 2008 dividend was 53% lower than the previous year. Priority is given to investments and acquisitions such as Cosmofon.

  • Valuation and recommendation
    • We downgrade Telekom Slovenije from Hold to Reduce and lower the target price from EUR 270 to EUR 160
    • Unattractive peer group valuation with a 25% premium in terms of EV/EBITDA 2009e and a 44% premium in terms of P/E 2009e
    • Margins and dividend yield below CEE average


  • Downgrade Magyar Telekom from Accumulate to Hold, reduce target price from HUF 635 to HUF 625
  • Downgrade Telekom Slovenije from Hold to Reduce, lower target price from EUR 270 to EUR 160
  • Upgrade TP SA from Hold to Accumulate, lower target price from PLN 21.6 to PLN
  • No rating/target price changes for Telekom Austria, T-HT and Telefónica O2 CR