Telekom Austria: Will consolidation change the playing field?   

Tuesday’s Capital Market Day of Telekom Austria does not trigger any bigger changes to our model. However, for us the negative takeaways (esp. negative impacts from roaming and MTR cuts quantified at EUR 290 mn in 2013 – 2016 at the top line) outweigh the positive points (additional cost savings of EUR 100 mn gross, halting price erosion in Austria). The guidance for 2013 - sales incl. Yesss! of approx. EUR 4.1 bn, capex around EUR 700 mn - was already issued last week. We reiterate our “hold” recommendation and set a new target price of EUR 5.70 (previously EUR 5.50).
We think it is rather the sector news-flow one should turn to when looking for supporting factors. Recent comments on future regulation to support broadband coverage sound encouraging. However, for the time being the regulatory environment remains tough and gives no breathing space to Telekom Austria, as lower roaming charges and MTR cuts weigh on the Austrian home market as well as CEE. Competition on the Austrian home market will remain intense at least in 2013. However, the recent announcement to hike the price for the smartbobXL tariff of the no-frills brand Bob is a positive signal to the market which could lead to a more rational behaviour in the mid term. Weighing upside and downside risks we clearly point out that we see the risk more to the downside. Since its trough in the beginning of November, the share price has recovered some 23% already pricing in positive effects from Austrian mobile market consolidation - which have yet to materialise in the current low-visibility environment - and/or a higher takeover premium.

Outlook: We have incorporated Yesss! in our model (annual sales of around EUR 50 mn, EBITDA margin of approx. 50%) and assume financing of the acquisition via the placement of a hybrid bond (EUR 800 mn, interest rate of 5.75%). We have somewhat lifted our assumptions for the Austrian (Yesss! acquisition, market consolidation) and Belarusian markets (price increases totalled 39% in 2012) while we lowered our forecast for Croatia (negative regulatory effects) on the other hand. We see Group EBITDA comparable of EUR 1,432 mn in FY 12e broadly in the middle of the guided range of EUR 1.40 bn – EUR 1.45 bn. Telekom Austria is going to report FY 12 figures on February 28. EBITDA comparable FY 13e is forecast at EUR 1,274 mn.

Valuation: We derive our target price of EUR 5.70 by equally weighting a regional SOTP valuation where we split Telekom Austria into its Austrian and CEE operations taking FY 14e EV/EBITDA multiples and our year-end 2014 DCF fair value. Given the changes on the Austrian mobile market and the debt peak in 2013e we consider it appropriate to use 2014e financial figures for fair value calculation.