After being hit hard by the coronavirus pandemic in the first half of the year, Q3 started to signal a recovery for the telecommunications sector. That is why today, we take we take a closer look at regional telecom companies to see if their performance was in line with overall industry trends.

In 9M period HT posted a drop in revenue of 3.9% YoY. Mobile revenue (-6.7%) and Fixed revenue (-5.5%) segments decrease, which was partially offset by 18.3% growth of System solutions segment (+HRK 103m). In 3Q System solutions revenue surged for 48%, coupled with growth in mobile postpaid and Fixed BB & TV (+4.5%) that has all resulted in solid 3Q net income amounting to HRK 245m (+2.9% YoY). System solutions revenue is realized on HT’s subsidiary Combis which is offering ICT and cloud computing services. Due to the Covid-19 pandemic, digital transformation has entered a challenging phase and demand for this service grows as sudden shutdowns of offices, schools, and enterprises have increased. System solutions segment in 9M increased 18.4% or HRK 104m, as management confirmed in CC that they were able to secure additional big deals in this segment.

EBITDA before exceptional items after leases has amounted to HRK 1,293m (-7.8% YoY) and was down due to lower revenue and Evo TV transaction that took place in Q1 2019, but when we normalize it for, EBITDA after leases decreased by -3.7%. EBITDA after leases in HT Group in Croatia amounted to HRK 1,196m and decreased by 8.1% or HRK 106m. Crnogorski Telekom also had negative contribution and its EBITDA after leases decreased by HRK 4m to HRK 97m (-3.9%). Depreciation increased (+9%) due to higher capex (+10%), which is in line with our estimate and management guidance. Exceptional items more than tripled to HRK 62m, which majority is stemming from personnel restructuring already booked in Q1. As a result, net income decreased 28.6% YoY to HRK 313m.

Meanwhile Telekom Slovenije posted sales in the amount of EUR 440m, representing a decrease of 3.8% YoY. revenues from the mobile segment of the end-user market is down by 3.4%, primarily due to the impact of the Covid-19, which resulted in lower revenues from roaming services abroad. Besides that, sales were impacted by the optimisation of subscribers whose basic subscription fee includes an increasing number of services, which is driving down revenues from services not included in the subscription fee. Furthermore, revenues from the fixed segment of the end-user market is down (-1.2%) primarily due to lower revenues from traditional telephony, while revenues on the wholesale market is down 9% due to reduced international voice traffic and lower revenues from roaming by non-residents.

Moving on to operating expenses, they amounted to EUR 410.35m, representing a decrease of 3% YoY. Of that, the largest item was cost of services which stood at EUR 157.1m (-7% YoY). Such a decrease could be attributed to the to the reduced volume of international traffic and roaming as and lower costs of multimedia content.

As a result of all of the above EBITDA amounted to EUR 144.6m, representing a slight decrease of 0.8% YoY. Meanwhile EBITDA margin showed an improvement of 1 p.p. and stood at 32.9%. As a reminder, according to the Group’s key objectives for 2020, EBITDA is estimated at EUR 210.6m. However, the Group assesses that the pandemic and measures adopted at the national level due to the two waves of the declared epidemic will have an adverse impact on the Group’s EBITDA of around 4% relative to planned EBITDA for 2020.

Operating profit amounted to EUR 40.12m, which is an increase of EUR 2.97m or 7.5%% YoY.

Going further down the P&L, net profit from continuing operations stood at 36.85m, which marks an increase of EUR 5.6m or 18.2% YoY. However, the company reported a decrease in net profit of 6.5% to EUR 27.44m. Such a decrease could be attributed to the loss from discontinued operations of EUR 9.4m. Of that, Loss from the sale (recognized upon the measurement of fair value) of Planet TV amounted to EUR -5.6m, while loss of the period for Planet TV amounted to EUR -3.58m.

Valuation

Turning our attention to valuations, it is clear that regional telcoms are undervalued when compared to their peer group when it comes to their EV/EBITDA multiple. However, when valuated base on their P/E multiple, HT stands out above the median of the group, while Telekom Slovenije was unable to record a positive bottom line on a T12M basis. Note that even if we adjust HT’s P/E for their significant cash pile, the company’s multiple still comes in above the median with a cash adjusted P/E of 18.1x.