New technology, stiff competition and an extremely dynamic environment are all traits of the telcom industry today. To understand where the industry is going in the upcoming year, we decided to break down some key trends and see how they will impact the industry as we currently know it.
New technology has always been at the heart of telecommunications companies as it was used to expend the reach and possibilities of services provided to customers. However, as technology advanced it brought with it a whole wave of new trends in customer behaviour which impact the way in which telcoms operate. As a result, many of them are forced to rethink their strategy in ordered to find sustainable sources of growth for the future.
Competitors who operate in the digital sphere have emerged in the form of so-called over the-top players (OTT) who provide the same staple services of voice, messaging, and video calls that used to be the domain of traditional telcos. As a result, the use of voice services has remained flattish, growing at a CAGR of just 1% in the period from 2011-2018 and as seen on the chart below the trend is poised to continue in the upcoming years.
Global voice traffic (Monthly Minutes of Use)
Source: Ericsson, InterCapital Research
Telephones are no longer used just to make calls, as advanced smartphones offer their users countless opportunities through various apps. As a result, consumers have been displaying an insatiable appetite for mobile data. This is clearly seen on the chart below which shows the strong growth of mobile data consumed, which has grown with a CAGR of 74% in the period from 2011 to 2018.
Global mobile data traffic (EB/month)
Source: Ericsson, InterCapital Research
The main driver of the growing mobile data traffic is the increased video usage. Users tend to spend increasing amounts of time both streaming and sharing videos which adds to their data traffic. This trend is expected to continue further with video accounting for 74% of the total data usage in 2024.
Securing future growth
According to Ericsson’s Mobility report the total number of mobile subscriptions in 2024 is expected to reach 8.9bn with mobile broadband accounting for almost 95% of the amount. Meanwhile, the number of unique mobile subscribers is estimated to reach 6.2bn. Note that the difference between the numbers of subscriptions and subscribers is caused by subscribers who have several subscriptions. Reasons for this could include users lowering traffic costs by using optimized subscriptions for different types of calls, maximizing coverage and having different subscriptions for mobile PCs/tablets and mobile phones. Subscriptions for PCs and tablets with mobile capabilities, however, are expected to show only moderate growth.
Global subscriptions and subscribers (million)
Source: Ericsson, InterCapital Research
Although data revenues are seen as only a limited substitute for voice revenues, the sheer growth rate of the segment has introduced network quality as the preeminent goal for operators. To further enhance the mobile broadband experience, 5G network deployments are anticipated to start from 2020 and to reach 1.5bn subscribers by 2024. With global mobile data traffic forecast to increase more than 5 times between 2018 and 2024, key drivers for 5G deployment include increased network capacity and decreased cost per byte.
Global mobile subscriptions by technology (million)
Source: Ericsson, InterCapital Research
New networks provide new opportunities
The growing demand for 5G networks is also pushed by the growing demand for the Internet of things (IoT). As the IoT application market is widening, more advanced use cases requiring enhanced network capabilities are emerging. Examples of such capabilities are support for optimized voice quality, more accurate device positioning and support for device mobility at high speed. Meanwhile, with the number of IoT connections to expected reach 4.1bn by 2024 one can see why the successful implementation of 5G networks is one of the telcom industry’s main goals.
Think globally, act locally
Despite being a relatively small market, global trends are very much visible in Croatia as well. According to the latest report of the Croatian Post and Electronic Communications Agency (HAKOM), in September 2018, 84% of the populace used broadband internet through a mobile network. When compared to 2017, this represents an increase of 3% YoY. Further growth is expected from the segment which will also drive the growth in data traffic. Consequently, investment in infrastructure can be expected to provide the required capacity.
Among Croatian companies who were the first to tackle the new trend one should certainly highlight HT, Croatia’s leading telcom company. HT was the first in Croatia to realize 5G functionalities in real conditions by using Ericsson’s 5G network devices. The successful implementation of the new technology came after HT initiated the modernization of the radio access network in the whole of Croatia at the beginning of 2018. According to their estimates each citizen will have an average of four devices connected to the internet by 2020, making future development of new technologies such as 5G essential.
As HT proposed a dividend of HRK 10 per share we are bringing you a historical overview of their dividends.
On Friday, Hrvatski Telekom published their results for 2018, which we have already covered in our IC Company Note. Here we decided to make a brief overview of dividends the company offered historically, since they proposed a dividend of HRK 10 per share for 2018.
Of the HRK 10 per share, HRK 7 per share was proposed to be paid out of 2018 net profit and, in addition, HRK 3 per share is proposed to be paid following improved economic and investment climate in Croatia.
At the proposed DPS, the dividend yield (at the current price) would be 6.5%. Note that this would be the highest yield since 2013.
*compared to the share price a day before the dividend proposal
In 2018, Transgaz recorded a decrease in operating revenues before the balancing and construction activity of 6% YoY, a decrease in EBITDA of 9.2% and a decrease in net income of 14.3%.
As Transgaz published their 2018 preliminary results, we are bringing you some key takes from the report. According to it, in 2018, Transgaz observed a decrease in operating revenue before the balancing and construction activity of 6% YoY, amounting to RON 1.6bn. The decrease in revenue can be attributed to lower capacity booking revenue by RON 33.8m and to lower commodity component revenue by RON 125.7m.
When observing their costs, the company recorded a decrease in operating costs before the balancing and construction activity of 3%, an increase of 508% in cost of assets built amounting to RON 388.5m. It also observed a decrease of 17% in other operating expenses, amounting to RON 93m. Next, financial expenses decreased by 83%, amounting to RON 25.3m. This decrease could be attributed to the removal of the asset amounting to RON 138m from its accounting records, representing Transgaz’s share in the share capital of Nabucco Gas International Company GmbH.
Furthermore, Transgaz recorded a decrease in EBITDA of 9.2%, which amounted to RON 798.4m, while EBIT decreased by 12%, amounting to RON 582m.
In 2018, Net income decreased by 14.3%, amounting to 498.9m
In 2018, Fondul’s NAV amounted to RON 10.2bn (EUR 2.15bn), which is a decrease of 5.3% YoY. NAV per share amounted to 1.4095, which is a 13.9% increase. Discount of the Fund’s share price to the NAV ranged between a high of 38.9% and a low of 23.8%.
As Fondul Proprietatea published their 2018 preliminary results, we are bringing you some key takes from the report. According to it, in 2018, Fondul’s NAV amounted to RON 10.2bn (EUR 2.15bn), which represents a decrease of 5.3% YoY.
When observing NAV per share, it amounted to 1.4095, which is a 13.9% increase YoY.
In 2018, the Fund’s NAV per share total return was 19.9% and the Fund’s share price cumulative performance was 9.9%. Note that the company managed to generate positive returns on the NAV and on the share price for their shareholders, despite the 6.2% drop in the share price of the Fund in December. Furthermore, the discount level remains excessively high in the company’s view and they state that their efforts to reduce it significantly below the current levels will continue in 2019, with share buy-backs and cash distributions as key actions that are under their control. Note that the discount of the Fund’s share price to the NAV ranged between a high of 38.9% and a low of 23.8% and ended the year at 35.8%.
The company’s management notes that the increase in the discount level registered at the end of the year was directly influenced by the Emergency Government Ordinance in which the Romanian government adopted series of fiscal measures adopted in December 2018 in order to fill the Government’s budget gap.
January Report
Fondul Proprietatea also published their NAV as of 31 January 2019, in which they report a NAV of RON 9.8bn (EUR 2.1bn), which represents a decrease of 4% MoM. Meanwhile Fondul’s NAV per share amounted to RON 1.3692.
Next, when observing the portfolio structure, it remains traditionally oriented towards the power, oil and gas sectors, whereby the two largest holdings, Hidroelectrica and OMV Petrom account for roughly half of the total NAV.
Meanwhile, when compared to the same period last year, the Fund reduced their net cash & receivables (-8.8 p.p.), while they increased their exposure to unlisted equities (+8.5 p.p.), which account now for 71% of the total NAV. Listed equities remained flattish, accounting for 24% of the total NAV.
Turning our attention towards the share’s price performance, as of 15 February, the share price amounted to RON 0.877, marking a 4.6% decrease YoY, while NAV per share increased by 8.9% YoY. The discount to NAV per share increased by 9p.p YoY and currently stands at 36%.
In 2018, Digi observed an increase in revenues of 13.3% YoY, decrease in EBIT of 11.6% and a decrease in net profit of 65.5%
As Digi Communications published their 2018 preliminary results, we are bringing you some key takes from the report. According to it, in 2018, Digi observed an increase in revenues of 13.3% YoY, amounting to EUR 1bn. The Group’s Revenue Generating Unit (RGUs) increased by 12%, amounting to EUR 14.9m. This increase could be attributed to the acquisition of Invitel, cable tv, and internet Romanian RGU’s growth and the growth of Spain’s mobile business line’s RGU.
Further, the Group recorded an Adjusted EBITDA of EUR 324.6m which is an increase of 13% compared to 2017 adjusted EBITDA. Meanwhile, even though the Group recorded an increase in revenue, their EBIT recorded a decrease of 11.6%, amounting to EUR 101.9m.
When looking at Digi’s operating expenses (excluding intersegment expenses and other expenses, but including depreciation, amortization and impairment), they amounted to EUR 925m, which represents an increase of 15.5%. The main driver of the higher expenses was the acquisition of Invitel. The Group also observed increases in salaries and depreciation compared 2017.
In 2018, Digi also recorded EUR 59.1m of net finance costs, which is an increase of 64.4%. This increase could be attributed to the recognition of a lower fair value gain of embedded derivatives compared 2017 (a decrease of €18.0 million). Also, there was an increase in interest expenses as a result of additional financing and increase in ROBOR.
Higher operating expenses and finance expenses lead to a decrease in the Groups net profit which decreased by 65.5%, amounting to EUR 21.3m
In 2018, Romgaz recorded a 9% YoY increase in revenue, a decrease in EBITDA of 7% and a decrease in net income of 22%.
Romgaz published their FY 2018 preliminary results on Friday, showing a 9% YoY increase in revenue which amounted to RON 5bn. The increase can be attributed to the 17.7% YoY increase in revenue from sales of internally produced gas and of gas purchased for resale as well as gas from joint ventures. However, this was somewhat offset by the 30.6% YoY decrease of revenue from electricity sales and 41.1% YoY decrease in revenue from storage services. The drop-in revenue from storage services can be directly linked to the reduced storage tariffs approved by ANRE. In 2018, Romgaz’s EBITDA amounted to RON 2.2bn (-7% YoY), while the EBITDA margin decreased 7.8 p.p. to 44.9%. Finally, the bottom line fell 22% YoY as a result of higher tax obligations and impairment of assets. Namely the cost of petroleum royalties went up 51% YoY to RON 445m, while the windfall tax went up 43% to RON 164m. Furthermore, the company impaired RON 103.6m worth of gas field assets after conducting an internal analysis regarding their profitability. The company also recorded a RON 54m impairment of assets representing the current Iernut powerplant which is set for termination of its activity in 2020
Romgaz’s Key Financials (RON bn)
Source: Romgaz, InterCapital Research
Turning our attention to the balance sheet, Romgaz remains to operate as a debt free company with a large cash pile which amounts to RON 566.8m. However, note that if we include other current financial assets the cash pile would reach a whopping RON 1.4bn.
Investments doubled in 2018, reaching RON 1.2bn but were mostly related to the construction of the new power plant Iernut. Meanwhile exploration expenses rose 33.7% YoY to RON 247m, mainly due to a growing number of 3D seismic activities studies.
In 2018, Transelectrica recorded a 11% YoY decrease in revenue, an increase in EBITDA of 6% and an increase in net income of 216%.
Last week Transelectrica published their FY 2018 non-consolidated financial results, showing a top line decrease of 11% YoY. The segment of profit allowed activities registered slight growth in revenues, amounting to RON 1.2bn (+0.4% YoY). This was due to a higher tariff valid from July 2018 onward and to the 2% increase in electricity consumption. On the flip side, revenues of zero profit activities decreased by 18% YoY, reaching RON 1.5bn. The main reason for the drop in revenues was the 31% drop in the revenues on the balancing market which was caused by negative imbalances and lower revenue from system balancing.
EBITDA grew 6% YoY to RON 403m as a 13% decrease in operating expenses managed to offset the negative top line performance. The main contributor to the EBITDA growth were the diminished expenses on the balancing market. Below the operating line, an improved FX result of RON -8m (-69%) gave an additional leg up to the bottom line. As a result of the aforementioned, net profit skyrocketed reaching RON 89m (+216% YoY).
Transelectrica Key Financials
Source: Transelectrica, InterCapital Research
On the balance sheet the company managed to significantly increase their net cash pile which now amounts to RON 285m (from RON 8.5m in 2017).
Investment wise, earlier this month, Transelectrica announced that they plan on investing RON 144.4m into upgrading the Domnesti transformer power station in 2020.
In 2018, Purcari reported an increase in revenues of 19% YoY, an increase in EBITDA of 48% and an increase in net income of 58%.
As Purcari published their 2018 preliminary results, we are bringing you some key takes from the report. According to it, in 2018, Purcari observed an increase in revenues of 19% YoY, amounting to RON 168.7m. The increase could be attributed to the growth of the core markets, Romania and Poland, by 30% and 22%, respectively. Note that the sale of wine continues to be the main source of the company’s revenues (84%), whose sale increased by 17%.
Furthermore, Purcari recorded an increase in EBITDA of 48%, amounting to RON 62.6m. This increase could be attributed to above mentioned increase in revenues and also an increase in other operating income by RON 8.8m. Meanwhile, their EBITDA margin increased by 7 p.p. amounting to 37%.
The company’s net income amounted to RON 45.6m, which represents an increase of 58%. Net income margin also increased by 7 p.p., amounting to 27%
Note that for 2019 the management forecasts the EBITDA margin and net income margin to be 32-34% and 22–24%, respectively.
In February 2018, Purcari successfully concluded the IPO. The price range for the offer was initially set between RON 19 per share and RON 28 per share, but the final price was at the lower limit (EV/EBITDA 9x). In this IPO process, 9.8m shares were sold for a total of RON 186.2m. Some 90% of the shares were bought by institutional investors, while the rest were acquired by retail investors. Since the IPO the company has observed a drop of 3.2% and is currently traded at RON 18.4 per share.