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.
HT Financials (EUR 000)
Telekom Slovenije Financials (EUR 000)
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.
New circumstances primarily relate to Covid-19–related claims on policies written in the Irish market and reinsurance contracts written in the United Kingdom for business interruption coverage, which may potentially have an adverse effect on the Group’s business results and solvency position.
Sava RE published an announcement on the Ljubljana Stock Exchange stating that the Company’s Management and Supervisory boards, with all due care, believe that at the moment it is in the best interest of Sava Re, the Group and its policyholders that the general meeting be cancelled and dividend payments in respect of 2019 be temporarily suspended.
As a reminder, in mid-October of this year, Sava RE proposed EUR 16.27m (of distributable profit of EUR 34.7m) to be paid out as dividends, which translates into a dividend per share of EUR 1.05.
The reason behind such a decision was explained by the following. After the general meeting had been called, some days ago Sava Re was informed of and faced with new circumstances that had arisen in certain EU insurance markets and in the United Kingdom that are in contrast to previously obtained legal advice.
These primarily include legal and regulatory practices and other material facts related to potential additional adverse effects of the Covid-19 pandemic on the operations of the insurer Zavarovalnica Sava and the reinsurer Sava Re. These new circumstances primarily relate to Covid-19–related claims on policies written in the Irish market (under the freedom of services rules) and reinsurance contracts written in the United Kingdom for business interruption coverage as part of property policies, which under new court and regulatory practices may potentially have an adverse effect on the Group’s business results and solvency position.
As a reminder, the implementation of the dividend policy is subordinated to achieving the medium-term sustainable target capital adequacy of the Group. Sava Insurance Group noted early into the pandemic that even in the most stressful scenario, capital adequacy would not drop by more than 10. p.p. compared to their plan of 203%. As a reminder, the Group’s solvency is targeted to be maintained in the 180% to 220% range in the strategy period (2020 – 2022), which represents the optimal level of capitalization based on the Group’s risk appetite.
In this regard, Sava Re has also been called upon by the Slovenian Insurance Supervision Agency to reconsider its position relating to the assessment of risks in the above-mentioned markets, as well as any impacts on its solvency position. In line with the Group’s risk management policy, the Company immediately started assessing the likelihood and severity of such risks occurring and add that this will take some time.
The companies Zavarovalnica Sava and Sava Re have started compiling additional information to assess their exposure to these new risks and the likelihood of these risks being realised and to calculate any potential impact on the separate and consolidated results and the solvency position of the companies and the Group. The Company will assess the size and likelihood of potential claims in the 2020 annual report and the following quarterly financial reports.
The company further added that 9M 2020 results, which will be published on 19 November 2020, are favourable and consistent with published plans. Any potential effects that may arise from the new risks have neither materialised yet nor impacted the results of the 9M of 2020, but they could affect future results.
Such news took investors by surprise, which led to the share price dropping by 4.65% on Friday, ending the day at EUR 16.4 per share. At the current share price the company is traded at a P/B of 0.61.
Trading statistics for October 2020 show an average daily turnover of EUR 6.37m (-8.5% YoY).
The Bucharest Stock Exchange published their trading statistics for October 2020, showing a total equity turnover of EUR 140.12m. This translates into an average daily turnover of EUR 6.37m, representing a decrease of 8.5%. When comparing MoM, this represents a decrease of 74.8%. As a reminder, in October, for the first time in history, the Romanian capital market is included in the Emerging Markets indices, according to the classification of the global index provider FTSE Russell. The aforementioned led to a sharp increase in average daily turnover.
When observing the top traded shares, one can notice that Banca Transilvania recorded the highest turnover of RON 191.66m. Fondul Proprietatea follows with a turnover of RON 81.6m. Next come OMV Petrom with RON 69.96m and Romgaz with 68.4m. These 4 companies account for roughly 60% of the total equity turnover in October.
Turning our attention to the main index of the BVB, in October, BET witnessed a decrease of 5.6% (ending the month with 8,510.37 points), marking the biggest monthly decrease of the index since March (-16.4%). Such a performance was in line with most major European indices, as negative sentiment with regards to Covid-19 increased, while many European countries imposed stricter measures in efforts to prevent the virus from further spreading. As of end October, BET is still down 14.7% compared to the beginning of the year.
When observing the index constituents, 9 of 17 ended the month in red, with two banks – BRD (-12.5%) and Banca Transilvania (-12.1%) leading the losers. On the flip side, Digi and Teraplast led the gainers with +8% and +4.5%, respectively.
Share Price Performance of BET Constituents in October (%)