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Based on better than expected financial performance, significantly better than expected proposed dividend for 2007, and upgraded future dividend estimates, we reiterate our BUY recommendation for TEO LT, projecting a share price of LTL 2.77, which implies a capital gain of 18.4%.
The company’s recently released Q1 2007 results bested our revenue forecasts by +2.33%, mainly driven by faster adoption of broadband and slower than expected decline in voice services as fixed line growth trend reversed to positive figures after steadily declining for more than twenty quarters in a row. Faster than expected growth in OPEX (+6.9%) resulted in slightly lower (-0.9%) EBITDA margin, which we expect to be a one-off event however, without affecting longer term performance.
One of the major factors for favourable valuation is the jump in dividend, with LTL 0.26 (11.1% yield) per share paid for 2006 as opposed to expected LTL 0.19 (8.1% yield). We take it as a sign that company is starting to hand out its huge excess cash reserve already in 2007 onwards, with future DPS expected to closely follow EPS plus a fraction (LTL 0.09 per share) of retained earnings. The earlier than expected cash distribution to investors provides significant contribution to its estimated current value.
IPTV services have emerged as significant player in the main value driving factors, with estimated impact on the company’s bottom line to reach up to 7% by 2011. Additional to the face value of revenue generated, the service is also expected to serve as a strong factor supporting the rest of the company’s product portfolio via triple-play packaging.
Current share price implies estimated forward P/E of 15.9 with an EV/EBITDA of 4.5, which also makes TEO LT an attractive share relative to its peers. Our target price would bring the stock to a competitive P/E of 18.8 and EV/EBITDA of 5.3.
Growth sustained by new services
Faster than anticipated broadband adoption rate aided by reversal of downward trend in the number of fixed line subscribers allowed TEO’s 1Q revenues to beat our forecasts by +2.3%. In the mid term, increased growth in IPTV related sales allowed us to increase the revenue outlook to LTL 831M in 2011, up by +8.6% from previous estimate.
As TEO had to increase its marketing efforts due to finally introduced triple play packaging, increased levels of expenditure (+6.9% versus estimate), EBITDA margin ended up at 46.4% against the expected 47.3%. Due to increased revenue outlook in the mid term, we have also increased related expense forecast, resulting in a total of LTL 474M by 2011, up by +7.7%. EBITDA margin, however, remains unchanged throughout the forecast period.
Q1 net profit bested our expectations by +20.2% due to lower depreciation and tax burden. In the mid term, however, we expect the profit growth to remain at an earlier estimated level and reach LTL
164M figure by 2011.
Dividends — market leading yield We were pleasantly surprised by TEO’s change of dividend policy,
which suggests that the company has started to pay out its excess cash (TEO’s net debt comprised LTL -450M (LTL 0.58 per share) at the end of 2006) even before the privatisation of TeliaSonera, which
we previously assumed to be the trigger for any significant cash payout. It is likely however, that privatisation is still the driving force behind such change, as the earlier payout would increase TEO’s
value and hence the appeal of its owner TeliaSonera to potential investors or buyers.
We believe that this year’s dividend policy of paying out an amount equal to EPS plus additional LTL 0.09 out of retained earnings (totalling to LTL 0.26 or 11,1% yield) per share will remain unchanged until TEO would pay out most of its cash reserves and retained earning by 2012, just in time for expected TeliaSonera’s
privatisation, with sustainable dividend of LTL 0.24 (10.3% yield) per share after that.
IPTV — new growth centre
Although IPTV has been around since 1994, it has not been until recently widening adoption of broadband internet connections that it really took off, with TEO being the first company to offer the service to Lithuanian consumers in 2006. Particularly strong and growing fast in Europe and Asia, experts expect it to keep momentum in the upcoming years, possibly even replacing cable TV altogether.
Table above compares IPTV to the rest of mainstream television transmission systems, with focus being on Lithuanian market. It is evident that with the regulatory push and growing demand for digital
high definition content and value added services (Video on Demand, choice of language and subtitles, internet browsing, customised content, etc), IPTV and TEO are well positioned to be the pioneers of the digital TV revolution in Lithuania. This is due to several reasons:
- While terrestrial television has traditionally been seen as the most affordable means of using TV, this role is set to change by 2012, when the switch to DVB-T will force everyone willing to watch free TV to upgrade to digital decoders or more expensive TV sets. Services offering subsidised equipment are expected to gain momentum, putting IPTV on level ground with the rest of paid proposals.
- Although cable and satellite providers are technically capable of offering the same portfolio of services as IPTV does, market situation in Lithuania provides a player like TEO with an advantage — even though subscriber base of cable TV is currently above 322K, the market is very fragmented, with more than 50 providers without sizeable market share.
- Conversion to digital and HDTV requires sizeable financial resources that small providers are unable to gather alone, while TEO’s financial strength and existing network of fixed lines allows it to aim at providing the absolute majority of Lithuanian households with high-speed broadband for HDTV and other bandwidth intense applications.
- The company can push the services more effectively via recently introduced triple-play offers and reap the economies of scale at the same time, exploiting its sizeable customer base.
TEO is hence perfectly positioned to take on television retransmission market. The main risks for the company to succeed are the potential entry of another big player, possibly through acquisition of existing cable TV network portfolio.
The company has noted that due to backbone limitations and lack of specialists not all willing customers were able to subscribe to the service, resulting in IPTV subscriber turnout lagging our expectations somewhat.
Driven by strong demand, however, Q1 momentum was particularly favourable, providing basis for expecting increased growth in the mid term, as well as supporting company’s plans to reach 20,000 — 25,000 subscribers by the end of 2007.
We upgrade our estimates to 121K customers (28% of the DSL subscriber base) by 2011 versus a previous estimate of 116K. The resulting revenue share grows from 5.4% to more than 7% by 2011. Better sales figures are mainly driven by increased forecasted ARPU (Average Revenue Per User), reaching LTL 42 (up from previous LTL 35) in 2011, as the company lived up to its promises and started offering additional services in order to secure increasing ARPU in the future.
Fundamental valuation remains favourable
Based on the above factors and adjusting for the latest economic development forecasts, our valuation yields a share price of LTL 2.77, suggesting potential gain of 18.4%. Given a rather conservative approach to estimating relevant growth figures, we believe theBUY recommendation to be well deserved.
Peer comparison suggests undervaluation
Even though when comparing with DJ Stoxx Global 1800 Telecom index TEO’s share performed on par after adjusting for dividends, the stock has trailed both the OMX BALTIX index (~-12% after adjusting for dividends) and the performance of its peers, outlined in the table below.
When compared to its Western European peers, TEO share still has very favourable P/E, P/B, and, notably, EV/EBITDA ratios, suggest ing there is upward potential in the share price. Also, increased dividend payment outlook make it an attractive face-value investment that is expected to generate stable and low-risk return over longer time frame, and a worthy consideration for institutional investor’s portfolios.
The bottom line
Based on our valuation yielding more than 18.4% higher value on TEO share than its current price, as well as the company's P/E ratio being on a steady decline to all time lows and the multiples comparison suggesting undervaluation, we reiterate BUY recommendation for TEO LT stock.
-----------------------------
Mantas Pakėnas
Kapitalo rinkų skyrius / Capital Markets Unit
DnB NORD Investment Banking
J. Basanavičiaus g. 26, 03601 Vilnius
Tel./phone: +370 5 2393776
Faksas/fax: +370 5 2393783
El. paštas/e-mail: mantas.pakenas@dnbnord.lt
The company’s recently released Q1 2007 results bested our revenue forecasts by +2.33%, mainly driven by faster adoption of broadband and slower than expected decline in voice services as fixed line growth trend reversed to positive figures after steadily declining for more than twenty quarters in a row. Faster than expected growth in OPEX (+6.9%) resulted in slightly lower (-0.9%) EBITDA margin, which we expect to be a one-off event however, without affecting longer term performance.
One of the major factors for favourable valuation is the jump in dividend, with LTL 0.26 (11.1% yield) per share paid for 2006 as opposed to expected LTL 0.19 (8.1% yield). We take it as a sign that company is starting to hand out its huge excess cash reserve already in 2007 onwards, with future DPS expected to closely follow EPS plus a fraction (LTL 0.09 per share) of retained earnings. The earlier than expected cash distribution to investors provides significant contribution to its estimated current value.
IPTV services have emerged as significant player in the main value driving factors, with estimated impact on the company’s bottom line to reach up to 7% by 2011. Additional to the face value of revenue generated, the service is also expected to serve as a strong factor supporting the rest of the company’s product portfolio via triple-play packaging.
Current share price implies estimated forward P/E of 15.9 with an EV/EBITDA of 4.5, which also makes TEO LT an attractive share relative to its peers. Our target price would bring the stock to a competitive P/E of 18.8 and EV/EBITDA of 5.3.
Growth sustained by new services
Faster than anticipated broadband adoption rate aided by reversal of downward trend in the number of fixed line subscribers allowed TEO’s 1Q revenues to beat our forecasts by +2.3%. In the mid term, increased growth in IPTV related sales allowed us to increase the revenue outlook to LTL 831M in 2011, up by +8.6% from previous estimate.
As TEO had to increase its marketing efforts due to finally introduced triple play packaging, increased levels of expenditure (+6.9% versus estimate), EBITDA margin ended up at 46.4% against the expected 47.3%. Due to increased revenue outlook in the mid term, we have also increased related expense forecast, resulting in a total of LTL 474M by 2011, up by +7.7%. EBITDA margin, however, remains unchanged throughout the forecast period.
Q1 net profit bested our expectations by +20.2% due to lower depreciation and tax burden. In the mid term, however, we expect the profit growth to remain at an earlier estimated level and reach LTL
164M figure by 2011.
Dividends — market leading yield We were pleasantly surprised by TEO’s change of dividend policy,
which suggests that the company has started to pay out its excess cash (TEO’s net debt comprised LTL -450M (LTL 0.58 per share) at the end of 2006) even before the privatisation of TeliaSonera, which
we previously assumed to be the trigger for any significant cash payout. It is likely however, that privatisation is still the driving force behind such change, as the earlier payout would increase TEO’s
value and hence the appeal of its owner TeliaSonera to potential investors or buyers.
We believe that this year’s dividend policy of paying out an amount equal to EPS plus additional LTL 0.09 out of retained earnings (totalling to LTL 0.26 or 11,1% yield) per share will remain unchanged until TEO would pay out most of its cash reserves and retained earning by 2012, just in time for expected TeliaSonera’s
privatisation, with sustainable dividend of LTL 0.24 (10.3% yield) per share after that.
IPTV — new growth centre
Although IPTV has been around since 1994, it has not been until recently widening adoption of broadband internet connections that it really took off, with TEO being the first company to offer the service to Lithuanian consumers in 2006. Particularly strong and growing fast in Europe and Asia, experts expect it to keep momentum in the upcoming years, possibly even replacing cable TV altogether.
Table above compares IPTV to the rest of mainstream television transmission systems, with focus being on Lithuanian market. It is evident that with the regulatory push and growing demand for digital
high definition content and value added services (Video on Demand, choice of language and subtitles, internet browsing, customised content, etc), IPTV and TEO are well positioned to be the pioneers of the digital TV revolution in Lithuania. This is due to several reasons:
- While terrestrial television has traditionally been seen as the most affordable means of using TV, this role is set to change by 2012, when the switch to DVB-T will force everyone willing to watch free TV to upgrade to digital decoders or more expensive TV sets. Services offering subsidised equipment are expected to gain momentum, putting IPTV on level ground with the rest of paid proposals.
- Although cable and satellite providers are technically capable of offering the same portfolio of services as IPTV does, market situation in Lithuania provides a player like TEO with an advantage — even though subscriber base of cable TV is currently above 322K, the market is very fragmented, with more than 50 providers without sizeable market share.
- Conversion to digital and HDTV requires sizeable financial resources that small providers are unable to gather alone, while TEO’s financial strength and existing network of fixed lines allows it to aim at providing the absolute majority of Lithuanian households with high-speed broadband for HDTV and other bandwidth intense applications.
- The company can push the services more effectively via recently introduced triple-play offers and reap the economies of scale at the same time, exploiting its sizeable customer base.
TEO is hence perfectly positioned to take on television retransmission market. The main risks for the company to succeed are the potential entry of another big player, possibly through acquisition of existing cable TV network portfolio.
The company has noted that due to backbone limitations and lack of specialists not all willing customers were able to subscribe to the service, resulting in IPTV subscriber turnout lagging our expectations somewhat.
Driven by strong demand, however, Q1 momentum was particularly favourable, providing basis for expecting increased growth in the mid term, as well as supporting company’s plans to reach 20,000 — 25,000 subscribers by the end of 2007.
We upgrade our estimates to 121K customers (28% of the DSL subscriber base) by 2011 versus a previous estimate of 116K. The resulting revenue share grows from 5.4% to more than 7% by 2011. Better sales figures are mainly driven by increased forecasted ARPU (Average Revenue Per User), reaching LTL 42 (up from previous LTL 35) in 2011, as the company lived up to its promises and started offering additional services in order to secure increasing ARPU in the future.
Fundamental valuation remains favourable
Based on the above factors and adjusting for the latest economic development forecasts, our valuation yields a share price of LTL 2.77, suggesting potential gain of 18.4%. Given a rather conservative approach to estimating relevant growth figures, we believe theBUY recommendation to be well deserved.
Peer comparison suggests undervaluation
Even though when comparing with DJ Stoxx Global 1800 Telecom index TEO’s share performed on par after adjusting for dividends, the stock has trailed both the OMX BALTIX index (~-12% after adjusting for dividends) and the performance of its peers, outlined in the table below.
When compared to its Western European peers, TEO share still has very favourable P/E, P/B, and, notably, EV/EBITDA ratios, suggest ing there is upward potential in the share price. Also, increased dividend payment outlook make it an attractive face-value investment that is expected to generate stable and low-risk return over longer time frame, and a worthy consideration for institutional investor’s portfolios.
The bottom line
Based on our valuation yielding more than 18.4% higher value on TEO share than its current price, as well as the company's P/E ratio being on a steady decline to all time lows and the multiples comparison suggesting undervaluation, we reiterate BUY recommendation for TEO LT stock.
-----------------------------
Mantas Pakėnas
Kapitalo rinkų skyrius / Capital Markets Unit
DnB NORD Investment Banking
J. Basanavičiaus g. 26, 03601 Vilnius
Tel./phone: +370 5 2393776
Faksas/fax: +370 5 2393783
El. paštas/e-mail: mantas.pakenas@dnbnord.lt
Parsisiųsti: Updated recommendation for TEO: buy, target price 2,77 LTL 
Bylos dydis: 203KB, Siuntimų skaičius: 297
Bylos dydis: 203KB, Siuntimų skaičius: 297