28 October 2020 Corporates Magyar Telekom Nyrt
MagyarHungary, Telekom Telecommunication Nyrt services STABLE Hungary, Telecommunication services BBB+
Corporate profile Ratings & Outlook Magyar Telekom is Hungary’s largest telecommunications operator with consolidated Corporate rating BBB+/Stable revenues of HUF 667bn (EUR 2.0bn) in 2019. It is the market leader with a customer Senior unsecured rating BBB+ base of 5.4m mobile clients, 1.4m fixed voice customers, and 1.3m broadband customers. It was created in 1989 as successor of the telecommunications company of Hungarian Post when that was split into three, under the usual name of Matav (short for Magyar Tavkozlesi RT), and was privatized in 1993 through a partial sale to a Analyst consortium including Deutsche Telekom, which now controls Magyar Telekom with 59% Jacques de Greling of its capital. Its only significant foreign subsidiary is Makedonski Telekom, the +33 1 82 88 23 70 incumbent operator in North Macedonia. [email protected] Key metrics Related Methodology Scope estimates Corporate Rating Methodology, Scope credit ratios 2018 2019 2020F 2021F February 2020 EBITDA/interest cover 12.2x 15.9x 13.1x 12.2x
Scope-adjusted debt (SaD)/EBITDA 1.9x 1.6x 1.9x 1.7x Scope-adjusted funds from operations/SaD 44% 53% 45% 50% Free operating cash flow/SaD 20% 16% 0% 19%
Rating rationale Scope Ratings has assigned an issuer credit rating of BBB+/Stable to Hungarian Magyar Telekom Nyrt. Scope has also assigned a BBB+ rating to senior unsecured debt.
The business risk profile (BBB+) benefits mainly from the low cyclicality in the telecom industry and the company’s leading position in mobile and broadband markets in Hungary, which strongly support its competitive position. As the Hungarian telecommunications market is mature, we do not expect a significant change in market share. The group also displays stable profitability (29.6% EBITDA margin after leases in 2019), somewhat below that of main European peers. The group also benefits from a very strong position in North Macedonia. Magyar Telekom’s financial risk profile (A-) is sustained by the Scope-adjusted debt (SaD)/EBITDA ratio of below 2x. The group also benefits from good debt protection, with an EBITDA/Interest cover of well above 10x. We expect the group’s debt to increase somewhat in 2020, mainly driven by the 5G auctions in Hungary, which took place in March Scope Ratings GmbH (HUF 91bn, of which HUF 54bn paid in 2020) and will again take place in 2021 (to be paid in 2022) with the renewal of spectrum auctions in Hungary. Nevertheless, we expect Neue Mainzer Straße 66-68 SaD/EBITDA to remain below 2.0x. We assume that the Covid-19 crisis will have a limited D-60311 Frankfurt am Main impact on the group, as demonstrated by H1 2020 results. We view the liquidity of Magyar Phone +49 69 66 77 389 0 Telekom as adequate, in particular through its financial integration in the Deutsche Telekom group. Headquarters Financially, Magyar Telekom is strongly integrated in the Deutsche Telekom group (cash pooling, financing). While Deutsche Telekom is more indebted, we deem it a remote risk Lennéstraße 5 that the parent company’s behaviour would adversely affect Magyar Telekom’s ability to 10785 Berlin meet contractual financial debt obligations as a going concern on time and in full. Phone +49 30 27891 0 Magyar Telekom plans to issue up to HUF 70bn senior unsecured corporate bond under Fax +49 30 27891 100 the Bond Funding for Growth Scheme of the Hungarian National Bank during Q4 2020 or Q1 2021. The bond will have a seven-year tenor, with 50% amortization at the end of the [email protected] 6th year and we expect 2.5% of interest costs in our base case. The bond’s proceeds will be www.scoperatings.com used for general capex (networks, spectrum). We rate senior unsecured debt at BBB+, the same level as the issuer rating. Bloomberg: SCOP
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Magyar Telekom Nyrt Hungary, Telecommunication services
Outlook and rating-change drivers The Stable Outlook incorporates assumptions of increased leverage, due to spectrum auctions in Hungary in 2020 and 2021.
A positive rating action is possible if deleveraging happened faster than expected, with SaD/EBITDA reaching below 1.5x on a sustained basis.
A negative rating action is possible in case of higher dividends, higher capex (spectrum), leading to a significant increase in leverage towards 3.0x on a sustained basis.
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Magyar Telekom Nyrt Hungary, Telecommunication services
Rating drivers
Positive rating drivers Negative rating drivers
• Leader in Hungarian mobile market, • Dependence on one market (Hungary)
with a 45% share • Temporary increase in leverage with • Market leader in broadband in spectrum auctions
Hungary, with a 40% share • Profitability somewhat lower than • SaD/EBITDA ratio of below 2x European peer levels
• Market leader in North Macedonia, with a mobile market share of 50%
• Large, diversified customer base
Rating-change drivers
Positive rating-change drivers Negative rating-change drivers
• Lower leverage, with SaD/EBITDA of • Increased leverage, with SaD/EBITDA lower than 1.5x on a sustained basis of towards 3.0x on a sustained basis
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Magyar Telekom Nyrt Hungary, Telecommunication services
Financial overview
Scope estimates
Scope credit ratios 2018 2019 2020F 2021F
EBITDA/interest cover 12.2x 15.9x 13.1x 12.2x
Scope-adjusted debt (SaD)/EBITDA 1.9x 1.6x 1.9x 1.7x
Scope-adjusted funds from operations/SaD 44% 53% 45% 50%
Free operating cash flow/SaD 20% 16% 0% 19%
Scope-adjusted EBITDA in HUF1 m 2018 2019 2020F 2021F
EBITDA 192,507 220,562 217,650 225,400
Operating lease payments in respective year 11,501 0 0 0
Scope-adjusted EBITDA 204,008 220,562 217,650 225,400
Scope-adjusted funds from operations in HUF m 2018 2019 2020F 2021F
EBITDA 192,507 220,562 217,650 225,400
less: (net) cash interest as per cash flow statement -18,498 -22,578 -22,000 -25,000
less: cash tax paid as per cash flow statement -11,953 -12,560 -11,000 -11,700
add: depreciation component, operating leases 7,784 0 0 0
Scope-adjusted funds from operations 170,375 185,866 185,050 189,150
Scope-adjusted debt in HUF m 2018 2019 2020F 2021F
Reported gross financial debt 234,493 322,313 347,313 307,313
less: cash and cash equivalents -7,204 -13,398 -12,788 -22,278
add: operating lease obligations 113,713 0 0 0
Other 46,115 42,744 78,000 93,500
Scope-adjusted debt 387,117 351,659 412,525 378,535
1 EUR 1 = HUF 356 (October 2020)
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Magyar Telekom Nyrt Hungary, Telecommunication services
Business risk profile Industry risk profile: A The industry risk profile for telecommunication services stands at A, based on low cyclicality (subscriptions for what is now considered a basic service), medium to high entry barriers (licences, network roll-out), and medium to low substitution (over-the-top services).
Figure 1: Magyar Telekom, revenues in 2019 (HUF 667bn) Figure 2: Magyar Telekom, EBITDA after leases in 2019 (HUF 198bn)
3% 5% Mobile Hungary 12%
Fixed Hungary 15% Hungary (Fixed + Mobile + IT) IT Hungary 48% Mobile North Macedonia North Macedonia (Fixed + Mobile + IT) Fixed North Macedonia 29% IT North Macedonia 88%
Source: Magyar Telekom Source: Magyar Telekom
Market leader in Hungary The group’s home market of Hungary (9.7m inhabitants) represents 91% of its revenue. Magyar Telekom, as the incumbent operator, is the market leader. Its telecom revenues have continued to grow in recent years (up by around 3% in 2019; around 6% in 2018), driven by the mobile revenues and fixed-equipment sales, a situation not so common in Europe.
A very strong position in mobile In Hungary, where mobile penetration is somewhat lower than in most European countries, the group is the clear leader with a market share around 45% (in terms of subscribers), a level which has remained remarkably stable and far above those of the two main competitors, Vodafone and Telenor-PPF. The group’s market share in terms of revenue is 49% (Analysys Manson estimate), which is above the levels achieved by most market leaders in Europe.
Figure 3: Mobile subscribers and penetration in Hungary Figure 4: Mobile market share in Hungary (subscribers million)
Mobile subscribers Mobile penetration (RHS) Others Vodafone Telenor Magyar Telekom
14,000,000 140% 12.0
12,000,000 120% 10.0 10,000,000 100% 44.8% 44.3% 44.9% 44.9% 8.0 8,000,000 80%
6,000,000 60% 6.0 4,000,000 40% 29.4% 28.8% 28.0% 27.2% 4.0 2,000,000 20%
0 0% 2.0
26.0% 25.6% 26.4% 26.7%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017 2018 2019 0.3% 0.7% 0.7% 1.3% 0.0 2016 2017 2018 2019 Source: ITU, Scope estimates Source: National Media and Infocommunications Authority (NMHH)
Hungary allocated 5G spectrum in April 2020 through auctions, and Magyar Telekom agreed to pay HUF 91bn (of which HUF 54bn in 2020), a reasonable price. This was helped by the regulator (NMHH) preventing Hungary’s second largest fixed-service
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Magyar Telekom Nyrt Hungary, Telecommunication services
provider, DIGI, from bidding in the auction as it did not fulfill the requested conditions. As some spectrum renewal is expected in 2021, it seems DIGI will be unable to participate in the forthcoming auctions for similar reasons. Magyar Telekom’s average revenue per user (ARPU) for mobile has been increasing over the last few years, a rare situation in Europe. According to the latest European Commission benchmark, Hungary is among the most expensive markets for mobile services.
Figure 5: Magyar Telekom mobile ARPU (HUF), 12-months Figure 6: Mobile prices in Hungary vs EU average (EUR rolling average PPP) for 17 mobile baskets
ARPU ARPU IFRS 15 Hungary EU 28 average
3,800 90 3,700 80 3,600 70 3,500 60 3,400 50 3,300 40 3,200 30 3,100 20 3,000 10 0 H1 H2 H3 H4 H5 HD1HD2HD3HD4HD5 L1 L2 L3 L4 L5 L6 L7
Q1 2015 Q1
Q2 2015 Q2
Q3 2015 Q3
Q4 2015 Q4
Q1 2016 Q1
Q2 2016 Q2
Q3 2016 Q3
Q4 2016 Q4
Q1 2017 Q1
Q2 2017 Q2
Q3 2017 Q3
Q4 2017 Q4
Q1 2018 Q1
Q2 2018 Q2
Q3 2018 Q3
Q4 2018 Q4
Q1 2019 Q1
Q2 2019 Q2
Q3 2019 Q3
Q4 2019 Q4
Q1 2020 Q1
Q2 2020 Q2
Q3 2020 Q3 Q4 2020 Q4
Source: Magyar Telekom, Scope Source: European Commission, Scope
Magyar Telekom also has the leading position in fixed broadband in Hungary, where the market is still growing (by around 5% per year in terms of subscribers). Cable operators
own much of Hungary’s fixed-broadband market, which is unique in Europe. Even less Hungary: strong position for cable common is that Magyar Telekom owns (and sometimes rents) a significant number of broadband access through cable technology.
Figure 7: Fixed broadband subscribers and penetration in Figure 8: Fixed broadband market by technology in Hungary Hungary (End 2019)
Fixed broadband subscribers Fixed broadband penetration (RHS)
3,500,000 35% 3% 21% DSL 3,000,000 30% 27% Cable 2,500,000 25% Fibre 2,000,000 20% Satellite 1,500,000 15% Fixed wireless 1,000,000 10% Other 500,000 5% 49%
0 0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017 2018 2019 Source: ITU, Scope Source: OECD
Magyar Telekom holds roughly 40% of Hungary’s fixed-broadband market, a level in line with the average incumbent operator in Europe. In 2018, Vodafone became a key player
in Hungarian fixed broadband through its acquisition of UPC. At about the same time, 40% market share through DSL, fibre and cable DIGI bought the smaller fixed service operator Invitel and became the second largest player in Hungary. Magyar Telekom’s share of the broadband market has slowly but regularly increased in recent years, partly through the acquisition of smaller cable operators, but mostly through the roll-out of fibre (which now represents 28% of
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Magyar Telekom Nyrt Hungary, Telecommunication services
customers, vs 6% five years ago). Magyar Telekom’s ARPU for broadband services was declining until 2014 but has now stabilised. Pricing for these services in Hungary are generally lower than the EU average.
Figure 9: Fixed broadband subscribers (million) and market Figure 10: Magyar Telekom’s market share in fixed shares (%) in Hungary broadband per technology (2016 and 2019)
3.5 2016 2019 3.1 M Others 3.0 M 3.0 2.8 M 80% 2.7 M 70% 2.5 Inivitel 38.3% 39.8% 37.6% 60% 37.7% 2.0 DIGI 50% 1.5 21.8% 21.6% 40% 22.1% 22.1% 30% 1.0 UPC/Vodafone 15.8% 16.3% 24.6% 23.6% 20% 0.5 9.4% 8.8% Magyar Telekom 10% 14.9% 15.3% 15.3% 14.9% 0.0 0% 2016 2017 2018 2019 DSL Cable Fibre Source: Magyar Telekom Source: Magyar Telekom, OECD, Scope
In North Macedonia (2.1m inhabitants), Magyar Telekom’s 51% subsidiary is the incumbent operator (still 35% owned by the government), with almost 50% of the mobile market and about 40% fixed-broadband subscribers.
Magyar Telekom is also the leading IT provider in Hungary’s very fragmented market (through the T-Systems brand), with its market share estimated at 16%.
In terms of diversification, the group is almost entirely focused on telecommunications services in Hungary and, to much lower extent, in North Macedonia. The weight of IT services in group EBITDA is also rather limited. In terms of profitability, Magyar Telekom’s margin (EBITDA margin after leases of 29.6% in 2019) is lower than for most European incumbents focused on domestic market, typically at around 40%.
Covid-19 impact very limited According to H1 2020 results, the Covid-19 crisis has had a very limited impact on core business, and the group has maintained its guidance for both revenue and EBITDA.
Financial risk profile
Debt set to increase in 2020 and The main driver of debt in the coming years will be Magyar Telekom’s investment in 5G 2022 due to spectrum auctions… spectrum in March 2020 (HUF 91bn for 700 MHz, 2,100 MHz and 3.5 GHz) and in
forthcoming spectrum renewal auctions in 2021 (900 MHz and 1,800 MHz). Leverage stood at 1.6x at YE 2019 after declining in recent years. We expect leverage to increase slightly in 2020 and 2022 but remain below 2.0x. The group also benefits from good debt protection, which increased to 15.9x at YE 2019 after averaging 11.4x in recent years.
…but leverage and debt protection We expect debt protection to lower somewhat following the spectrum investments, but expected to remain good remain above the average of previous years, and significantly above 7.0x.
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Magyar Telekom Nyrt Hungary, Telecommunication services
Figure 11: Leverage, 2014-2022F Figure 12: Debt protection, 2014-2022F
2.5 20 2.3x 2.2x 18 2.0x 1.9x 1.9x 15.9x 2.0 16 1.7x 1.7x 1.6x 1.6x 14 13.3x 13.1x 12.2x 12.2x 11.8x 1.5 12 9.9x 10 8.2x 8.7x 1.0 8 6 0.5 4 2 0.0 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 0 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F Source: Magyar Telekom, Scope estimates Source: Magyar Telekom, Scope estimates
Over the last six years, the free operating cash flow/SaD ratio averaged 13.9% (with a peak of 20% in 2017 and 2018). Excluding the figure in 2014, when Magyar Telekom made spectrum investments, the average would be 16.9%. We expect the ratio to lower significantly in 2020 and 2022 due to spectrum investments and to stand at 19% in 2021. In 2019, Magyar Telekom decided ahead of the spectrum auctions to cut its dividend by 20%.
Figure 13: Free operating cash flow/SaD, 2014-2022F Figure 14: Free operating cash flow and dividends (HUFm), 2014-2022F
Free operating cash flow Dividends
20% 80,000 20% 20% 19% 70,000 17% 15% 60,000 16% 14% 50,000
10% 40,000 30,000 7% 5% 20,000
1% 10,000 0% 0% 0 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F
Source: Magyar Telekom, Scope estimates Source: Magyar Telekom, Scope estimates
Over the last six years, cash and undrawn committed lines have averaged 1.5x of short- term debt, with the level reaching 1.0x at the end of 2019. The issuer’s parent company Deutsche Telekom, which has been providing all current and non-current financial liabilities at Magyar Telekom, is also providing adequate liquidity for its subsidiary. Supplementary rating drivers Link with parent company Although Magyar Telekom is strongly financially integrated into the Deutsche Telekom unlikely to affect credit quality group (which owns 59% of the issuer) in terms of cash pooling and financing, we deem it
a remote risk that the parent company’s behaviour would adversely affect Magyar
Telekom’s credit quality in the foreseeable future. Deutsche Telekom’s creditworthiness is driven by its strong position in mobile and broadband in Germany, its growing share of the US mobile market, and the increased leverage and execution risks accompanying its
merger with Sprint, after which Deutsche Telekom’s leverage has stayed at just above
3.0x. However, we do not consider that the parent group’s credit risk profile to constrain Magyar Telekom’s creditworthiness.
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Magyar Telekom Nyrt Hungary, Telecommunication services
Long-term debt rating Reflecting our view of Magyar Telekom’s ability to meet contractual and financial debt obligations as a going concern, on time, and in full out of its operating business, we rate senior unsecured debt issued by the company at BBB+, the same level as the issuer rating.
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Magyar Telekom Nyrt Hungary, Telecommunication services
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