Equity Analysis /
Croatia

Hrvatski Telekom: Steadily unlocking its true value; Buy

    InterCapital
    14 February 2020
    Published byInterCapital

    We update our coverage of the HT Group with a BUY recommendation and a price target of HRK217 per share. According to 2020 projections this translates into 4.1x EV/EBITDA and 14.7x P/E. There are several reasons behind our view:

    Stable top line: HT holds a dominant position on the Croatian telecommunications market, where they account for roughly half of the entire market. The company is currently in the final stages of their investment cycle which aims to upgrade their current technological capabilities and prepare them for the launch of 5G technology. In turn, this should serve as base for future growth generation after obsolete technologies die out (e.g. fixed voice). 

    Above average dividend yield coupled with share buy-back program in place: Although many have criticised HT for not paying out a higher dividend, the company has consistently been paying out dividends above market average. Furthermore, with last year’s increase to HRK10 DPS (which we expect to remain in the projected period), HT still offers an attractive yield of 5.3%. On top of this HT is also engaged into a share buyback programme which has in 2019 amounted to HRK73m. In our model we assume an increase of buy back activities which will support share price in the mid-term. 

    Substantial amount of excess cash as an opportunity to drive growth: HT can react quickly to any potential acquisition or other market opportunities within a large spectrum of target size – as we have seen with the recent acquisition of Evo TV. However, lack of realization of sizable acquisitions will continue to add excess cash to the BS. Since HT finances only a small portion of their development projects or acquisitions through debt, its capital structure is unleveraged and, in our view, suboptimal (BV of equity of HRK13bn and HRK2.5bn net cash position). This excess net cash now translates into HRK31.4 per share.

    Value of the cash pile: In our current analysis we do not anticipate HT paying out anything more than what their operating activities are able to secure. We base such a view on the fact that HT capital structure policy has been consistent for years and is likely to stay as such due to Deutsche Telekom’s recent USD26bn acquisition of Sprint. Due to the acquisition, we believe that the parent company will aim at retaining HT’s large cash pile and consolidate it into their own balance sheet. Therefore, in our analysis we treated it as any financial asset, rather than adding it back on top of future cash flows.