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Hrvatski Telekom: Plenty of cash with nowhere to go but back to shareholders

  • Despite declining top line, HT will continue to hold a dominant position in Croatia while sustaining profit margins.
  • Ensured dividend pay-out coupled with pick-up in share buyback results in above average yield.
  • Excess cash could potentially be paid out as dividend or returned via share buyback.

We update our coverage of the HT Group with a BUY recommendation and a price target of HRK 214.0 per share. According to 2021 projections this translates into 5.0x EV/EBITDA. There are several reasons behind our view:

Despite declining top line HT will continue to hold a dominant position on the Croatian market while sustaining profit margins: The company is currently accounted for roughly half of the entire market. The development of 5G mobile technology is in its final stages. With continuation of its next investment cycle HT will maintain its leadership position and continue to extract value for shareholders at sustainable profit margins albeit a declining revenue (CAGR -0.9%). As obsolete technologies die out (e.g., fixed voice), part of lost sales could be compensated by future growth of ICT segment. Nevertheless, we do not expect it to nudge sales into growth trajectory as ICT is very segmented market and quite competitive due to its strong growth.

Ensured dividend pay-out coupled with pick-up in share buyback results in above average yield: HT is paying out dividend from its parent company Hrvatski Telecom Inc. and it is usually paying out almost all its annual earnings (2021 90.2% pay-out ratio). In 2020 DPS amounted to HRK 8 (same as previous year). On top of this HT is also engaged into a share buyback programme which has in 2020 amounted to HRK 90m translated into 1.1 per share. HT has stepped up pace of its buy-back in 2021 and until May 24 it has already bought back shares amounting to HRK 54.4m. We assume buy back activities to continue throughout the projected period which will support share price in the mid-term. We expect dividend to grow mildly in period and yield in 2025 to come to 5.4% (at current share price).

Excess cash could potentially be paid out as dividend or returned via share buy-back: We do not see company acquiring any other telecom services provider due to its size, but any additional services add-ons (like Combis) could perfectly complement its portfolio. However, it is difficult to predict M&A, so we are not estimating any acquisitions. But due to its strong buy back-program and capex, net cash on the BS is diminishing by the end of projected period to HRK 2.3bn in 2025 from HRK 2.7bn in 2021.


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