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TEO LT is set to release its Q2 results on the 19th of July, 14:30 Vilnius time. Prior to the release, we reiterate our BUY recommendation for the stock, with the main focus of the upcoming report being broadband and IPTV sales growth, as well as the company’s ability to keep its expenditure and consequently the EBITDA margin in check.
We expect the year-on-year sales growth to be close to +2.4%, driven by strong growth in internet and other services, at +9.6% and +41.4% respectively, and thus compensating for further decline in voice sales, at –3.4%. While a small change in the latter can have a significant momentary impact on the overall sales growth figure, it is the former two factors that will have a lasting effect on the company’s value.
As above growth figures can exercise some degree of variability due various discounts, promotions and other short term impact factors, special attention should be paid to broadband and IPTV subscriber base, which will determine the future revenue growth potential. For broadband, we are expecting a figure of at least 218K subscribers, a +18K increase from the previous quarter, while a 50% variation in this growth figure would correspond to as much as 10% of the total stock value. As for IPTV, we expect the subscriber base to grow by at least +5K and reach a total of 14K. 50% variation in the growth rate is estimated to constitute up to 4% of the total company value.
We estimate the company’s operating expenses to be in line with the ones posted during the previous quarter, whereas the Q2 figure should be around +8.5% higher than a year ago, mainly due to increased headcount. This will lead to EBITDA being some –7.8% lower, with the margin down to 45.6% from a high 50.3%. Albeit a big drop by itself, the figure is perfectly within the industry norm.
If the margins are to be maintained in the future however, it is imperative that the number of employees is kept under tight control. Our end-of-year target is for a total of 3200 employees and a Q2 figure pointing to significant changes in the latter is to be met with careful consideration, as every percentage point update to the target figure is estimated to have the same negative impact on the share value.
We will update our annual estimates and target price after the release of Q2 results.
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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
We expect the year-on-year sales growth to be close to +2.4%, driven by strong growth in internet and other services, at +9.6% and +41.4% respectively, and thus compensating for further decline in voice sales, at –3.4%. While a small change in the latter can have a significant momentary impact on the overall sales growth figure, it is the former two factors that will have a lasting effect on the company’s value.
As above growth figures can exercise some degree of variability due various discounts, promotions and other short term impact factors, special attention should be paid to broadband and IPTV subscriber base, which will determine the future revenue growth potential. For broadband, we are expecting a figure of at least 218K subscribers, a +18K increase from the previous quarter, while a 50% variation in this growth figure would correspond to as much as 10% of the total stock value. As for IPTV, we expect the subscriber base to grow by at least +5K and reach a total of 14K. 50% variation in the growth rate is estimated to constitute up to 4% of the total company value.
We estimate the company’s operating expenses to be in line with the ones posted during the previous quarter, whereas the Q2 figure should be around +8.5% higher than a year ago, mainly due to increased headcount. This will lead to EBITDA being some –7.8% lower, with the margin down to 45.6% from a high 50.3%. Albeit a big drop by itself, the figure is perfectly within the industry norm.
If the margins are to be maintained in the future however, it is imperative that the number of employees is kept under tight control. Our end-of-year target is for a total of 3200 employees and a Q2 figure pointing to significant changes in the latter is to be met with careful consideration, as every percentage point update to the target figure is estimated to have the same negative impact on the share value.
We will update our annual estimates and target price after the release of Q2 results.
---------------------
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
