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Earnings are up +23% at this
Central European Telecom |
Published:
January 14,
2007
A state-owned monopoly until 1994,
Magyar Telekom (NYSE: MTA, $27.52) is now Hungary's largest
full-service provider of telecommunication services. It carries
local and long-distance phone services, Internet-based
television, high-speed Internet, cell phone, and wireless data
services.
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Roughly 80% of Hungary's phone customers subscribe to T-Com
brand, which markets Magyar's traditional, fixed-line phone
services. The company also dominates the mobile phone business,
with a 45% market share. Also, Magyar provides a full range of
telecom services in the nearby states of Montenegro and
Macedonia and has a footprint in Bulgaria, Romania, and the
Ukraine. Magyar is well financed, with Germany's phone giant
Deutsche Telekom (NYSE: DT) holding a 59% stake in the company.
Dividend: Magyar
typically pays a dividend once a year, usually in May. The latest distribution of slightly more than
$1.87 went ex-dividend on May 15th and was payable on June 1st.
In addition, the previous year's dividend of slightly more than
$1.85 also went ex-dividend this year. As a result, total
dividends paid to shareholders in 2007 rounded out to $3.73.
That gives the shares a 12-month trailing yield of 13.6%.
Management has said it seeks to keep its balance sheet flexible
for potential acquisitions. As such, it pegs its dividend
payouts to a targeted debt to total capitalization (which
includes debt plus shareholders' equity) ratio of 30-40%. With
the company sporting a current debt to total capitalization
ratio of just 15%, future dividend payouts should be secure at
current levels.
The Budapest-based company maintains a dividend reinvestment
plan and can be contacted via its website for more information.
Performance Drivers: The local phone business continues
to generate rich and stable cash flows, which amply support the
dividend while also funding future growth.
While the residential telephone service isn't growing, the
company is using the substantial cash flows from this business
to acquire other telecom operators both within Hungary and in
surrounding countries. In October, for example, the company bid
on acquiring an equity interest in Slovenije dd, a telecom
provider in nearby Slovenia.
As well, the company is leveraging its large base of existing
customers to market new broadband, cell phone, and wireless
services. In 2006, Magyar integrated former stand-alone division
T-Mobile Hungary, and more recently it incorporated Emitel and
T-Online. In addition to reducing administrative expenses, this
integration benefits the company by making it easier to
cross-sell and up-sell services to existing customers.
In the third quarter of 2007, Magyar increased revenues overall
about +2.5% versus the comparable period of 2006. A standout was
its T-Systems unit, which provides telecom services to
businesses and grew its revenues by more than +30% compared to
the year-ago period.
Cost-cutting to improve profit margins is another key tactic.
Magyar plans to have -5% fewer group-level employees at its
headquarters in 2008, which should provide important cost
savings. A simplified organizational structure based on customer
segmentation to be introduced in 2008 should also lower costs.
Valuation/Outlook: Earnings are forecast to have grown
about +23% in 2007, and grow another +13% in 2008 -- averaging
around +11% annually over the next five years. Selling for just
ten times next year's projected earnings, the shares seem
reasonably priced, especially considering the hefty dividend
yield.
Action To Take ---> Magyar's
telecom operations support a stable yield for income investors,
and the company's strategy of growth through acquisition and
expansion provides it with a positive outlook going forward. The
shares are suitable for investors seeking a stable yield in a
declining interest rate environment.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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