|Shares Out. (in M):||665||P/E||0||0|
|Market Cap (in $M):||5,037||P/FCF||0||0|
|Net Debt (in $M):||2,071||EBIT||0||0|
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(TKA is listed in Austria, I put Germany in the dropdown box above as there was no Austria)
Telekom Austria AG (TKA VI) - compelling risk/reward
Telekom Austria (TKA VI) represents an attractive risk/reward with a probability adjusted 20%+ IRR over the next 12 to 24 months
TKA is a telecom provider that is supported by stable free cash flow from TKA’s Austrian business, growing earnings in the company’s Central & Eastern European markets, and significant hidden asset value in the form of passive tower assets that should be unlocked in the near-term.
Key thesis points
· Telekom Austria (TKA) is a telecom provider in Austria and 6 Central & Eastern European (CEE) countries: Bulgaria, Croatia, Belarus, Slovenia, Serbia and North Macedonia. The Company generates most of its revenue (84%) from services: wireless services (46% of revenues) & fixed line (38% of revenues). The remaining revenue is largely from equipment revenue.
· TKA generates ~57% of its revenue & profits in Austria. Other large markets for the company include Bulgaria (~11% of EBITDA), Croatia (~9% of EBITDA) and Belarus (~11% of EBITDA).
· Wireless services (46% of revenue) comprise digital mobile communications services including value-added services, such as text and multimedia messaging, m-commerce, information and entertainment services (for example mobile television, streaming of music, etc.).
o 2% of wireless service revenue in 2020 was from roaming of travelers (lower due to COVID; was 3% in 2019) but shrinking as part of reduced roaming fee regulation via Euro
§ Was 4% impact to EBITDA in 2020 given lack of travel and high margin nature of roaming fees. Some upside to margin from reopening / travel return as roaming fees return and flow directly to earnings
o 9% of wireless service revenue was from interconnection fees
· Fixed-line services (38% of revenue) include access fees, domestic and long distance services including Internet services, fixed-to-mobile calls, international traffic, voice value-added services, interconnection, call center services, data and ICT solutions, television services, IPTV and smart home services.
o Of its ~6mn RGUs (as of 12/31/20), 2.55mn are broadband and 1.68mn are TV with presumably the remaining being largely telephony
Valuation & Return Analysis
· TKA currently trades at ~5.1x EV/FWD EBITDA (9.5% normalized FCF yield), which is at the low-end of telecom peers.
· In the base case, with the Company monetizing their tower assets, we ascribe a 5x multiple as such a stable telecom company, even with higher lease payments, is worth at least 5x and this seems conservative. We assume the €2.7bn in tower assets are unlocked either through a spin to shareholders or sale with cash then distributed to shareholders. With a growing dividend in the near-term and a YE’23 price target of €11.30, it represents an IRR of ~24%.
· In the bull case, we assume the Company monetized their assets at a higher valuation (€3.4bn) and the Company repurchases ~40% of its float at a 65% premium to today’s price. In addition, revenue growth modestly accelerates with margins expanding as service revenue grows due to 5G and TKA benefits from operational leverage coupled with the return of roaming fees and the impact of its restructuring program over time. As a result, the Company commands a higher multiple than the base case at 5.25x, resulting in an IRR of 41%.
· In the bear case, the Company does not monetize their assets and faces declining top-line results in the LSD as fixed-line losses accelerate, particularly in Austria and wireless competition increases, reducing the 5G opportunity and seeing margins decline. However, the tower assets help put a floor on valuation and any weakness in operations likely increases the odds of an eventual sale/spin. Putting a 5x multiple on the business with tower assets seems conservative and results in a -10% IRR.
· The value of the towers was determined using a SoTP between the company’s Austrian towers and its CEE towers where we would expect the Austrian towers to command a higher premium. In the base case valuation, we use a €20k per rent for the Austrian towers and €16.8k in annual rent for the CEE towers. We then use a 60% margin and a 20x multiple on the Austrian business and a 55% margin and a 12x multiple on the CEE business, resulting in a total value of ~€2.7bn in tower value.
§ For comparison, Cellnex acquired ~5,000 (4,500 towers + intention to build 500 more) Austrian towers from CK Hutchison as part of a larger transaction. In its financials, Cellnex ascribed a purchase price of ~€1.2bn for the assets. (Source: Cellnex 10-K)
§ At the same value per tower, this would imply TK’s Austrian towers are alone worth ~€2bn.
§ The €240,000 valuation for tower is also roughly in line with precedent transactions in price per tower in Europe
For the non-Austrian towers, the best comp is a pulled IPO in 2016 of Global Tower, which owns towers in Turkey and Ukraine. According to TowerXchange, the company had ~4,574 revenue generating at a revenue of ~$14,000 per year and was seeking a 12-15 EV/EBITDA multiple (~52% EBITDA margins). Using the ~$14,000 (~€16,800 in annual revenue, which is likely conservative since these were based on 2016 numbers), similar 55% EBITDA margins and the low end of the EBITDA range implies a conservative €1.1bn valuation for the non-Austrian towers.
o Had small dividend in 2015/2016 (0.05 Euro) that was increased to 0.20 EUR in 2017 and since grown to 0.25 EUR
Restructuring Program Overview
Why this opportunity exists
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