There is increasing speculation on the market regarding the dividend to be paid this year by Cesky Telecom (CTel). The size of the dividend will be a function of two factors: the increasing need of the state, the majority owner in CTel, to boost its fiscal revenue (the state will collect 51% of the total dividend plus a withholding tax on the rest) vs. the additional borrowing capacity of the company (or rather its willingness to have its debt rating downgraded due to increased leverage -- i.e., additional debt taken on for the intended Eurotel acquisition and the dividend).
While market expectations regarding the dividend are wide, we believe the dividend could exceed CZK 20-30 crowns per share, along with the prospect of a rating downgrade. S&P’s current domestic and foreign currency rating on CTel is A-/Stable. A one-notch downgrade would put the rating in line with, for instance, Matav (BBB+/Stable), and CEZ (BBB+/Positive). The Czech Republic has a domestic currency rating of A+/Stable, and a foreign currency rating of A-/Stable. The downgrade would not be a worrying fact for equity investors. Therefore, the prospect of a large-sized dividend could lead to a further closing of the gap between our target price (cum-dividend) of CZK 394 per share and the current market price.
Jiří Soustružník