In our view, there were two important highlights from the CT management presentation: 2006 guidance and dividend policy going forward.
Management is guiding for 2006 revenues and OIBDA to remain flat from reported 2005 figures. Given that management said that they are not aware of further impairment charges to be made, this would imply further contraction of up to 180bp from the underlying 46.7% margin in 2005, to 44.9% (reported OIBDA margin in 2005). We believe that this reflects management’s expectation that driving revenues will come at the expense of margins. Hence, we would not expect substantial broker upgrades on the back of the relatively strong 4Q05 results.
CT’s management remains reluctant to give any guidance regarding future dividend policy beyond saying that M&A is currently not a priority, and that Telefonica prefers to keep CT’s balance sheet flexible until they have better visibility on the risk of further revenue and cashflow deterioration.
Fixed line revenues remain under pressure, declining 5% y/y to CZK 32.3bn, versus our CZK 31.5bn forecast, as access lines, traffic and subscriptions continue to decline (down 7%, 20% and 4% y/y respectively). Although broadband (mainly DSL) posted an impressive 85% y/y growth, narrowband (internet access via dial-up) fell by 45% y/y, dragging down internet & broadband revenues 3% y/y. ET appears to have contained the deterioration in mobile revenues in 1H05 as they made inroads in migrating pre-paid subscribers to contracts. For the full year 2005, mobile revenues grew 2% y/y to CZK 30bn, versus our CZK 29.6bn forecast (1% y/y growth). Underlying group EBITDA for the full year came in stronger than expected at CZK 28.5bn (46.6% margin), versus our CZK 26.5bn estimate (44.4% margin). However, CT has shifted to reporting OIBDA, which includes impairment charges. For 2005, reported OIBDA was CZK 27.3bn (44.9% margin). Finally, underlying full year 2005 net earnings came in at CZK 7.5bn, well ahead of our CZK 6.15bn estimate. However, the CZK 1.3bn impairment charge booked in the 4Q05 reduced reported net earnings to CZK 6.2bn, broadly in-line with our forecast and slightly below consensus estimate of CZK 6.3bn.
We will be adjusting our earnings forecasts according to management guidance and will publish our revised estimates shortly. In the meantime, we highlight that the dividend pay-out removes speculation upside and therefore, we would expect the valuation premium that CT has been trading on to dissipate over the next few weeks.