TPSA: 4Q05 results in line, lower guidance for 2006
TPSA's 4Q05 results were in-line with our, and consensus forecasts, and comfortably within management guidance of -1.0% to 1.5% revenue decline. The company also presented its new 3-year strategy, and a set of new guidance for 2006. TPSA is now guiding for revenue decline of 1%-1.5% in 2006, incorporating more conservative assumptions regarding competition and tariff trends. They are also targeting between 42% and 44% EBITDA margin and capex/sales of 16%-19% this year, on 1.6m broadband and 11.5m mobile subscribers. The company presented its new strategy of shifting focus away from traditional telephony to innovation and convergence.
TPSA also hinted that it is in talks with the regulator, along with the other mobile operators, negotiating the possible compensation for having paid significantly more for their UMTS licenses than Netia (recall that PTC, Centertel and Polkomtel each paid EUR 650m for their licenses while Netia paid only PLN 345m). Management indicated that the operators could use the remainder of their license payments as investments credits under certain roll-out obligations, likely in under-invested areas.
Further, TPSA did not rule-out higher dividends and even share buy-backs from 2007. Note that they have a clear dividend policy of sticking to a BBB+ credit rating, which currently requires net gearing of some 35%-40%, and returning the rest of the cash to shareholders. TPSA also said that they will consider M&A opportunities that are immediately value-enhancing and earnings accretive.
In 4Q05, fixed line voice telephony fell 13% y/y to PLN 2.4bn on a 25% decline in traffic revenues, offset slightly by a 5% rise in subscriber base, while data revenues grew 16% to PLN 544m , driven mainly by the 20% growth in broadband. Main growth driver remains mobile, growing 20% y/y to PLN 1.6bn, on subscriber growth of 9% (from 7.4m in 2004 and 9.1m in 3Q05 to 9.9m by 4Q05), and 31% rise in usage. We note, however, the steep decline of 24% in mobile subscription revenues, suggesting a decline in the fixed stream of the mobile revenues, which is also partly reflected in the 15.5% y/y ARPU contraction to PLN 58.4 in 4Q05 from PLN 69.1 in 4Q04. The net impact, on the other hand, was mitigated by the even steeper y/y decline in SAC of 37% from PLN 210 to PLN 132. EBITDA was also in-line with our forecast at PLN 1.7bn. The steep increase in payments to other operators (up 20% y/y in 4Q05) was largely a function of the increase in mobile traffic. Total opex came in largely in-line with consensus growing 9% y/y, versus our own forecast of an 11% growth. Net profit came in ahead of our and consensus estimate at PLN 512m, versus our PLN 378m estimate largely because of the remainder of the tax benefit recognised in 3Q05 from impairment from past financial asset write-downs.
Overall, we view the new strategy positively. We maintain our view that whilst the share price could come under pressure today on the back of the lower 2006 guidance, we would view the weakness as a buying opportunity as we believe that TPSA is likely to surprise on the upside from here on in. Note that our forecasts have always been lower than management, at 2.4% revenue decline in 2006. We will be reviewing our numbers following yesterday's presentation. We reiterate our Buy recommendation and PLN 28 fair value.