ING Bank has downgraded Hungary's leading telecom group Magyar Telekom to ‘Sell' from ‘Hold', following a rise in the share price on the back of yield optimism and reasonable second-quarter results. ING analyst Dalibor Vavruska said in an outlook for EMEA telecoms' H2 performance, released on 6 September, that he saw about 10% downside to his unchanged DCF fair value of HUF 897 on MTelekom.
On 24 August, Merrill Lynch upgraded MTelekom to ‘Buy' from ‘Neutral' and set a 12-month price objective of HUF 1,190 on the stock, which then represented a 21% upside potential. (This is the highest price target known to Portfolio.hu.)
“We believe yield-hungry investors are pushing the Magyar Telekom price to levels that are hard to justify," Vavruska said.
On ING's 2006 forecast numbers, Magyar Telekom still offers an 11% free cash-flow yield and an 8% dividend yield.
While the bond market has rallied recently, resulting in long bond yields as low as 5.4%, the analysts believe “investors tend to compare dividend yields with bond yields, not focusing sufficiently on the equity risk."
“[...] we forecast the yield to peak in 2006, as we see limited growth potential and not too significant potential for cost/capex reduction, despite the recent discussion about fixed-mobile integration."
Vavruska said that at this stage it was “hard to price in much value based on future expansion either in Hungary or outside it."
The analyst added that ING's bearish stance were supported by several other issues, including no 2006F EV/EBITDA discount to Western incumbents, DT's recent decision to increase capex (in order to speed up triple-play rollout), Magyar Telekom's CEO recently selling shares, and historical share price trends (chart).
Source: Portfolio online financial journal
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08.09.2005