Deutsche Telekom AG (DTE) NPV
HL comment (12 November 2021)
In the first nine months of the year, revenue rose 8.8% to €79.9bn, on an organic basis, which excludes the effect of currency fluctuations, this was up 5.3%. There was particularly strong growth in the US.
Operating profit rose 22.6% to €10.7bn, largely because of the merger with Sprint in the US.
The shares rose 2.2% following the announcement.
As a telecoms giant, Deutsche Telekom's biggest attraction is its stability. It's not an industry renowned for heady growth, but does get thanked by shareholders for its more reliable revenue streams. People still need a phone network, and their office - at home or otherwise - needs internet. To that end, Deutsche Telekom's latest results show the apple cart is upright.
Despite being a German company, Deutsche Telekom (DTE) makes over 60% of its revenue and profits in the US through subsidiary T-Mobile.
The recently complete Sprint deal, which increased DTE's US exposure, has much to recommend it. While Sprint had been struggling, it owns a large chunk of valuable mid-band spectrum and DTE estimates that cost savings will outweigh integration costs after three years.
The combined group should have both the bandwidth and scale needed to take on Verizon and AT&T in the US 5G market but mergers always come with risks, especially one of this size. Either way any material benefits are unlikely to be realised before 2023, though management is enthusiastic about progress.
The tie up has led Standard & Poor's, a credit ratings agency, to downgrade the group from a ''BBB+'' rating to ''BBB''. Integrating Sprint will be costly and complicated, and Standard & Poor's expects it'll reduce free cash flow in the near term - increasing the burden of the group's substantial debt pile.
It doesn't help that telecoms is a difficult industry to do well in.
Firstly, building and maintaining modern communications infrastructure, like towers, cables and data centres, costs a fortune. Add the ever-increasing payments to governments for spectrum rights, and the capital requirements of the business become truly eye watering. In 2020 alone Deutsche Telekom spent €18.7bn in cash on investments and spectrum and is on course to spend even more this year. Spectrum investment varies considerably year to year and are long term investments, so telcos typically report free cash flow excluding these payments. But they're a real cost, and investors should keep a close eye on them.
Secondly, the industry lacks pricing power. Telcos compete primarily on price, which leads to pretty feeble margins and meagre returns on the massive amounts of capital employed. This is why companies bundle broadband and mobile data with entertainment services and other perks, and in DTE's case Magenta TV is a big part of the offering. The idea is to offer something meaningfully different that justifies higher pricing. Unfortunately it's led to something akin to an arms race as each provider hunts for unique content to bolster its offer.
Debt has mounted as a result, especially since the merger, and efforts to keep it in hand recently led management to trim the dividend. The group intends to pay a minimum dividend of 60 eurocents per share until 2022, although nothing is guaranteed. We doubt investors will see much if any dividend growth until Sprint has been properly embedded, and that's conditional on the integration going smoothly.
Deutsche Telekom key facts
- Price/Earnings ratio: 13.3
- 10 year average Price/Earnings ratio: 15.4
- Prospective dividend yield (next 12 months): 4.0%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
In the third quarter, revenue in the United States rose 1.4% compared to last year. For the year to date this is up 13.4% at €49.9bn, as T-Mobile's service revenues and increased equipment sales, especially devices, boosted results. Operating profit rose slightly to €6.0bn.
Total revenue in Germany rose 1.8% to €17.8bn, driven by private consumers and business customers, which offset declines in Wholesale. Growth reflects good performances from broadband revenue, as well as hardware sales. Cost efficiencies helped operating profit rise 25.3% to €3.7bn.
More lucrative service revenues, ''slight'' increases in roaming and visitor revenues and higher hardware sales, meant total revenues in Europe rose 1.3% to €8.5bn.
System Solutions revenue reached €3.0bn, down 2.9%, reflecting the expected decline in the traditional IT infrastructure business. Underlying operating profit rose significantly to €109m because of lower depreciation charges. Group Development revenue rose 9.7% to €2.3bn, while operating profit reached €766m.
Total group cash capital expenditure rose from €11.5bn to €12.9bn, because of costs associated with the Sprint acquisition. Underlying free cash flow rose 55% to €8.3bn. The spectrum acquisition contributed to net debt rising to €130.4bn from €120.2bn at the end of last year.
The group has agreed the sale of T-Mobile Netherlands, which is expected to complete in the first quarter of 2022.
Deutsche Telekom confirmed it's on track to meet its medium-term targets.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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