Telekom’s financial indicators have slightly improved compared to the previous two years, with growth in operating income, net profit and profitability indicators. However, Grupa Telekom Srbija is over-indebted, with a very unfavorable financing structure dominated by short-term liabilities, and with very poor liquidity indicators. The estimated value of Telekom is in the range of around 1 billion euros, which was before the failed privatization in 2015 and before the big investment cycle started in 2017 with the merger of a number of cable operators and investments in multimedia.
A slight improvement in business indicators
We can learn a lot about the company’s operations from the financial reports that are submitted to the APR, as well as from the annual reports on operations. In doing so, consolidated company reports should be used, because Telekom Srbija owns several companies abroad (mobile companies in Republika Srpska and Montenegro) or in Serbia (e.g. Telus, a company that deals with security services, or a minority share in Banca Poštanska štedionica), so looking at only an isolated part of a company like MTS will not show the true state of the company.
Also, during the previous year, the management adopted certain changes in accounting standards, which may affect the presented results, but the authorized auditor in his opinion on the financial statements claims that they will not significantly affect the financial indicators, therefore in this text we use directly those data from the financial statements reports.
Income from business activities, according to data from consolidated financial reports, increased by 15 billion dinars during the previous year, while business expenses increased by about ten billion, which improved the overall financial indicators of the company. The nominal growth of business income therefore amounts to 8.2% compared to the period before the corona, but only 4.8% in real terms. The previously recorded market trends continue: revenues from fixed telephony continue to decrease, while revenues from mobile telephony, multimedia and Internet sales grow.
The end of the big investment cycle left the company over-indebted
Probably due to the preparation for two privatizations (in 2012 and 2015), which later turned out to be unsuccessful, the company did not invest enough in its development. This is changing with the new large investment cycle that began in 2017 with the purchase and merger of smaller cable operators throughout Serbia, which was followed by the disputed overpaid price at which the operator Copernicus was purchased. The investment cycle that started then ended in 2020, and since then investments have been in line with depreciation costs.
The financing of this investment cycle primarily came from external sources, through taking out bank loans. In addition, in the second half of 2020, the company issued its corporate bonds for the first time in the nominal amount of EUR 200 million.
These bonds were immediately purchased by the National Bank of Serbia on the secondary market after being issued through the sponsoring bank, which led to the question of whether this was a pre-arranged financial operation, whereby Telekom was financed by the central bank.
Due to the large increase in borrowing, the financial stability of the company was damaged. Compared to 2017, the total liabilities increased even more than three times. But the borrowing structure is particularly unfavorable, given the high share of short-term borrowing in total liabilities (47%) and the deterioration over the previous two years: compared to 2019, long-term liabilities increased slightly, but short-term liabilities increased by one third. This is very unfavorable for financing as it can lead to liquidity problems.
Such a large increase in Telekom’s liabilities had a major impact on the deterioration of financial indicators related to solvency and liquidity. Total liabilities through EBITDA (earnings before interest, depreciation and taxes) increased from 2.23 in 2017 to as much as 5.50 in 2021.
At the same time, the rigorous liquidity ratio (short-term receivables + cash/current liabilities) was reduced from an already low level of 0.74 in 2017 to only 0.29 in the previous year. This means that problems related to liquidity can already appear as a problem in the functioning of Telekom. This is especially important considering Telekom’s need to borrow in order to pay off or refinance its short-term obligations as well as the growth in the cost of capital.
According to the information from the annual business report, a large part of the total liabilities are with variable interest rates that are linked to Euribor (if they are in euros) or Belibor (if they are in dinars) and an increase in interest rates of one percentage point would bring with it an increase in expenses for interest of 1.8 billion dinars. In other words, an interest rate increase of only 1.5 percentage points would be enough to cancel out the already low (previously already low) profit growth recorded in 2021.
Profitability indicators have improved slightly over the past two years compared to the very poor results recorded in 2019, but are still significantly lower than before the investment cycle of 2017. Return on assets increased slightly over the previous year from 0.9% to 1.4 %, and the return on capital from 2.4% to 4%, but both of these indicators of profitability, despite the improvement, are far below the average of companies (according to APR, in 2020, the average return on capital in the corporate sector was 6 .8% and return on property 3%).
How did this affect the value of Telekom Srbija?
The value of a company depends primarily on its ability to generate revenue. Therefore, observing only the net profit is not the most accurate – its level is influenced by other things that are beyond the control of the company itself, such as accounting practices, the level of tax rates, as well as the payment of previously assumed obligations.
That is why most often the ability of companies to create long-term earnings is viewed through two indicators: EBIT (earnings before taxes) and EBITDA (earnings before taxes, interest and depreciation). The value of the company is estimated on the basis of these two indicators, by multiplying one of them with the multiplier for the given industry, and subtracting the value of the debt and adding the amount of cash available to the company.
This multiplier is obtained empirically, as an average of recorded stock trades on the stock exchange. To evaluate the value of Telekom Srbija, it is justified to take multipliers for the industry of integrated telecommunication services, since Telekom Srbija deals not only with the provision of mobile telephony services, but also with cable internet, as well as with the creation and marketing of media content. The value of this multiplier was taken from Professor Damodaran from New York University’s Stern School of Business in January of this year.
It should be emphasized here that such an estimate of the reserve should be taken with a big margin, because for more accurate projections, a deeper analysis should be made, which goes beyond the scope of a media article. The main goal of this assessment is to see whether Telekom’s business moves regarding market expansion and takeover of other smaller cable operators contributed to the increase in the value of this company, or on the contrary, decreased it.
That is why we used the same value of the indicator in both years – since its value is influenced by external market factors that the company cannot influence. Valuation methods were used and through EBIT and EBITDA multipliers (which are 17.34 and 7.79, respectively).
According to this valuation method, Telekom’s market value today is just over a billion euros, more precisely between 121.4 billion dinars (1.032 billion euros) and 126.4 billion dinars (or 1.075 billion euros). This is very far from the Telekom director’s claims that the value of the company is around 4 billion euros, and shows how the previous investment cycle was poorly executed and most likely oversubscribed, and that its results for the company’s financial operations are quite weak.
Compared to 2019, the value of the company increased by about 300 million euros, but this was primarily due to the increase in the EBITDA multiplier (then it was 7.06), using the same multiplier, the company’s value today would be unchanged compared to 2019, and would still be was lower by about 40 billion dinars than in 2018, Talas writes.
