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Rating action

Scope Ratings GmbH (Scope) has changed the Outlook to Positive from Stable on the BBB+ issuer rating of Hungary’s Magyar Telekom Nyrt. Scope has also affirmed the BBB+ issuer rating and the BBB+ senior unsecured debt rating.

Rating rationale

The rating action reflects Magyar Telekom’s improving profitability, benefitting from its introduction of inflation-based fee adjustment in early 2023 and from the recently announced memorandum of understanding¹ with the Hungarian government on network roll-outs associated with the upcoming removal of sector-specific taxes in 2024 and 2025.

The business risk profile (BBB+) benefits mainly from the low cyclicality of the telecoms industry and the company’s leading position in Hungary’s mobile and broadband markets, which strongly supports its competitive position. Magyar Telekom’s domestic market shares in several segments outperform those of most telecoms operators in Europe. The company’s share of the mobile market increased in 2022, while its broadband market share continues to increase gradually. The purchases by Hungarian IT-telecoms group 4iG of broadband provider DIGI and Vodafone Hungary have not had a material effect on Magyar Telekom’s competitive position. Similarly, the probable purchase of Hungarian mobile operator Yettel by e& (Etisalat) is not expected to change the Hungarian market. The group also benefits from a strong position in North Macedonia, though this provides only limited diversification, accounting for just 12% of its revenues. The company’s profitability is stable, with a 29.7% EBITDA margin after leases in 2022. This is somewhat below that of main European peers, partly due to the telecoms and utility taxes in Hungary. In Q2 2023, the company’s introduction of inflation-based fee adjustments in its general terms and conditions led to its EBITDA margin after leases improving to 33.5%.

Magyar Telekom’s financial risk profile (A-) is underpinned by the expectation that Scope-adjusted debt/EBITDA ratio will improve after peaking at around 2x after the group acquired spectrum in 2020 (5G) and 2021 (2G and 4G renewal). Scope-adjusted debt/EBITDA was stable at 1.9x at end-December 2022 and should decline through 2023 towards 1.5x as profitability improves. Once the recently announced agreement with the Hungarian government on telecommunication tax (which have changed repeatedly over the last years) is implemented, leverage should lower further. The company issued its first senior unsecured bond (HUF 70bn) in 2020 as part of the Hungarian central bank’s bond programme, which represented 15% of Scope-adjusted debt at end-2022. The group also benefits from good debt protection, with EBITDA/interest cover of more than 10x, even after the spectrum acquisitions of 2021. The company’s policy is for shareholder returns (dividends and share buybacks) to run at 60%-80% of adjusted net profit. Magyar Telekom’s liquidity is adequate, helped by its 64% ownership by Deutsche Telekom AG.

Magyar Telekom’s integration within the Deutsche Telekom group (cash pooling, financing) is such that, while Deutsche Telekom is more indebted, Scope deems it a remote risk that the parent company’s activities would adversely affect Magyar Telekom’s ability to meet its own contractual financial debt obligations as a going concern on time and in full.

Outlook and rating-change drivers

The Positive Outlook on Magyar Telekom’s rating reflects its moderate capital expenditure and the stable competition in Hungary incorporated in Scope’s base case as well as improving credit metrics with Scope-adjusted debt/EBITDA declining towards 1.5x.

An upgrade may be warranted if profitability improved significantly, helped by the lowered telecoms taxes, leading to better credit metrics, particularly a Scope-adjusted debt/EBITDA sustained well below 1.5x. This might nevertheless be constrained by the current lower sovereign rating of Hungary of BBB/Stable.

Outlook revision to stable may be taken if Scope-adjusted debt/EBITDA fails to go below 1.5x, with lower than expected profitability, or more generous shareholder returns. Further negative action may be taken if competition in Hungary increased notably, leading to declining credit metrics, with Scope-adjusted debt/EBITDA reaching significantly above 2.5x. However, such a negative rating action is a remote possibility in the short to medium term.

Long-term and short-term debt ratings

Long-term unsecured debt has been affirmed at BBB+, the same level as the issuer rating.

Rating driver references
1. September 15 Magyar Telekom MoU with Hungarian government

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Methodology July 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation     YES
With access to internal documents                                         NO
With access to management                                                  YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Jacques de Greling, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 October 2020. The Credit Ratings/Outlook were last updated on 27 September 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.