The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

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

Magyar Telekom’s issuer rating reflects its continued healthy business risk profile and improving financial risk profile, which has led to an improvement in the standalone credit assessment of the company. However, continued concerns about policy predictability in Hungary have been reflected in a negative adjustment of the standalone credit assessment, and the revision of the Outlook to Stable. This is particularly relevant as changes in sector-specific policies have significantly impacted the performance of Hungary’s telecom companies in the past.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB+ (unchanged). Magyar Telekom’s business risk profile mainly benefits from the low cyclicality of the telecoms industry and the company’s leading position as the incumbent operator in the Hungarian mobile and broadband markets, which strongly supports its competitive position.

Over the years, the company has maintained a solid leading position in the Hungarian mobile segment with a market share of about 45%. The second and third largest players lag well behind with a share of around 25% each. While M&A activity in the sector has caused some disruption in the residential broadband segment, Magyar Telekom has seen a steady improvement in its market share. The company currently leads the market, with an approx. 42% share in the residential segment and approx. 49% share in the non-residential segment in Q4 2023. Together, the mobile and broadband segments in Hungary account for more than 80% of the company’s revenues. Scope notes that Magyar Telekom’s domestic market shares in several segments exceed those of most telecom operators in Europe. While the company also has a strong leadership position in the North Macedonian telecom market, this offers only limited diversification, representing roughly 10% of revenues and about 12% of EBITDA in 2023.

The company’s Scope-adjusted EBITDA margin* remained range-bound between 30%-34% over the past eight years. This was lower than its main European peers, primarily due to telecoms and utility taxes in Hungary. To cope with the steep inflation in Hungary (headline inflation of 14.5% and 17.6% in 2022 and 2023 respectively), Magyar Telekom implemented two consecutive, annual, inflation-linked price increases in March 2023 and March 2024. This enabled the company’s EBITDA margin to improve by almost 600 bps YoY in H1 2024 in combination with: i) cost containment measures; ii) a continued improvement in the subscriber base and higher underlying average revenue per user in some segments (e.g., blended broadband average revenue per user increased by around 18% YoY in H1 2024 compared to a 15% price hike in March 2024); and iii) the removal of the utility tax. With the supplementary telecom tax (equivalent to about 3.5% of revenues in 2023) scheduled to be abolished from January 2025 onwards, Scope expects a sustainable improvement in the company’s EBITDA margins of at least 500 bps over the medium term, compared to the last five-year average of about 33%. In this respect, the Memorandum of Understanding¹ signed between the Hungarian government and Magyar Telekom in September 2023 provides some comfort regarding the intended taxation structure over the medium term. Nevertheless, future changes in the tax structure cannot be completely ruled out.

Financial risk profile: A (revised from A-). The company’s enhanced financial risk profile is underpinned by a significant improvement in leverage and cash flow metrics, as a result of higher profitability and moderate capex outflows.

Leverage, as reflected in debt/EBITDA, improved to 1.5x in 2023 and further to 1.4x in the last 12 months to June 2024 (1.0x in H1 2024), after remaining at around 2.0x in the previous three years amid range-bound profitability and significant capex and spectrum payments. While the Board-approved KPIs allow the company to leverage (total debt/EBITDA) up to 2.8x, Scope does not anticipate significant leveraging in the near to medium term. Debt protection remains strong, with EBITDA/interest cover consistently above 10x.

As per its current financial policy, which has been defined for the 2022 to 2024 period, Magyar Telekom proposes to maintain shareholder remuneration (dividends and share buybacks) in the range of 60%-80% of adjusted net profit. While this will impact discretionary cash flows, the expected strong rise in profitability should improve leverage and liquidity metrics.

Liquidity: Adequate. Cash flow coverage has historically been volatile, depending on capex/spectrum-related outflows. However, liquidity remains adequate, supported by credit lines and access to funding support from parent Deutsche Telekom AG (which owns a roughly 66% stake as of 30 June 2024).

Supplementary rating drivers: (-1 notch). Scope has made a one-notch negative adjustment to Magyar Telekom’s standalone credit assessment (which has improved to A-) under peer context. This reflects Scope’s view that the company operates in a market that is more exposed to policy changes than similar rated peers active in more mature, stable and predictable European markets. For example, the possibility that special sector-specific taxes may be reintroduced in the event of an adverse economic scenario cannot be ruled out.

Scope has made no adjustment for other supplementary rating drivers such as financial policy, parent support, or governance and structure. However, Scope notes that the company remains partially reliant on the lower-rated Deutsche Telekom AG for its liquidity needs. Based on Magyar Telekom’s integration into the Deutsche Telekom group (cash pooling and financing), Scope believes there is a low risk of the parent company’s activities adversely affecting Magyar Telekom’s ability to meet its own contractual financial debt obligations as a going concern on time and in full.

Environmental, social and governance (ESG) considerations have no impact on the rating.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation of a continued healthy business risk profile with a stable market position and a strong financial risk profile reflected in debt/EBITDA of around 1.0x and EBITDA/interest cover of over 10.0x. This, in turn, is supported by an expected improvement in the EBITDA margin by at least 500 bps over 2024 and 2025 and moderate capex outflow. The Stable Outlook also reflects Scope's expectation that there will be no positive rating pressure in the near term from the company's major shareholder, Deutsche Telekom AG, nor a rise in Hungary’s credit quality due to improvements in the quality and predictability of policymaking.

The upside scenarios for the ratings and Outlook are (collectively):

1. Broader diversification of operations and/or improved policy visibility in Hungary, reducing regulatory uncertainty
    
2. Improved rating of the parent company
    
3. Maintenance of debt/EBITDA below 1.5x

The downside scenarios for the ratings and Outlook are (individually):

1. Debt/EBITDA above 2.5x on a sustained basis
    
2. Higher regulatory uncertainty as expressed by a deterioration in Hungary’s sovereign rating
    
3. Deterioration of the parent company’s credit rating

Debt rating

Scope has affirmed the rating of the senior unsecured debt issued by Magyar Telekom Nyrt. at BBB+, the same level as the issuer rating.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Magyar Telekom Nyrt.

Issuer rating: BBB+/Stable, affirmation with revision in Outlook

Senior unsecured debt rating: BBB+, affirmation

*All credit metrics refer to Scope-adjusted figures.

Rating driver references
1. 15 September 2023 Memorandum of Understanding for the digital transformation of Hungary between Government of Hungary and Magyar Telekom

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, 16 October 2023), 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 these 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 and Outlook 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: Nidhi Marwaha, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 October 2020. The Credit Ratings/Outlook were last updated on 26 September 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 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.