At its recent Capital Market Day in Bonn, Deutsche Telekom (OTCQX:DTEGY) laid out a comprehensive plan revolving primarily around higher investments in 2013. The company also announced its deal to sell Apple (NASDAQ:AAPL) products in the U.S. through its subsidiary, T-Mobile, sometime next year, while also giving out next year's EBITDA and free cash flow guidance.
Moreover, it has joined the list of the global telecoms that have cut their dividends, either due to the high debt burden or because of the need to invest in their networks to better position themselves for the future. Overall, there is a positive sentiment around T-Mobile selling the iPhone as the product will help it attract more contract customers to its network and bring about growth in subscriber additions. Moreover, the investment plan as laid out by the company will help stabilize revenues in the U.S. as well as for the group.
The Apple deal
T-Mobile will start selling the iPhone sometime next year; the date was not disclosed by management. After this agreement with Apple Inc. (AAPL), T-Mobile becomes the fourth telecom carrier in the U.S. to sell the iPhone. The German-based company has been aggressively pursuing growth opportunities in the U.S. and the recent spectrum swap with Verizon Communications Inc. (NYSE:VZ) (which would give it coverage of an additional 60 million people) confirms its commitment to helping T-mobile in its struggle to bring back customer growth.
The iPhone, which was once exclusive to AT&T, has become a very popular choice among consumers. With T-Mobile getting in on the action, the market is expecting a turnaround in its contract customer losses which will eventually be profitable for Deutsche Telekom. Despite showing growth in the prepaid segment of the market, T-Mobile has lost over a million contract customers since the start of the year. However, the Apple deal can be expected to lure more customers to the network, especially for its unlimited data plans on offer.
Source: Company presentation
Management has emphasized that its strategy for the iPhones is selling the phones on installment plans rather than offering them at a discounted price, thus helping the company in avoiding the margin erosion caused by subsidies.
Germany holding ground
In Germany, the company has been holding its own in the mobile and fixed networks markets. Over the years it has been suffering at the hands of fixed line losses, however, the key thing to note is that its line losses are slowing down on a consistent basis. Broadband market share is steady around 45%, with the broadband lines increasing by approximately 160,000 to reach 12.4 million lines in the quarter recently ended. The company's TV customer base is showing good growth. As of September 2012, 1.9 million subscribers were using its television service, an increase of 23% since the end of the last financial year. The company sold 2.7 million smartphones in the first three quarters compared to the sales of 2.3 million smartphones as of September 2011, with the smartphone penetration reaching 70% by the end of Q3. Contract customer additions are constantly improving, with the postpaid customer base reaching 19.1 million, up 7% from the year ago quarter.
The company is expecting the growth drivers in Germany to be similar to other developed markets, which are growth in smartphone penetration and mobile internet usage. As far as its wireline segment is concerned, the growth in demand for its video services will help stabilize falling revenues, largely attributable to its fixed line losses.
Deutsche Telekom is planning for its MetroPCS Communications Inc. (PCS) deal to close in the first half of the next year, subject to the FCC approval. The deal, which will combine T-Mobile and PCS, will serve to strengthen the company's position in the U.S. as it would provide a broader spectrum range as well as operational synergies. This merger, combined with the Apple deal, and the recently announced investment plans in the U.S. will also help in bringing back the much needed customer growth.
In light of its investment plans for each of the next three years, the company has announced that it will now be paying a dividend of 0.50 euros ($0.65) per share for 2013 and 2014. The dividend for 2012 is confirmed at 0.70 euros ($0.92) per share which translates to a dividend yield of 8.2%, based on the current share price. The dividend cut, which is expected to result in cost savings of approximately 800 million euros ($1.05B) annually, has been welcomed by investors, as it would free up more capital to pursue its investment plan. Deutsche Telekom has guided for 2013 free cash flows of around 5 billion euros ($6.6B), from which the dividend of 0.50 euros will be paid.
DTEGY is trading at 0.6 times it sales which is a 65% discount over what the Vodafone Group Plc. (NASDAQ:VOD) is trading at. The stock is down 2.5% since the start of the year but has shown a positive trend since mid- November. The company's decision to sell the Apple devices will stabilize its U.S. operations, and its capital expenditures for the next three years will serve to counter the negative impact of the European market slowdown as well as help in its network development. Moreover, its operations in Germany are producing good results, with growth in its broadband and mobile customer base expected to continue. The dividend cut was in the cards but financing its investments through cost savings will open the doors to growth opportunities for the company. I recommend Deutsche Telekom as a Buy.