The expansion of business in 2018 led to worsening in Telekom Srbija, the state-owned mobile and Internet provider, financial data in 2019, and it yet remained to be seen whether all the companies Telekom had acquired in the last two years would have positive effects, the Belgrade independent Danas daily has reported.
The daily wrote that the debt increase was much higher than the new companies' revenues.
Telecom Srbija total income in 2019 some 1.1 billion Euro (125.7 billion Dinars), or 6.6. percent more than in 2018 almost exclusively due to the multimedia content revenues of 47.6 million Euro, since the income from land and mobile phone services slightly dropped.
Those are the first results of the acquisitions of cable operators in the last two years. What is most important, however, is that the operating profit is almost halved compared to the year before, Danas wrote.
While the 2018 profit was slightly above 100 million Euro, in 2019, it was just under 60 million Euro. When the loss from the financial part of the balance sheet - mostly caused by higher interest rates – was subtracted, the profit before taxes reached 4.5 million Euro or almost 2,5 times less than the year before.
After the tax, net profit fell to slightly above 20 million Euro, compared to 93.5 million in 2018.
Telekom Srbija financial reports showed that after deducting exchange rate differences, the Group's profit went down to 6.8 million Euro or just 0.019 Euro per share.
At the same time, in 2018, it was 0.10 Euro per share.
The EBITDA (an accounting measure calculated using a company's earnings, before interest expenses, taxes, depreciation, and amortisation are subtracted, as a proxy for a company's current operating profitability) was some 410 million Euro. Still, it was affected by the changes in accounting standards.
Without those changes, the 2019 EBITDA was some 360 million Euro, while in 2018, it was 328 million.
Besides such a fall in profit, since the return on assets was mere 0.5 percent, there is a substantial increase in the company's debts. In fact, the financial obligations rose to almost 2.3 billion Euro from just above 1.2 billion (to 260 billion Dinars from 152 billion.)
Long-term loans rose to nearly 842 from 646 million Euro, while short-term credits went up to 385 from 262 million Euro. When the debts are reduced by the cash Telecom had at the end of 2019, the net indebtedness is around 1.15 billion euros.
When the cash owned by Telecom reduces the debts the company had at the end of 2019, the net indebtedness was around 1.15 billion Euro.
Nenad Gujanicic, of the Momentum Security consultant firm, said all those were consequences of the significant investments in the last year or two.
"The fall in Telekom profitability is, to a large extent, caused by huge investments. Partly, the continuous trend in fall in the revenues from land telephony and the stagnation in mobile phone business contributed as well. The latter is a trend everywhere in that business, while the Telekom's mid-term success will primarily depend on the cost-effectiveness of the takeovers. No one expected the results in the first year. Still, obsession during these takeovers is quite eye-catching especially if we know the previous company's acquisitions, such as the overpaying of Telekom Srpska and the unnecessary and expensive takeover of Dunav Banka ", Gujancic told the daily.
Telekom's financial health in coming years will depend on whether the investments were profitable, given the indebtedness ratio of Telekom Srbije a.d. was 39.6 percent at the end of last year.
Including the lease liabilities after the changes in accounting standards, the debt ratio rises to 45.9 percent concerning the company's capital.
"One of the consequences of takeovers is a significant increase in indebtedness, which will certainly not be a problem if these investments prove profitable. However, one should be quite sceptical about the expectations, especially because of the price paid, but also because of the company's general strategy in the market performance (quality of services compared to the competition, as well as the fact that many premium contents are broadcast by TV stations that should be its competition.)
The best debt indicator is the ratio of net debt to EBITDA, which was quite high and stood at 2.80 at the end of 2019.
"But, as I said, it wouldn't be dramatic if the investments prove justified," Gujancic added.
Telekom Serbia spent almost 200 million Euro in purchases and recapitalisation last year. The most significant acquisition was the Radijus cable operator worth over 86 million Euro, then Maskom, Telemark Systems, Exe Net and SAT TV Meteor, followed by obtaining the remaining shares in GO4YU and HD WIN companies.
Still, the largest Telekom's 2018 purchase was Kopernikus Technology for 195.5 million Euro, according to their financial reports.
Telecom's purchases of the operators were in instalments, and the short-term debt amounted to 71.4 million Euro, while the long-term liabilities for multimedia content were 132.5 million Euro.
Last year, no special effect of these investments was seen, considering that, except for Telekom Srpske and Telus, no one paid dividends to the parent company of Telekom Srbija, the daily wrote.
Bozo Draskovic, an economist, a professor at the Faculty of Applied Ecology Futura and associate at the Institute of Economic Sciences, said the public did not know whether the financial plans were made and if they were, who made them. It was also unknown if an analysis was made about when the acquisitions could bring financial effects.
"Since all that is unknown, I doubt the plans existed, and the minority shareholders should ask why that was the case. Given the deterioration of Telecom's financial position, if in 2021 and 2022 there are no effects in increasing operating income, someone should be held responsible - the management that approved the purchases and the administration that gave the green light to the operational management. We have an unhealthy system dominated by political rather than economic factors in the state and public enterprises. And that is the economic policy of all previous authorities, only the actors change. There is no responsibility in managing public resources ", Draskovic said.
Vladimir Lucic, the coordinator of Telekom Srbija Group Internet and Multimedia, has recently said that the company's worth will be four billion Euro by 2023. However, a privatisation attempt failed in 2015, since no offer met 1.2 billion Euro.
Gujanicic said it was hypocritical to talk about the value of the company and avoid to list the company's shares on the stock exchange for years.
"As for the potential assessment of Telecom's worth, it is quite hypocritical from company's officials to talk about it at all when we know that the citizens and company's employees have not been allowed to trade in the shares for eight years. Although the state is in charge of the company, credible management should insist that the company is listed on the stock exchange and see how potential investors value the strategic decisions the management makes," Gujanicic said.
He added he was afraid that "the current Telekom's worth would be substantially different from the management's claims, and that's why the company is still not in the market."