Deutsche Telekom Earnings: Price Increases Protect Margins; Maintaining EUR 25 Fair Value Estimate

Narrow-moat Deutsche Telekom DTE started the year on a good note. This followed its typical approach and it raised guidance slightly for 2023. Service revenue was up 2.6% year over year supported by the U.S. and Germany, while adjusted EBITDA after leases grew only 0.9%, as price increases across Deutsche Telekom’s portfolio have been offset by cost inflation pressures in energy and wages. However, we believe that Deutsche Telekom is doing a good job keeping personnel expenses under control; headcount remained flat year over year. We maintain our EUR 25 fair value estimate with shares offering 15% upside at this point. Deutsche Telekom is one of our preferred picks among European telecommunication companies we cover given its solid position in the U.S and Germany and its Exemplary Morningstar Capital Allocation Rating.

In Germany service revenue increased by 1.6% organically supported by a healthy German telecommunications market and upselling to more expensive fibre plans. This same week Telefonica Deutschland and 1&1 Drillisch also reported good organic growth trends, with service revenue up 4.2% and flat, respectively, highlighting the rationality in the German market. In the U.S service revenue growth has moderated and was 2.8% compared with 3.7% last quarter due to stable average revenue per user, which remained at around $50 per month for the last year. The European division (Austria and Eastern Europe) grew revenue by a healthy 5% organically due to price increases implemented to offset inflationary pressures. Hence, adjusted EBITDAaL only grew by less than 1% organically.