(Reuters) – Deutsche Telekom raised its earnings guidance after reporting forecast-beating third-quarter results on Thursday, lifted by outperformance at its recently merged U.S. unit T-Mobile .
The transatlantic telecoms group upped guidance for core profit to 35 billion euros ($41.2 billion) this year, saying T-Mobile was ahead of plan on network integration while it added the most German broadband customers since 2017.
“We are raising our guidance thanks to strong business on both sides of the Atlantic,” Chief Executive Tim Hoettges said. “We are able to do this despite feeling the effects of the (coronavirus) pandemic in some areas.”
The Bonn-based group raised its forecast for earnings before interest, taxation, depreciation and amortisation after leases (EBITDA AL) for the year by 1 billion euros, while nudging up its forecast for free cash flow by half a billion to 6 billion.
Although the United States accounted for most of those gains as T-Mobile added 2 million net postpaid customers in the quarter, Deutsche Telekom also lifted its profit guidance for Europe by a touch to 14 billion euros.
Analysts said the results supported the so-called ‘stub’ value of Deutsche Telekom’s European operations, which only accounts for a fraction of its market value due to T-Mobile’s stellar share performance.
After subtracting the value of its 43% stake in the U.S. carrier – worth $67 billion at Wednesday’s closing price – the rest of Deutsche Telekom’s business is worth just $18 billion.
“The stub valuation remains attractive,” Citi analyst Georgios Ierodiaconou said. Deutsche Telekom shares traded 0.5% higher.
Third-quarter revenues rose 31.9% to 26.4 billion euros, beating an average forecast in a company poll of 17 analysts of 25.8 billion euros. EBITDA AL gained 49.6% to 9.7 billion euros, also beating street expectations of 9 billion euros.
After adjusting for the impact of T-Mobile’s $23 billion takeover of Sprint, which closed on April 1, organic revenue was up 2% and EBITDA AL by 10%.
Despite the core telecoms strength, Deutsche Telekom’s troubled IT services unit T-Systems was hit by the coronavirus pandemic.
There were also headwinds from the weaker dollar, while merger-related expenses in the United States dented cash flow and group net debts rose to 124.5 billion euros in the quarter due to the extension of a U.S. leasing deal.
Finance chief Christian Illek said group leverage including leases was still on track to return to a target range of 2.25 to 2.75 times within three years, from 2.9 times.
Reporting by Douglas Busvine; Editing by Thomas Seythal and Jan Harvey