Total operating costs should be 1.3% lower y/y. In 2005, operating costs were burdened by extra costs related
to privatization (severance payments and consultancy costs). But there were also extraordinary costs in the third
quarter of this year, as in September Telefonica O2 launched its re-branding campaign, causing marketing costs
to rise by, we project, 20.8% y/y for the 9M06 while we saw a 12% y/y increase in 1H06. Telefonica O2 is
expected to continue to cut costs where possible. One example is a projected 5.8% cut in repair and
maintenance costs. Staff costs are expected to drop almost 14.7% y/y since there were no privatization-related
severance payments this year (most of those were booked in 1H05). We do not anticipate any impairment
charges in the 9M statements, but there could be a charge of 600 mn CZK since the merger of CTel fixed-line
business and Eurotel's mobile operation was finalized at the end of 1H06. This is not included in our projection.
Overall, we expect a strong consolidated OIBDA margin of 48% (up 1.1 p.p. y/y).
Lower investment than in the past will mean a further decline in depreciation (-5.5% y/y), which should
contribute to a 14.9% y/y increase in EBIT. If that forecast is accurate, the EBIT margin will be 19.9% (up from
17.3% in 9M05). The group's debt is expected to be the same as at the end of 1H06 (9.7 bn CZK, giving a D/E
ratio of 0.1) since the next repayment is due in 2008. This debt is, though, 17% lower than in 9M05, leading,
together with interest income coming from cash pooling with its parent, to a 73.8% y/y drop in net interest
expenses. This decline will help lift the pre-tax income by 19.6% y/y. We expect the group's effective tax rate
Telefonica O2 CR
2
to be 26.3% in 9M06 higher than the statutory tax rate in CR, which is currently 24% mainly due to the 27.4%
effective tax rate in the 1H06 (some costs and revenues were recognized as non-taxable). The combined effect
of these factors should be a 26.3% y/y increase in net income, to 6,456 mn CZK. That gives an annualized EPS
of 26.7 CZK (P/E of 16.6).
Investors will watch the 9M06 results closely to see how Telefonica O2 is progressing in taking advantage of
Telefonica's experience and how, on other hand, big an impact of re-branding costs will have. Aside from the
9M06 results, we expect the main interest in the near future to be news about Telefonica's new operations in
Slovakia (license acquired in September), such as its forecasts for additional earning and capex. In addition,
some news about Telefonica O2's future dividend policy may appear, though the company has said it will make
no decision about dividends before the company's AGM in 2007.
