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TELEFONICA DEUTSCHLAND HOLDI
TELEFONICA DEUTSCHLAND HOLDI
Improvement in EBITDA margin but until when?
26 Oct 16
Q3 revenues showed a slightly improving trend with a yoy decline of 5.2% to €1,876m compared to -5.9% yoy in Q2. Note that as in the previous quarter this is mainly a result of the handset revenue declines. Handset revenues fell by 24.5% yoy (-25.5% in Q2) reflecting longer replacement cycles and handset saturation in the German market. The key point is that Mobile service revenues (which represent 75% of the global business) declined by only 1.8% yoy in Q3, as in Q2, and by only 0.9% excluding the effects from mobile termination and roaming rate cuts. Like the previous quarter, the good news is the EBITDA growth of 3% yoy, thanks to the successful capture of synergies (mainly related to employee restructuring). Management has reiterated its full-year outlook for 2016: a slight decline in mobile service revenues and a low to mid single-digit percentage growth for the EBITDA.
Pushing ahead with the integration of E+
01 Aug 16
H1 revenues totalled €3.69bn, lower 4.1% yoy. Handset revenues fell by 15.9% yoy to €493m (-25.5% yoy in Q2), reflecting longer replacement cycles and handset saturation in the German market in line with broader European markets. The key point is that Mobile service revenues (which represent 75% of the global business) declined by 1.7% yoy in Q2 (vs -1.3% in Q1). Like in the previous quarter, the good news is the EBITDA growth of 1.2% yoy, even if it is lower than in Q1 (+6.2%!), thanks to successful synergy capture. The group has reiterated its full-year Mobile service revenues outlook, but has narrowed the range from “slightly negative to broadly stable” yoy to “slightly negative” yoy on the back of increased competition, especially in the non-premium end of the market. Note, however, that data usage and the LTE customer base continue to grow: the group still expects it will drive an inflection point in the revenue trajectory in the future. The narrowing of the revenues outlook range has no impact on the EBITDA outlook, as it continues to benefit from the roll-over effects of the successful integration initiatives in 2015, as well as pushing ahead with employee restructuring, customer migration and network integration efforts in 2016. But the group has also adjusted positively its capex outlook from “percentage growth in the low tens to mid” to “high single-digit growth”. This is largely the result of more efficient capex spend as well as phasing topics related to the network integration.
The new German mobile leader
19 Feb 16
h1.Business After the acquisition of E+ from KPN, Telefonica Deutschland has become the largest mobile operator in Germany with c.43m customers. Its two main competitors are Deutsche Telekom and Vodafone with respectively 39-40m and 31m mobile subscribers (at end 2015). The mobile market in Germany is perfectly mature and we don’t expect any major changes in the respective market shares of the three main competitors in the near future. There is no real mobile price war in Germany (Deutsche Telekom is not required to offer the latest wireless technologies, such as LTE, to cut-rate MVNOs, which undermines the competitiveness of discounters) and the mobile bundles are quite similar. The main issue for a pure mobile telco like Telefonica Deutschland is the strategy on Fixed as in some European countries the quadruple play (which links mobile with broadband fixed services) is the only way to move the lines and win new customers thanks to attractive bundles. TEF Deutschland is the German mobile player which is not really present on Fixed while its two main competitors could be more aggressive with attractive bundles thanks to the comfortable margin they generate on their Fixed activities (ultra-fast broadband networks need perhaps huge capex but they generate impressive EBITDA margins above 45%). In a mature mobile country like Germany, TEF Deutschland should maintain its market share at 35-40% and record slight growth over the next three years thanks to an ARPU which is relatively stable with the wide use of 4G. Note 5G should be deployed from the end of the decade and will allow the rise of the IoT (Internet of Things). h1.Recommendation and upside We are initiating coverage of Telefonica Deutschland (with a market cap of €13.5bn and a float of c.23%) with a add recommendation and 15% upside. h1.Slowly but surely improve the EBITDA margin With market shares which are unlikely to move in the short term and stable prices, the only way for the group to improve its margins is to increase productivity. The EBITDA margin of the new group should be 22.5% in 2015 and the objective is clearly to raise this quickly towards the 25% level thanks to the productivity gains due to the merger. It will probably be difficult to go beyond 25% if the group is still present only on the mobile side in Germany and can not rely on stronger margins on Fixed to develop profitable quadruple play offers. Note that at the end of the decade with the emergence of the IoT (Internet of Things), growth could be higher and margins could improve further. h1.Need to know Telefónica controls 62% of the group and a third of the supervisory board is made up of managers of Telefonica not working in its German subsidiary. Telefonica is a quite heavily-indebted group; its net debt before the approval of the sale of its UK subsidiary (O2 UK) was more than 3x its EBITDA. The listing of its German subsidiary (which represents 15% of its overall turnover) is aimed primarily to allow it to raise funds in case of an external growth transaction. Thus the acquisition of E+ has brought KPN to hold a 20% stake in Telefonica Deutschland (15% at end 2015). This may allow the latter to mix paper and cash in the case of a large scale operation with a Fixed operator in Germany (the group could be interested in a partnership with United Internet or Unitymedia, the two Fixed players which are not really present on the mobile side). Meanwhile, Telefonica should impose on its subsidiary to pay a substantial annual dividend.
30 Nov 16
Abzena (ABZA): Interim results indicate happy customers (BUY) | Horizonte Minerals* (HZM): Fund raise completed (CORP) | SacOil* (SAC): Half-year trading statement (CORP) | Revolution Bars (RBG): New openings (BUY) | Amino Technologies* (AMO): Multi operator FUSION roll out (CORP)
Joy of Techs
21 Nov 16
ICT evolution is driven by technological development as advances are made which both meet and shape customer requirements. Our 2011 note No such thing as a telco described the modern reality in that former ‘telcos’ now deliver varying elements of a range of managed services. We built on this theme last year, exploring in further detail their evolutionary paths, operating fundamentals, and cashflow yield similarities. In the consumer environment, demand for bundles of technology is complemented by demand for content. Across the pond, the mooted combination of AT&T and Time Warner typifies the bundled need of ‘pipe’ and content, since unbundled alternatives such as FaceTime and WhatsApp can be easier and clearer to chat over, and Amazon and Netflix are easier to watch anywhere. In the UK, BT’s defensive actions cover delivery, content and capabilities, acquiring EE yet also buying football rights. While TV was long ago added to triple play to become quad play, voice is now merely an app, and fixed and mobile seen as just dumb pipes: it's the content that will influence consumer choices. Growth of TV and film as well as music and gaming over IP leads to UK small cap opportunities. In context of the drive to maximise value from pipes and access by offering content and data, we look at some amongst the potential tech small cap beneficiaries: Amino*, Keyword Studios, ZOO Digital*, 7digital*, KCOM* and CityFibre*.
N+1 Singer - Morning Song 03-11-2016
03 Nov 16
Overall trading for the year appears to have started slightly slowly overall but with underlying revenues making progress and profits flat for the period. Slow profit progress was already expected due to the previously signalled growth orientated investment being made. A material timing change on a Compliance unit contract, strong growth in AXCO and buoyant Health performance bode well for revenue performance looking forward. Visibility levels are said to be good underpinning managements confidence that the group is on track for the year. Wilmington remains a good play on the growth in global regulation and compliance. BUY
Reduced H1 loss and strong H2 flagged
30 Aug 16
H1 shows a continuing move towards Bio-Medical, with that division now delivering 57% of group revenue. Overall, a challenging first half year was as expected, but improved margins and tight cost control reduced the loss and a much stronger second half is flagged in the outlook. There is thus no change to FY 2016 guidance or forecasts. Following its $3.8m acquisition of Green Lab in January, but before receipt of the $3.0m Egens investment in Adaltis, BATM ended June with a healthy $14.0m net cash. Reviewing the financials, H1 revenue was down 5% YoY to $45.1m, with sales falling in both divisions; Networking & Cyber (down 9%) continues to transition away from legacy products, while Bio-Medical (down 3%) suffered a slowdown in the Sterilization business as it focused on new opportunities in bio-pharma and agriculture markets which should deliver in H2. However, both divisions achieved breakeven at operating profit level in H1 thanks to higher margins; notably from cyber security solutions and from better products in Medical Distribution, and improving sales of high-margin machines and reagents in Diagnostics. This left a small $0.6m operating loss from unallocated group overheads, but $0.3m profit at the EBITDA level. The outlook is positive, with growth and contributions anticipated from both divisions in H2, generating a solid c$2m FY operating profit.
Strategic focus at interims
30 Nov 16
KCOM’s interims show a focus on the continuing transformation of the business in cost and investment, under a single brand. The benefit of the cash injection from the network sale has led to the opportunity for significant investment both in the Hull & East Yorkshire division and the nationwide Enterprise division, to create a platform for growth. With a reiterated commitment to a minimum 6p dividend for FY17 and FY18, ongoing cost-saving initiatives, and proof of customer enthusiasm for the integrated platform which investment will further support, KCOM continues to deliver an attractive dividend in anticipation of its return to headline growth. Target 130p reiterated.