Picking Battles: US Pricing
Post the close of the acquisition of Cablevision (CVC), Altice assets are now split 40/40/10/10 between France (SFR), USA (Suddenlink, CVC), Portugal and smaller markets (principally in Israel, Caribbean). In this note we review the coming quarter and carry out a deep dive on US broadband (and TV) pricing. Recent broadband tariff moves at Suddenlink in particular bode well for cable gross profit growth. We retain our Outperform rating on Altice OP PT €20/share (was €30) and Top Pick on SFR PT €45/share (was €54).
SFR (Top Pick PT €45, was €54). SFR has raised prices, is investing in 4G catch up, fibre coverage expansion which combined with 2H bias to cost savings should see them on track to deliver c€4.0bn EBITDA. We estimate that SFR will generate ~€0.75bn and ~€1.0bn FCF in 2016 and 2017 and that the shares trade on 5.5x EV/EBITDA and 8.3% equity FCF yield for 2016E offering potential upside. We lower our PT to €45.00/share (was €54.00) using a 2.0% terminal growth (was 3.0%) as we standardise assumptions across our coverage group.
Portugal and smaller assets. Portugal should face easier comps in the coming quarters reducing both enterprise and wholesale drag. Coming to resolution with NOS over access to premium sports cost remains a key driver for investors.
Picking battles - USA cable pricing. Along with our US colleague, Jonathan Atkin, we have done a deep dive on US broadband, dual and triple-play prices (see Broadband/Video Pricing & Product Update: 2Q16). Key to successful pricing is segmentation and the ability for cable players to driven higher gross profit by shifting consumers to higher speed broadband (on higher ARPU/gross profit) to mitigate risks from 'cord cutting' (consumers spinning down from high price TV bundles to cheaper OTT offerings).
Suddenlink moves in the right direction. Suddenlink has recently simplified its broadband offers to four tiers from 35mbps/US$39 per month, 100mbps/US$49, 200mbps/US$59 and 1Gbps/US$99 (with prices rising by US$5 per year, wifi-routers etc rented at US$10/month). Encouraging consumers to move to higher ARPU and gross margin broadband is key to cable profit growth.
Altice (Outperform PT €20, was €30). Altice has now closed the acquisition of Cablevision (CVC). Altice US cable assets combine high growth, lower competition Suddenlink and lower growth, more competitive urban franchise of CVC. We see future value creation driven broadly equally between FCF from France and USA, however more visible growth in the US, some initial easy wins on cost cutting at CVC mean we expect US trends to come into focus in the coming quarters. We lower our price target to €20/share (was €30) using an Sum-of-the-parts methodology compared with the prior method.
Altice and SFR — Mixing the good and the bad
Western Europe | Integrated Telecommunication Services, Wireless
Telecommunication Services, Telecommunications Operators
We reduce our TP on SFR to €23.5 (from €32.5), reflecting cuts in our forecasts.
We reduce our TP for Altice to €14.0 from €14.5 due mainly to our change in TP
for SFR. Both Altice and SFR remain Neutral-rated. In 2Q16, we expect Altice
group revenue to decline by -2.1% yoy excl CVC, which is a small improvement
on -2.7% excl CVC in 1Q due to moderating declines in France and Portugal
offset by slightly slower growth in the US on a tough comparable. We forecast
2Q16 EBITDA margin of 40.2% vs. 37.9% in 1Q with PT and SuddenLink making
a positive contribution to the margin mix. We expect core SFR revenue to decline
by -5.3% (from -6.1% in 1Q) despite the price rises applied to the subscriber
base during 2Q. Inclusion of Media sees the reported top line decline by -3.2%
and reported EBITDA decline by -7.9% yoy.