ALtice : Summer sell-off leaves large organic upside; raising FCF ests, CL Buy
* Source of opportunity
Altice underperformed sharply during the recent market sell-off and now
trades materially below our valuation excl M&A potential, which increases
to €30/shr (from €28) as our analysis suggests there remains c.€1 bn of extra
cost-cutting opportunity in France. Given attractive organic upside potential,
we see less likelihood that Altice will issue equity to acquire new assets
until the stock price recovers. Even so, we see several opportunities for
additional value creation, including: (a) a buy-in of NUME, which could be
4%-13% accretive to FCF/shr, (b) rapid de-leveraging creating >€10 bn of
debt-financed M&A capacity by mid-2016, (c) scope for accretive buy-backs.
* Catalyst
Catalysts include: a) improving customer trends in France in the coming
quarters and strong early execution in Portugal, which should reassure on
the sustainability of Altice’s cost-cutting ‘formula’; b) earnings upgrades –
our raised 2016/17 EBITDA forecasts are 10% / 13% ahead of Bloomberg
consensus, but remain conservative relative to ATC’s long-term ambition to
reach c.50% EBITDA margins; and c) the French spectrum auction could be
competitive, but this would increase pressure to price rationally, and we
note recent reassuring commentary from Bouygues.
* Valuation
On our higher forecasts (our medium-term prop. FCF increase 8%-19%),
Altice now trades in line with European incumbents (9% 2017E FCF yield)
despite its superior growth / M&A optionality. Our valuation excl. M&P
potential is now €30/shr, implying 25% upside and our ‘blue-sky’ analysis
(incorporating €36 bn of debt-financed future acquisitions) implies upside to
€45/shr. Our 12-month ROIC-based price target remains €41/shr, as we
moderate our expectations for the pace of future incremental M&A.
* Key risks
Downside risks include execution, increased competitive/regulatory
pressure in all markets; access to high-yield markets is key for future M&A.