‘Liberty 3.0’ to accelerate growth, high M&A optionality: Buy; onto CL
Source of opportunity
We believe that LBTY’s rebased OCF growth rate will accelerate into the
high-single digits in 2016-17, as a new ‘Liberty 3.0’ investment program
adds a further boost, on top of the announced ‘Project Lightning’ network
expansion in the UK. Assuming c.$30 bn of share buybacks in the absence
of further M&A, we estimate FCF/share will reach $8 by 2021 (when these
investments end), justifying our ‘base-case’ valuation of c.$60/share. Also,
LBTY has multiple options to make accretive in-market mobile acquisitions,
allowing it to capture a share of c.$20-30 bn of potential synergy value. We
reiterate our Buy rating and add LBTY to our European Conviction List.
Catalyst
We expect a strong 2H acceleration in both KPIs and rebased OCF growth
after a seasonally weaker 2Q (revs +3%/OCF +4% yoy, c.150k RGU adds). We
expect an inflection in the Netherlands, where a 2Q drag from restructuring
charges becomes a 2H tailwind from synergy capture, while early Lightning
sub gains should drive a strong 4Q RGU recovery. We believe ‘Liberty 3.0’
can add further momentum from 2016: we expect management to recycle
restructuring savings from integrating the OpCo’s into investment in
footprint expansion (notably in German broadband) and product quality
improvements, which should drive revenue and OCF growth. We estimate
‘Liberty 3.0’ will add c.10-15% to long-term FCF and >100 bp to OCF CAGR.
Along with lower interest costs, we lift our FCF/shr estimates by 1-19%.
Valuation
Our 12m, ROIC-based price target increases to $70, from $69, on higher
forecasts. We take no view on the outcome of negotiations with Vodafone,
but include $10/shr for LT M&A optionality; at our $60/shr base-case
valuation, LBTY would trade on a 6% 2016 FCF yield ex-Lightning/3.0 capex.
Key risks
Downside risks include competitive or regulatory pressure in all markets;
execution of mobile acquisitions; capital discipline in acquiring content; FX.