Bouygues (EN FP)
Setbacks on Several Fronts; Lowering PT to €25
Key Takeaway
We lower FY14 Telecom EBITDA from €831m (-6% y/y) to €690m (-22%). 2Q results should draw attention to heavy re-pricing (not abating), higher marketing costs and limited commercial inflection. Colas demand in France also looks to be weakening. With EFCF post-minorities likely to drop two-thirds to €150-200m, a repeat of FY13's dilutive scrip dividend seems probable. The upside case for a co-ordinated carve up bid for BYG Tel from domestic rivals
feels distant.
A bleak backdrop. BYG shares have u/p the CAC40 by 9% and SXXP by 12% in the last 2 months. This reflects receding prospects for French telecom consolidation, 5% dilution from strong take-up of a scrip option for the FY13 dividend and an Alstom deal tilted in the Government's favour.
No respite with 2Q results (28th Aug). We anticipate heavier re-pricing pressure in Telecom as strong commercial activity drives migration to cheaper mobile plans unveiled last year. We expect Telecom EBITDA to fall €86m y/y (-34%) vs. -€49m (-23%) 1Q. A €35m EBITDA gain in 2Q13 (unusually low sales tax provision) should not recur. Colas is likely to report weakening demand in France.
Eroding expectations. We expect consensus forecasts for FY14 Telecom EBITDA to drop into the €680-700m range post-results (€880m in FY13). An incremental c.€55m of spectrum fees has been anticipated, but the combined pressure of heavier re-pricing, higher marketing costs and non-recurrence of the 2Q13 sales tax gain has not, in our view. We expect further decline in FY15 (to €653m) as forced migration of subs on legacy plans that BYG Tel wishes to close down is carried out. Meanwhile our colleagues on the construction team highlight the secular risk that, as macro conditions begin to improve (outside France at least), contractors find themselves executing on work secured at low prices during the downturn. The generic risk of profit warnings is heightened in our view.
Valuation/Risks
We lower our Dec-14 PT to €25 (from €30). Telecom EV is €4.1bn (€5.0bn) reflecting lower forecasts, but still equates to 6.0x/6.3x EV/EBITDA in 2014e/15e (vs. sector 6.0x/5.8x). Construction activities all valued on 8.0x 2014 EV/EBIT (unchanged), Alstom/TF1 at market value. We apply a conglomerate discount of 10% (unchanged). Upside risk: domestic telecom rivals coordinate a carve up bid for BYG Tel. Downside: EBITDA pressure forces under-investment in Telecoms.