Numericable-SFR (EUR33.15)
Buy
(upgrade from Neutral)
The Counter-offensive 15 December 2015
Thesis: Higher network investment, a more aggressive commercial approach and the leadership of Michel Combes give us greater confidence that operational performance will improve leading to revenue stability in 2017. We forecast a 10.3% EBITDA CAGR in 2015-18E and 50% equity upside over two years. Buy.
Numericable-SFR is now at a 12-month relative low having hit €60/share in March.
The shares now trade at a discount to the sector on 6.1x EV/ adjusted EBITDA 16E (sector on 6.9x) and 8.3% FCF yield to equity for FY16E (sector on 6.0%). Earnings estimates are coming down and we cut our EPS estimates 10.6% for FY16E and 12.2% for FY17E (Fig 13). Even if the short-term operational performance stays mixed – with strong EBITDA growth driven by more cost cutting but weak revenues – we see enough reasons to upgrade Numericable-SFR from Neutral to Buy:
• Differentiate through investment: Altice is guiding for extra investment over
the next two years in France. Numericable-SFR has launched a new triple-play box and SVOD platform. It has acquired English Premier League rights in France. Together with Orange, it should have the best fixed and mobile network in France once it completes its 4G investment and network sharing deal with Bouygues.
• Fight back: our meeting with Michel Combes, the COO of Altice and Chairman of
Numericable-SFR, makes us more confident the group is better prepared to fight back and protect its market share. Improving commercial performance should lead to revenue stabilisation in 2017.
• 50% equity upside: on our estimates, Numericable-SFR trades on 9.8x
EV/OpFCF 2018E. We see 50% equity upside assuming the shares rerate closer to a sector multiple of 13x EV/OpFCF 18E by the end of 2017E. Numericable-SFR will also pay an attractive 17% dividend within the next 30 days.
• Benefit from consolidation: there is speculation of consolidation in France
with Orange (Neutral) buying Bouygues Telecom. This has pushed Bouygues (now cut to Neutral) to a 12-month relative high and Iliad (Sell) to a three-month relative high versus the market. Despite positive speculation on consolidation, Numericable-SFR is at a 12-month relative low.
• No liquidity issue: Numericable-SFR suffers from being guilty by association
with Altice, which has the highest leverage in the sector on 5.2x proportionate net debt/EBITDA in 2015E. The group’s maturity profile is long dated with the first