Altice : A call option with all the risks that this entails
The group is currently succeeding in acquiring new customers in France on both Fixed and Mobile, but at the expense of revenue and margins. We remain at Buy on Altice as we still see solid long-term prospects for Altice France and Altice Portugal but we remind once again that the stock, given its high leverage, is a sort of call option with all the risks that this entails.
Q3 revenues declined by 4.6% yoy and lfl while the EBITDA was down by 6.8%. Note these numbers are globally in line with expectations but they reflect, however, a clear acceleration of the decline compared to Q2 (revenues were down by 2.3% yoy, while th EBITDA was down by 5.5%). In France (75% of Altice’s business), revenues were down by 5.5%, while the EBITDA declined by 7.1%, reflecting how much the group had lowered its prices to win customers.
As for 2018, the guidance is unchanged: Altice Europe is expected to generate an operating free cash flow of €2.3-2.5bn (excluding the Altice TV segment). Note, however, it is likely Altice France will end 2018 at the low end of the €1.5bn to €1.6bn guidance range as it is generating higher acquisition costs and client capex.
The group is currently succeeding in acquiring new customers in France on both Fixed and Mobile, but at the expense of revenue and margins. Altice France’s revenues have indeed declined by 5.5% yoy and lfl in Q3 (vs -4.6% in Q2) while EBITDA was down by 7.1% yoy (vs only -2.2% in Q2). Fixed B2C and Mobile B2C ARPU were indeed sharply down respectively by 7.6% and 10.6% (vs -4.4% and -7.2% in Q2).
The group, however, won customers: 166k (vs only +13k in Q2) on the Fixed side (corresponding to 2.7% of the 6.2m subscriber base) and 378k (vs 211k in Q2) on the Mobile side (corresponding to 2.5% of the 14.9m subscriber base). This customer growth is expected to lead to an inflection in revenue and EBITDA growth in the coming quarters: but it will probably only be from the second quarter of 2019.
The main issue concerning Altice’ stock is that the market cap of the group is of only €3bn for an EV of €33bn. So it is very difficult to have a fair target price, given a 10% improvement in the EV estimate implies a doubling of the share price. Total net debt was €30bn at the end of Q3 compared to €31.7bn at the end of Q2.
Remember, the group sold its Belgian and Luxembourg businesses for €280m at the beginning of the year while in July Portugal Telecom reached an agreement with a consortium including Morgan Stanley Infrastructure Partners and Horizon Equity Partners for the sale of 75% of the newly-formed tower company called OMTEL, which comprises 2,961 sites operated by Altice Portugal. The transaction closed on September for a global amount of €539.5m.
Continuing its non-core asset disposal programme to strengthen its balance sheet, Altice France entered in June into an exclusivity agreement with KKR for the sale of 49.99% of the shares in a newly-incorporated tower company called SFR TowerCo which will comprise 10,198 sites currently operated by the group.
Altice France will continue to consolidate SFR TowerCo fully and, hence, the assets and liabilities related to SFR TowerCo were not classified as held for sale. The deal was signed in August for a transaction value of €3.6bn (Altice will therefore receive €1.8bn). The closing of the transaction is expected to occur at the end of 2018.
Lastly, in October, Altice Europe announced the closing of the transaction to sell 100% in the tower company Teletorres del Caribe, which comprises 1,039 sites formerly operated by its subsidiary Altice Dominicana, to Phoenix Tower International, a portfolio company of Blackstone. The consideration received was €148.6m.
At end 2018, net debt should be around €27.5bn which corresponds to 5.2x current adjusted EBITDA. Does it imply selling more assets? Patrick Drahi said he was open to the possibility of selling a stake in its cable network in France after having already begun discussions on its future fibre network.
We remain at Buy on the stock as we still see solid long-term prospects for Altice France and Altice Portugal but we remind once again that the stock, given its high leverage, is a sort of call option with all the risks that this entails.
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