Altice SFR - Waiting Game
All,
Please find our updated analysis post their Q1 results.
In March, we expected no update from Atlice SFR about their capital structure/deleveraging plans. Our only expectation was further deterioration in the Company’s underlying performance. The Q1 results were slightly more negative than our expectations. We had held off updating our model as rumours circled that either the Company or the senior Creditor Group would make some announcement concerning the capital structure, but none materialised.
Investment Consideration:
- We are more convinced that Altice SFR is un-investible at the current time. We understand various attempts to estimate a) sum of the parts, b) various scenarios concerning what level of debt forgiveness at the various creditor classes and c) the difficulty for Drahi to move money outside the Group. But at the core of Altice SFR is a business that is underperforming, with no turnaround in sight.
- Previously, trading levels were reaching interesting levels, but we can’t ignore the market competitiveness in France and the continuous underperformance of SFR versus historical numbers and its peers.
- We maintain that the risk-reward is more favourable at Altice International. We will continue to monitor SFR in the coming months.
Underlying Performance:
- We had suspected the poor guidance issued in March at the year-end call was very cautious, but Q1 results are as bad as guided. Revenue was down 4%, EBITDA down 6.5% with leverage now reaching 6.5x on LTM basis. Although Operating Cashflow was ahead of guidance due to some working capital movement and lower CAPEX levels, expectations for the remainder of the year are for further weakness (The company are guiding to a high single-digit decline in EBITDA) which will further increase leverage multiples.
- Altice SFR has appointed Lazards as a financial adviser and retained JPMorgan to assess liability management alternatives. The Company did not hold a Q&A as part of their Q1 call, electing to share prepared comments. This continues to leave significant questions concerning entities that have moved outside of the restricted group, and the impact this has on creditors.
Guidance:
- Guidance is broadly the same as given in FY23 results.
-Revenue: Due to the lower construction activity, and the competitive environment in the residential market, specifically the mobile division, Altice management is guiding for a decline in FY24 revenue versus prior years.
- EBITDA: Overall a reduction of mid-single digit levels. Driven by a couple of factors including the lower revenue numbers. Secondly, the transition of customers to FTTH comes with additional costs, especially in regions where Altice does not own the infrastructure (higher rents). Unlike other European countries, French consumers are not operating under inflation-linked contracts, so there is no natural pass-through of recent inflationary cost increases.
- Cashflow: Lower than prior years, due to lower EBITDA and higher interest costs. Management expects lower CAPEX levels versus prior years, but this is not sufficient to compensate for the higher interest costs.
Peer Analysis:
- Since the Q1 call, there has been more price promotional activity in the French market. Bouygues and Orange have responded to SFR’s aggressive pricing strategy concerning large mobile-data offerings, and at the lower end of the market with its “Red” no-frills tariff. This type of competitive pressure is not positive for anyone (except the consumer).
- Iliad continue to take market share in the fibre segment, with double-digit organic growth in Q1. This is on the back of their Free Box Ultra offering.
- All these combined will lead to further pressure on profitability and EBITDA at SFR.
Other Issues:
- We have written previously on the possibility of Drahi dividending out the proceeds of the upcoming asset sales. In summary, we don’t think it is possible, but the Company do retain the ability to apply the proceeds as it sees fit. This means they can use the proceeds to make a distressed tender for either the sub or senior bonds, and all possibilities will be open when negotiations commence.
- But we don’t see negotiations commencing before the publication of H1 numbers, and even late August would be optimistic. Although time is not on the side of the Company, SFR has sufficient liquidity to meet upcoming maturities until mid-2025.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk