United Group – Look forward to Positioning
All,
Please find our updated analysis here.
United Group (UG) has used the proceeds from its tower sale to reduce leverage and to push its maturities out. The €570m Nov-25 PIYC SUNs will be refinanced by November 2024. Exactly when and how the refinance will take place is not clear yet. Operationally, Q2 was a strong quarter, with UG able to get ARPU increases whilst gaining RGUs in most of its markets.
Investment Rationale:
- We have a long position in the PIYC 9% 2025 for 3% of NAV. The PIYCs are bid at around 94c/€. Capturing the last six points of capital return will take time, we do not expect any refinance before Q424. We are not rushing this fence and will make our exit at 96c/€ or the end of September, whichever is earlier. This will give us a 23% return over 5 months, made up of 16 points of capital and 3 points of PIK. The downside of renewed stress for the market or UG is 20 points.
- The PIYC currently trades at 94c/€, and if we assumed a distressed recovery at 60% of our DCF valuation, their value would be closer to 75%. The bonds would likely trade lower in a distressed scenario.
- We see a par refinance in November 2024 as increasingly likely. Rather than a tender or amend and extend. Management tone suggests they will pay cash coupons in Nov-23 and Apr-24, but it is not guaranteed.
- The geographic footprint of UG does give some EM flavour to the name, but Serbia is the only major network outside the EU. UG has an interest rate challenge, but an additional 8% rise in revenue would cover an increase in coupons to an average of 10%, and UG has 5- years to achieve this.
The PIYCs are now more likely to be refinanced at par:
- Management will likely seek a refinance in Nov-24, but beyond that, they declined to discuss how.
- We think a new SUN would be the preference for management. Getting a PIYC SUN would be expensive, so a SUN is more likely. The 2030 SSNs trade at 10%, so a coupon of 11.5% - 12.0% would be necessary today. UG will be hoping pricing will improve over the next 12 months.
- An SSN to take out the PIYC is another option. The bonds have a 6x incurrence test, but there are carve-outs for credit facilities, and UG could use one of the baskets as part of any refinance.
Trading Update:
- LTM Revenue €2.7bn, Adjusted EBITDA €917m.
- PF completion of the Towers business (in August), Net Leverage at H123 was 5.1x.
- UG raised pricing to reflect cost pressures, and ARPU increased 6% in 1H. Despite the price rise, RGUs were up 2%. Management had expected to be able to get price rises through and were correct. EBITDA margins were slightly higher, except for a minor fall in Serbia due to local cost issues.
- UG's hoped-for broadband price increases in Greece have not materialised yet, as the government continues to block them. The timing for the rise will slip into 2024. However, providers have committed to fibre roll-out, which will not happen if pricing does not rise. The 5% fall in Greek post-paid mobile ARPU was blamed on discounts to convert users from pre-paid. Post-paid customers have higher stickiness/margins, and the maturity of the Greek market makes customer gains hard to achieve.
Cable remains a capex-hungry business:
- Since God was in short trousers, TMT operators have promised that TMT capex will fall. However, technological advances and spectrum auctions always seem to be a reason for the figure to remain high.
- UG does not expect any significant reductions in capex soon.
- Management projections include the €20m - €30m expected in Bulgaria next year. The tender for spectrum in Croatia will be for €90m (payable annually over ten years). Fibre will continue to be pushed further into the network as a complement to 5G mobile and a competitive defence from other mobile operators.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055