Tuesday, January 28, 2014

KPN preview 13Q4: slowing down Reggefiber for a truce with Ziggo

KPN's 13Q4 results are due February 4. The employee reduction program (4-5k in the period 2011-15) is probably ahead of course (reaching 4.5k). Already, at the 13Q3 results a new program was launched: simplification, aimed at distribution, customer processes and networks & IT, as well as reduction of jobs and products. At the same time, the capex budget was announced for the 2013-15 period: less than EUR 4.7bn, which includes Reggefiber in 2015.

Since the 13Q3 results, it has been relatively quiet around KPN, which is a good thing. Pending corporate issues include:
  • Will the E-Plus sale proceed? KPN hopes it to be cleared mid 2014. It will bring KPN EUR 5.5bn in cash and 20.5% of Telefónica Deutschland (valued at EUR 3.6bn, based on a call option Telefónica has). What does it intend to do with that?
  • What will America Movil do with its 29.7% KPN stake? This, as well as KPN's 20.5% stake in Telefónica Deutschland, is interesting for financial reasons only, not for strategic reasons. Perhaps there will be a swap and maybe America Movil will aim for all of Telefónica Deutschland.
  • Will the Reggefiber consolidation be approved? Probably yes and KPN counts on the last day of 2014 for this to happen.
Current guidance:
  • NL stabilises during 2014. EBITDA will still drop during 2014 on a yoy basis, but improve on a qoq basis. EBITDA will be flat in 2015. FCF will be flat in 2014 and improve in 2015.
  • Outperformance in Belgium.
  • Capex 2013: < EUR 1.7bn.
  • Capex 2013-15: < EUR 4.7bn.
  • Net debt / EBITDA to fall in the 1.5-2.5 range.
  • Synergies at E-Plus are conservative (EUR 5.0-5.5bn) and more leverage will allow Telefónica Deutschland to increase its dividend.
  • Impact on the fixed-line markets:
    • of the Ziggo/UPC merger
    • of T-Mobile's new mobile-only strategy
    • of the combination of CanalDigitaal and Online.nl
    • of Vodafone's and Tele2's plans to unbundle FTTH
  • Impact on the mobile market:
    • of the Ziggo/UPC/merger
    • of Tele2's migration to MNO status
    • of T-Mobile's new mobile-only strategy
  • The impact of new CEO's at Ziggo, Tele2 NL and T-Mobile NL.
  • KPN's LTE plans.
    • What next after reaching nationwide coverage in March? This gives KPN a 12 month headstart to Vodafone.
    • Where does LTE Broadcast stand? And LTE-Advanced?
    • How will it integrate FON?
  • Will there be a new job reduction program from KPN?
  • KPN's plans for Belgium.
Much of all this has to do with opex and capex.
  • Large opex savings are ahead:
    • The impact of the new simplification program, including job cuts.
    • The impact of LTE and FTTH.
    • In other words, large opex savings are ahead.
  • Implicitly, capex will drop as well:
    • Reggefiber's capex (passive assets only) was EUR 186m in 2010, EUR 291m in 2011 and EUR 381m in 2012. Let's assume stabilisation of roll-out in 2014 and 2015, then KPN is looking at EUR 380m in each year.
    • If KPN's capex in 2013 is EUR 1.7bn (excl. Reggefiber and E-Plus), then there is EUR 3.0bn left for 2014 + 2015 - and the latter will include Reggefiber's.
  • KPN's stance on stable market shares in 13Q3 could actually mean that it is settling for a stable broadband market share during 2014 and 2015 (on the TV market, the share grows by roughly 1 point per quarter).
  • KPN believes that 40 Mb/s is enough for now, but an upgrade to 200 Mb/s is required within 3 years. Also, KPN believes that 200 Mb/s could be sufficient for as much as the next 5-7 years.
  • KPN can do this provided the current VDSL + vectoring + pair bonding copper upgrade is successful. VDSL + vectoring enables up to 100 Mb/s and this is doubled with pair bonding.
Final conclusions:
  • The above implies a heavy capex reduction in 2014 and 2015. It looks like this will only be possible if Reggefiber's expansion is slowed down.
  • KPN appears to be looking for a truce with the cable companies.

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