Tuesday, November 07, 2023

KPN Capital Markets Day 2023: strategy update Connect, Activate & Grow spanning 2024-2027

Main takeaways:

  • Costs
    • Ongoing efficiency enhancements. Drives cost savings and improved customer experience (fully digital) at the same time.
    • ESG delivers sustainability and at the same time cost savings.
    • Revitalise cost savings program by modernising the operating model, incl. the 'always-on' network (= zero-touch).
  • Partnerships
    • for B2C (smart home in a wide sense) and B2B
    • Household 3.0 replacing (or: extending the scope of) FMC; it could mirror the Proximus+ Super App.
  • Financial
    • EBITDA margin flat (44%) on rising Glaspoort access fees
    • Capex drops below EUR 1b to EUR 900m in 2027
    • FCF (def. KPN) and TSR rise above EUR 1b in 2027

General strategy update 2024-2027:

  • Connect (loyalty, convergence, relevant services)
  • Activate (network, platforms, partners, assets)
  • Grow (modernise, simplify, AI-powered automation, future-ready workforce)

Targets

  • Financial
    • 2023 maintained [see 231025]
    • 2024:
      • SR growth 3%, adj EBITDA AL EUR 2.48b
      • capex 1.2b, FCF 870m
      • div 17c (+13%), SBB 200m
    • 2024-2027:
      • SR CAGR 3%, adj EBITDA AL CAGR 3% (flat margin as result of rising Glaspoort access costs, rising to EUR 115m in 2027)
      • capex 1.2b in 2024-2026 (o/w EU% 450-500m for fiber), <1.0b in 2027, FCF CAGR 7% (accelerating on cash tax, interest, capex)
      • div CAGR 7%, SBB cumulative max EUR 1.0b, cumulative returns EUR 3.8b (30% of current marketcap)
      • to become B2C market leader (in SR terms), to compete fiber roll-out end 2026 (80% coverage, focus on HC)
      • RoCE to grow from 13.7% (23H1) to 15.0%
  • General
    • Policy rermains to fully return FCF to shareholders
    • Leverage <2.5x
    • Cash tax rises as losses are eaten up. From EUR 110m in 2023 to EUR 300m in 2027 (2024: EUR 50-60m higher than 2023), from when cash tax will be in line with P&L tax.
    • Interest will be EUR 35m higher in 2024.
    • Capex-to-Sales ratio to move from 21-22% (2023-2026) to 15-16% (from 2027).
    • Sources of opex savings: simplification, always-on automation, IT rationalisation, energy reduction (Eneco agreement with Eneco, exploring solar), copper switch-off, digital & personalisation (digital customer interaction, incl. AI), organisation (office footprint), innovation (selective).
  • FTTP
    • Construction cost 700-1000 EUR/HP
    • ARPU impact + 3 EUR/mo
    • Uptake: 8% after 1 year, >55% over time
    • 42% of new customers take 1 Gb/s (?)
    • 80% coverage YE 2026, with copper switch-off at 65%
    • 10 Gb/s available at 85% by YE 2026
    • Always-on network (no truck-roll at central office or street cabinet required, only shipping CPE) reaches 70% of fiber HH YE 2026
    • Copper savings 2023: EUR 25m on opex, EUR 70m on capex.
    • Copper switch-off in 3 phases:1. Lines, 2. Enterprises, 3. Areas. Final phase 3 years after roll-out. Hence full savings reaped by 2030.
    • Fiber net additions insights: 23Q3 at record DSL conversion (18k of copper net adds out of 24k copper losses: 75%) and record in-flow from third parties (22k of total fiber net adds of 40k).
  • Other
    • Glaspoort may be consolidated (acquire 1 additional share) once 80% of roll-out is completed during a 3-year window, 5 years after establishment (2021) i.e. 2026-2029.
    • Reconsidering leasing mobile sites (alternative is not clear).
    • Considers investment partners for edge network.
    • Considering legacy real-estate (sell or redevelop).

Operating model modernisation

  • simplification, automation, AI, always-on network
  • digital customer journey
  • full fiber, to add 2m HP (focus on HC) by end 2026 to reach 80% coverage
  • dual-vendor strategy (Ericsson, Huawei) in mobile RAN
  • win-back fiber customers (when altnet launches before KPN) in 1-2 years back to original market share
ESG

  • to be Responsible, Inclusive & Sustainable telco
  • to become near-circular by 2025, green energy from North Sea wind park from 2027, energy reduction 55% by 2030 relative to 2010
  • cybersecurity
  • Mooiste Contact Fonds to bridge digital divide

Business strategy

  • B2C:
    • Household 3.0 (smart home, security, gaming, OTT services, partners) replaces the FMC strategy: bundle of any connectivity with at least 1 VAS (excl. communication)
    • further digitize customer facing processes, improve customer experience, lower indirect costs
    • focus on churn more than on customer acquisition
    • to double data allowances on all mobile plans for FMC subs (from 3, 12, 20 to 6, 24, 40 GB/mo)
    • to relaunch KPN TV+ app from 231109
  • B2B: develop ecosystem & distribution channels, converged services for SME (add partners) & LCE (incl Private Campus, Multi Cloud, Data Services Hubs, IoT), Tailored Solutions for ICT/integration
  • B2W to launch building blocks
What the financial targets imply:
EUR m20222023E2024E2025E2026E2027E2024-2027 guidance/assumption
rev531654815645581459896168
SR4898505052025358551856843% CAGR
non-SR418431443457470485assumption CAGR 3%
adj EBITDA AL2404241024802554263127103% CAGR
margin (%)45.2%44.0%43.9%43.9%43.9%43.9%
capex12061200120012001200900total 4500
oper FCF (EBITDA - capex)119812101280135414311810
margin (%)22.5%22.1%22.7%23.3%23.9%29.3%
cash interest2202202352352352352023: assumption; from 2024: +35m
cash tax51110160210260300from 110 (2023) to 300 (2027)
net FCF (oper FCF - interest - tax)9278808859099361275
FCF (reported: after WC adj etc)86287087093199610667% CAGR
margin (%)16.2%15.9%15.4%16.0%16.6%17.3%
DPS (c)14.315.017.018.219.520.87% CAGR
# shares (m)400339093847376336803597
dividend571586654685716749total 2800
SBB300300200267267267total max 1000
# shares in SBB (m)9463838383shareprice 3.20
TSR8718868549519831016total 3800
net debt max601060256200638665786775leverage <2.5x