Altice (SFR) France - Beyond The Obvious
All,
Please find our updated model here.
The issues with Altice (SFR) France are well-flagged but the majority of them are still 3-4 years away. The interest rate risk and increased refinancing risk are real but are unlikely to impact the Company until FY26 at the earliest. We see EBITDA for FY23 as relatively static versus FY22, and with CAPEX expected to remain at elevated levels, FCF after interest will be neutral. We will still be talking about these topics in a year.
Instead, we have a growing concern concerning the operational performance of Altice France, especially compared to its peers in Q1. We aim to take a more active position post Q2 results from Altice France and its peers.
Investment Considerations:
- We have a growing concern with the operational performance of Altice France, especially compared to its peers in Q1. The Company have echoed in our calls with management the confidence that they shared on the Q1 call that a turnaround later this year. It is worth noting that operational data was only marginally weaker in Q1 and peer analysis highlights that further price increases are likely throughout FY23.
-The bigger issue for Altice France is the risks highlighted below, and in an environment of rising refinance rates, interest rate coverage is going to reduce. But this isn't a new issue and in our analysis, we show that this isn't going to be an issue until FY27.
- Altice France has c. €25bn of outstanding debt, so we feel this name will remain in our universe for the foreseeable future. We are seeking further information on the competitive landscape as we think this will be the driving force of spreads in the coming quarters.
- We are not taking an active position at the moment.
Interest Rate Rises/Refinancing Risk:
- Altice France enjoys a relatively low cost of capital given its ratings and leverage stats. The recent debt extensions highlight the new reality of higher spreads with Altice France paying 550bps plus 2/3 OID. However, given the maturity profile of Altice France’s debt, when we refinance upcoming maturities 6 months early at 650bps or 12.5% on the bonds, it only increases the interest bill from €1.6bn in FY23 to €1.7bn in FY26. It is true that in FY27, the interest bill could balloon to €2.8bn with a full refinancing, including the Altice France Holdings sub-bonds at a rate of 16%.
- However, considering the visibility of this issue, there are some self-help options available to the Company. The Company have highlighted the potential of the sale of assets, including data centres.
- Secondly, the perceived wisdom is that Altice France will invoke their option to buy a further 3-5% stake in XPfibre, and therefore consolidate this asset in their accounts. That still appears to be the most likely, Altice France could sell down a stake of the JV depending on the need to deleverage.
Working Capital Management:
- What gives us concern is the increased level of reverse factoring Altice France operates with. SFR France historically used reverse factoring for 10-12% of their nominal payables (Trade Payables and Others plus Reverse Factoring). Over the last four quarters, this has increased from 11% to 12%, 14% and now 16%. This isn't a huge concern at this moment, but something we will be keeping an eye on.
Operational Data:
- Operational performance weakened in Q1 2023, driven both by a disappointing top line (lower revenue from fixed residential customers) and an increase in costs, mainly energy. The Company has guided for a reversal of this in H2, but it is difficult to ascribe probability to this assertion. Subscription periods are generally 12 months in the residential segment and between 1-3 years in the business segment.
- Customers are price sensitive, which leads to a significant level of churn across the Group. The use of broadband TV and mobile services has increased sharply in recent years. However, the Group relies on multi-play and premium TV services to attract new customers and with a high level of penetration, growing subscriber numbers is difficult, without resorting to price competition.
Anything Positive:
- Notwithstanding the above issues, it should be noted that Altice France enjoys a significant market share in France. Altice is the largest operator in the fibre/cable market with c. 20.5m homes passed. Altice is the second largest mobile operator with 16m customers. Thanks to its market share, Altice is a leading participant in the multi-play segment which leads to significant cross-selling opportunities.
- Although there is some price competition, Altice France's peers also operate with leverage (albeit at lower levels). This is likely to prevent a competitor from attempting to gain market share at the expense of cash flow.
- As mentioned above, the Company are well aware of the necessity to deleverage and has openly admitted to examining asset sales.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk