United Group - Adapting to the landscape - Positioning
All,
Please find our initiation on United Group here.
Like its peers, United has been acquisitive, has issued a lot of debt and is facing inflation. The corresponding rise in yields has cheapened the debt stack and we have decided to go long the short-dated bonds. Although higher yields will feed into higher interest costs as bonds are refinanced, having stress-tested our model assuming current yields persist, we are comfortable that the company can cope. Closing the short end of the curve is not very exciting, but for now we are attempting to avoid duration/volatility. We have considered United Group as part of the European cable issue club but in reality, its strategy differs from its peers. There are two things we want to highlight 1. Mobile telephony is the largest individual division after recent acquisitions in Greece and Croatia, and 2. The content division is considered a differentiator for what is a collection of mature businesses.
Maturity and interest rate risk is significant but manageable:
- If current yields persist between 2022 and 2030 interest will more than double. Our analysis gives us comfort that United Group will be able to cover this rise through price rises. United Group has pushed through price rises linked to inflation and we will get to test our analysis that customer price elasticity is low.
-On our projections, the company (like many) would likely face a couple of tough years where it has to tighten CapEx and cost, before inflation - at whatever rate - begins to stabilise and United cashflows begin to normalise.
- Despite having only a small RCF, United has the assets and resources to fund itself through this period.
- United Group has been even more acquisitive under BC Partners' ownership (18Q2). The company has taken advantage of low rates to put debt on the balance sheet and to push put its maturities.
- Maturities before 2025 are modest so the refinancing risk is lessened.
- We have modelled for limited growth beyond inflationary rises and United can continue to cover its interest even without taking an axe to CAPEX.
A mature business looking for differentiation:
- United has built a significant portfolio of content and Pay-TV channels and is exploring new delivery channels. Network penetration is only going to grow slowly in this mature business.
- Own content provides the differentiation that is needed for growth but also provides some opportunity to cut costs when stability is all that’s required.
- In addition to its own cable networks, it delivers its content via DTH and increasingly through third-party internet connections. United has its own box under the EON brand.
Mobile telephony provides growth and defence opportunities:
- The growth of mobile data as 5G is rolled out represents a further opportunity to capture new content customers outside of the fibre network. An example is rural areas where broadband has not been feasible to roll out.
- A presence in the mobile market will ameliorate any losses from clients switching off fixed broadband in favour of mobile data.
- 5G represents a credible competitor to broadband in urban areas and will pressurise ARPU in that business without some differentiation.
Positioning:
- We are buying 5% of NAV in the 4.875% July/24 SSNs at 93.625c/€ for a YTM of 9.0%. The rise in interest rates is manageable given the maturity profile of the company and the low elasticity of consumer demand.
- To avoid the volatility that would come with a longer-dated position, we are only buying the short-dated bonds for now. As and when we feel more comfortable with the market overall, we will likely migrate down the curve.
- 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 a rise in coupons to an average of 10% and it has 5- years to achieve this. EZPZ.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055
www.sarria.co.uk