Telenet will publish its 1Q11 results tomorrow after market, followed by a conference call on Wednesday at 3pm. We expect again solid results with good growth in sales, EBITDA and subscribers. Pending the results we reiterate our Accumulate rating and € 34 target on Telenet.
1Q11E –continued sales growth and cost control: we expect 7% sales growth and 8% EBITDA growth, putting us marginally ahead of consensus estimates. Telenet indicated a reporting change with regard to the billing for certain premium voice and SMS content services starting in 1Q11 and this will have a negative impact of about € 2m on quarterly sales, but no impact on EBITDA. This accounting change is not reflected in our or consensus sales expectations.
FY outlook –no changes expected: Telenet guided for about 6% sales growth this year and a stable EBITDA margin. We do not expect Telenet to alter these targets. We are counting on € 1,393m in sales (+7%) and € 713m in EBITDA (51.2% margin), and this puts us slightly ahead of consensus (and guidance) on sales, but in line with the consensus on EBITDA.
Generous cash returns: Telenet will propose a € 4.5 capital reduction (gross and net, and paid out in July). Moreover, barring large M&A, this should be a recurring pay-out for at least the coming two years. This translates into a 14% recurring cash yield, and means that Telenet will distribute over 40% of the current market cap in the next three years.
Conclusion:
Accumulate maintained: we reiterate our Accumulate rating and € 34 target. Telenet continues to show impressive sales and earnings growth, while the prospect of more large cash returns going forward should support the share price. However at the current valuation of more than 8x EV/EBITDA11E we go no further than an Accumulate rating.
A Flash note with our detailed forecasts as well as consensus expectations will follow.
On a separate note, we also highlight that Telenet reacted to some press rumours last Friday referring to cable TV price hikes of up to 25%. Telenet said the info was not accurate, but confirmed that they are indeed looking to raise prices for cable TV, and this in line with two years of inflation (hence probably slightly less than 5%). This decision has to be approved by the government however, so this will take time, and if approved it will only be implemented in the course 2H11. Moreover, analogue TV clients will only feel the impact when they get their yearly bill (digital TV clients on the other hand pay each month so price changes are effective immediately here). Hence we see this news as slightly positive for Telenet, but the impact on group revenues will remain very limited (we estimate less than 1% sales impact).