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BELGACOM: Weak 1Q11 results, FY outlook lowered

BELGACOM: Weak 1Q11 results, FY outlook lowered

06.05.2011 9:46

Belgacom’s 1Q revenues and EBITDA were below expectations. The company will take actions to protect its market share and lowers its FY sales and profit outlook.
1Q revenues are down 3.5% to € 1583m, falling 2.5% short of expectations. Excluding regulatory impact, sales would have been down 0.3% y/y, whereas last year Belgacom (24,81 EUR, -5,92%) usually managed to show positive underlying sales growth.
The shortfall in sales is mainly due to lower-than-expected revenues in the Consumer segment (-4.3% y/y) and in the International Carrier Services business (-1.5% y/y). Belgacom attributes the sales decline in Consumer to a sharp decline in Mobile voice usage (revenues -12% y/y), while Fixed suffers from a competitive and increasingly penetrated market. The ICS business suffered from lower MTRs and lower voice revenues.
EBITDA is down 2.8% y/y to € 480m, 1% below expectations. Lower D&A led to a net income that was 1.5% ahead of CSS expectations.
Net adds were in line to slightly below expectations across the board. Mobile adds in EBU were a lot weaker than expected however, as Belgacom lost 46k clients (all pre-paid clients, which is a normal evolution, but whereas usually there is growth in postpaid subs to offset this, this is now not the case as postpaid subs are only stable q/q). This seems in line with Telenet’s comments about a fairly soft market overall during the first quarter.
The € 239m FCF is ahead of expectations (€ 210m) mainly explained by working capital effects.
The 1Q results were below Belgacom’s expectations, and the company will take measures to protect market share (revamping of product offering, improved customer service, revalorize fixed line).
As a result, Belgacom lowers its FY outlook as follows: 1% to 2% sales decline (was up to 1%) and a 4% to 5% EBITDA decline (was up to 2%). Capex guidance is maintained at the high of 10-12% of sales.

Our View:
Two weeks after KPN’s profit warning, Belgacom lowers its FY guidance as well. Mobile revenues are under pressure (similar to KPN) while Belgacom also suffers from competitive pressure in its fixed business (Telenet has consistently gained market share in broadband and fixed telephony over the last years).
Belgacom will take measures to protect market share - more aggressive pricing could be part of this strategy and this would be bad news for all Belgian telco players, including Telenet.

Our and CSS estimates were in line with the old guidance and will have to be lowered –we estimate our FY11 EBITDA forecast will be lowered by around 3% while our FY11 EPS estimate will probably be lowered by 4%. Belgacom’s valuation is more or less in line with EU peers and seems fair, Hold and € 26.3 target maintained. We continue to prefer Telenet that offers better growth prospects and higher cash returns (although at a much higher valuation).
Conference call at 2pm CET.

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