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BELGACOM: Feedback CC & lowered estimates

BELGACOM: Feedback CC & lowered estimates

9.5.2011 10:00

Highlights from last Friday’s conference call & IR contact: 
 - Management did not yet want to disclose a lot of details about the initiatives they will take to protect market share (for competitive reasons). Belgacom (24,97 EUR, -0,18%) will continue to push their bundles – 55% of clients are still single-play, and they see plenty of growth opportunities here. As an example, they also highlighted that they are now proactively contacting certain groups of clients who only have a fixed line, to try to convince them of also taking TV for example. 
 - Selective handset subsidies (e.g. for smartphones as part of a bundle) will probably also be introduced – no large-scale subsiding however. 
 - Pure price competition is not really considered – Belgacom does not want to start a price war and believes it can protect market share through innovative and convergent products. 
 - The competitive pressure seems to be increasing in Wallonia, where cable operator VOOis aggressive on pricing when pushing their bundles. 
 - Belgacom also stressed that it keeps its cash return plans: a € 2.18 dividend paid out over the 2011 results combined with a € 200m share buy back over 2011/2012.

Our View:
Walloon cable operator VOO now also seems to be getting its act together, whereasthey were behind the curve for a long time. As a result Belgacom is now not only facing a credible (cable) competitor in Flanders (Telenet) but also in Wallonia (VOO), and this clearly is hurting them.
The measures they will take to protect market share (be more proactive in pushing bundles, some subsidising of smartphones etc) will increase competitive pressure in Belgian telco landscape and is hence bad news for all operators we believe. And all this comes on top of Telenet’s announcement a few weeks agothat they will also start selling (and probably subsidising) the iPhone, Mobistar trying to push its Starpack bundle etc. Competition is heating up, while the market seems to be getting weaker overall, judging by the net adds of all the operators.

We have reviewed our estimates following the lowered FY guidance; we are now counting on € 6,495m in FY11 sales (-1.7% vs. guidance hinting at -1% to -2%) and € 1,901m in EBITDA (-4.1%, guidance: -4% to -5%). Previously we were counting on € 6,565m and € 1,956mrespectively. Our FY11 EPS is lowered to € 2.29 from € 2.39. Our FY12 EPS goes to € 2.30 from € 2.41.

Weak 1Q results and a lowered outlook, but fortunately Belgacom confirmed its cash return plans (€ 2.18 dividend over FY11 results, or close to 9% yield, topped up with the current € 200m share buy back program), and this probably limits the downside risks. Based on our new estimates and after lat Friday’s drop in the share price, Belgacom is trading in line with the sector. Valuation seems fair. Hold rating and DCF-based € 26.3 target are maintained –we continue to prefer Telenet, offering better growth and cash return prospects. A company note will be issued on Wednesday as part of our publication at the occasion of the KBCS Benelux conference in London.

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