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TMT Credit Focus: a look into the reporting season

Publication Date: 05 Feb 2019 - By Philip Grose By Philip Grose
Actionable
Differentiated

Thematic Fixed Income/Credit EU ex-UK UK Global Telecom & Media

In this Cross Asset's February post,  Philip Grose discusses:

  • A look ahead into February results season
  • Thoughts on 4Q earnings so far; and
  • Spotlights on companies with €90bn of debt and €40bn of equity: Vodafone revenues and outlook, Telecom Italia situation, and Digicel.

Cross Asset Advisors Coverage:


4Q18 Earning Season

4Q European telecom results have generally missed expectations to date, while guidance has underwhelmed. We see little to be positive about and question the robotic issuance of analysts notes reiterating BUYS on equity and debt. We believe the muted forward guidance is a harbinger of further valuation pressure in the telecom sector, which will have a knock-on effect on spreads – in particular the levered but considered stable/defensive telecom credits.

  • Looking ahead at the February reporters, Liberty Global releases results on the 13-Feb (focus: its OCF guidance). On Feb-21, Orange, Telecom Italia, and Bouygues report. Eutelsat on 15-Feb will kick off the satellite sector reporting, with SES and Intelsat reporting on the same day: 27-Feb. Millicom releases results on 7-Feb.
  • There are three situations that we expect to receive news flow on in February: Telecom Italia, Millicom-Liberty Latam (both reporting), and Liberty Global-Sunrise. 
  • Additionally, a news story that has grabbed global attention is Huawei; this will have ramifications across the B2B technology space.
  • Liberty Latam's approach to Millicom (TIGO) created a new situation for us to follow. 

Vodafone disappoints

Vodafone is leveraging up if it concludes its Liberty Global asset purchase and failing to grow. The rating agencies are sceptical, but still give VOD a premium to other ±3x levered European telecom companies (VOD is heading to 3.5x leverage), while its equity trades at a premium to the sector (20x P/E adjusted according to Bloomberg vs the iShares STOXX Europe 600 Telecom at 15x). Our issue with VOD begins with the current dividend debate, but then morphs into more financially severe questions over real free cash flow generation, capital allocation, and financial engineering. In fact, VOD's dividend is a poisoned chalice, even for credit investors, who would benefit from the company retaining cash/paying down debt.

Telecom Italia / TIM: Never change

Somethings don't change in the European markets –  and belief of a transformed Telecom Italia is one of them. We have seen shareholder and management changes at the telecom company for 20 years (and various multiyear plans that the company does not achieve). To us, the company's capital structure lacks a facilitator for value despite all the attention the company receives. 

Digicel

Digicel continues to be credit we follow closely (no listed equity), especially given its multi-tier debt structure with bond yields starting at 10% (i.e., 'senior' debt trading +300bp vs the Bloomberg Barclay US High Index).  Although we think some of its debt tranches are attractive, the news from the company over the last few months is skewed negatively in our view.

Contact us at mg@reachx.co to book consultation with Philip and access the full monthly report

Disclosure:

I have positions in the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Philip Grose

 

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