Description

We recommend purchase of Altice USA, Inc (70% owned by Netherlands traded Altice NV):

 On 2018 estimates - EV/ EBITDA of 8.25x, FCF yield of 10%.  Debt / 2017e EBITDA 5.2x to 4.4x YE 2018

• Excellent management team - same assets doing $4.0B EBITDA this year did $2.7B EBITDA in 2015
• Street overly focused on video – broadband growing rapidly, 40% of revenue & we think 60%+ of EBITDA
• June 2017 IPO at $30.  Altice NV issues (weak France biz) not relevant.  ATUS Q3 results were excellent

Background.  ATUS is a combination of the Cablevision (acquired June 2016 $17.7B EV) and Suddenlink/Cequel (acquired December 2015 $9.1B EV) cable businesses acquired by Altice NV.  Altice NV brought ATUS public in June 2017 at $30.00 per share and continues to own 70% of the company while BC Partners and Canada Pension Plan (both were equity partners in the Suddenlink deal) own 15%.  Including insider ownership, float is less than 10%.

Cablevision.  Surrounding the NYC area…Long Island, Bronx, Brooklyn, Northern NJ and some of Connecticut.  High-income areas, dense population, FIOS overlap of about 50% has been a fact of life for several years.  ATUS management targeted $900 million in cost reductions at the acquisition.  2.4m video subs, 2.7m internet subs, average residential monthly revenue per customer $156.88 .  Q3 revenue and EBITDA of $1.7 billion and $714 million.  Should do $6.7 billion revenue / $2.8 billion EBITDA in 2017, up from $6.6 billion revenue / $1.8 billion EBITDA in 2015.  EBITDA margins have increased from 28% in 2015 to 43% in Q3.

Cequel (Suddenlink).  Southwest Texas, Oklahoma, Louisiana, Arkansas and West Virginia.  Lower income, more rural, less competitive with telecoms (offering DSL) as the key competitors.  ATUS management targeted $215 million in cost reductions at the acquisition. 1.1m video subs, 1.4m internet subs, average residential monthly revenue per customer $110.64.  Q3 revenue and EBITDA of $663m and $312m.  Should do $2.6 billion revenue / $1.3 billion EBITDA in 2017, up from $2.4b revenue and $949m EBITDA in 2015.  EBITDA margins have improved from 39% in 2015 to 47% in Q3.  These less penetrated broadband markets offer solid internet growth.

ATUS Financials.  Important to note the following when analyzing ATUS financials:

Video gross margins (revenue less programming costs) are 40% currently and declining, with programming costs per sub growing at HSD rates annually - higher retrans to network broadcasters/general content price increases. With customer service costs and cable box cap-ex there isn’t a lot of FCF in video. 

The real money is in broadband.  No programming costs, no expensive cable boxes.  Gross margins likely in the 90’s% and EBITDA margins likely in the 70% range.  With residential broadband penetration of U.S. households continuing to increase + cable broadband taking share from DSL + continued customer uptake of higher speeds, the broadband  businesses has been growing at a double digit rate.

The net of these points is that while overall revenue growth is quite low given video at 45% of revenue and voice (declining) at 9% of revenue, what really matters is revenue growth at internet, which is 40% of revenue.  ATUS still has some cost to take out (we estimate close to $200 million).  These cost reductions + organic growth will bring $4.4 billion EBITDA in 2018.  Post the impact of cost reductions the street is estimating 2%-3% revenue growth and 5% EBITDA growth annually.

We estimate at least $1.5b of FCF going forward with NOL usage in 2018 and 2019 running out by 2020 but FCF still at the $1.5b level then given EBITDA growth.  Management very comfortable with debt at 5.0x-5.5x given stability of the business.  Acquisitions are an obvious use of cash but there does not seem to be an obvious good size target currently.  An ongoing cash dividend might help correct ATUS discount valuation while also providing a no doubt helpful cash flow stream to parent Altice NV.

Summary.  2019 EBITDA should come in at $4.5 to $4.6 billion with net debt at $18 billion given $3+ billion of cumulative FCF.  A 9x EBITDA multiple would bring a $30 share price, equivalent to a 15x FCF multiple – at that point Debt/EBITDA would be less than 4x and broadband would represent nearly 70% of EBITDA.  A $30.60 share price by YE 2019 is a 20% IRR from today.

Disclosure: We are long ATUS.

Catalyst

 We are at management's leverage target.  Future use of FCF for capital returns or acquisitions.