Description

Description

MasMovil is the only "growth-story" in the Spanish telecom market, and the Company is well positioned to continue stealing market share from incumbent operators even in a deflationary market due to current prices offered to consumers and cost-structure which makes the organization much more flexible vs. incumbent operators.

Currently, the market thesis and current analysts noise are based on whether or not the Company would be capable of acquiring subscribers in a semi-oligopolistic market dominated by the three usual players (TEF, VOD, ORA). In this front, the Company has over-delivered vs. market consensus by posting strong growth in subscribers (c. >200k subs per quarter) in a market which is growing at 1-2% and thus validating the thesis that Company's current model works and it is able to attract customers searching a more competitive bundle vs. the "more-for-more" strategy initiated in the Spanish market several years ago.

It is worth mentioning that, despite not buying a lot growth stories as an investor, MasMovil does have a real edge over incumbents in top-line terms and also has all the required management incentives to make a growth case happen. I believe, there is an attractive opportunity to buy a real growth case, with strong EBITDA growth, and attractive valuation in a market with positive dynamics for the Company.

(i) Tariffs in Spain: despite the fact that in Spain, as in the rest of the markets, there is a deflation of the operators' ARPU, MásMóvil offers tariffs c. 20% lower than the rest of the operators, this means that in a potential price war (as happened in the past) the company would not have to enter the game, and also that the incumbents do not want to mess with their tariffs because they have much more to lose from customer base re-rating (ex. TEF has c. 4M user-base with approx 70 ARPU vs. 40-50 MM).

As a result, MásMóvil has been able to capture a great share of the operators' low-mid market and has grown at a rate of > 190k users per quarter in the last 9 consecutive quarters. Consequently, its share of the BB / Mobile market has risen from 1/8% in 2016 up to 10/13% respectively.

(ii) Market is migrating again from traditional convergence to unbundling: One of the problems with Másóvil's bullish thesis was how the company would land in a world that was migrating towards convergent offers and the differentiation of carriers in terms of content. In this sense, Spanish Market moving towards a gradual unbundling of content and connectivity, in our view. Regulatory pressure and the increasing OTT offers could cause large operators to gradually scale down their bets on content differentiation. This should have some positive impact on MásMóvil, which has always been seen as a connectivity player.

For the time being, only football remains as a key differentiation factor in Spain (for Telefónica and Orange) and it's costing hundreds of million for carriers to gain content exclusivity with a questionable NPV. At the beginning of the last football season, operators did not show any further subscriber growth, suggesting football is a valuable retention tool but it is not helping to grab further share, which suggest the case for opening licensing to OTTs again, reducing differentiation importance.

(iii) Digi (challenger operator) as the main threat: The main threat of MásMóvil could be other operators that have appeared with similar prices in the market, however we highlight here that i) MásMóvil’s growth was already affected by Digi in 2019 and KPIs were still at record highs; and ii) after certain Digi's management declarations, I am confident the company will not get more aggressive in order to speed up growth in the short term because there is no risk to de-rate low market when there is significant room to gain market from traditional incumbents.

(iv) Capex as the main problem of the sector: the problem of the Telecom sector has always been the capex needs to roll-out fiber / lines together with the spectrum auctions which always pose some-cash for any investor, including myself.

In this regard, it should be noted that MM's management has always been clear on how to carry out investment in the roll-out of new FTTH and lines, agreements with other operators ( mainly Orange) through co-investment that means less capital deployment where it makes sense to roll out fibre, as well as using NERA agreements (regulated prices) in the rest of the regions where it does not make sense to roll out own a proprietary network.

I see this strategy as completely appropriate for an operator like MásMóvil that has been opportunistic in taking advantage of economies of scale by developing its own network where it is necessary, at the moment its own / shared network reaches 13.4 million including the 5.2 million additions from the agreement with Orange.

An increased footprint should provide tailwinds to further broadband net add momentum as MM has been adding fibre subscribers without covering the whole country. The migration of customers onto its own FTTH network will also provide a useful tailwind for costs as Masmovil’s co-investment agreements give it access for lower monthly fees.

In the regions where it is not worth developing your own network, due to the special market regulation in Spain, it is possible to take advantage of the other operators (specially Telefónica) by using their network as a public regulated price (NERA) and start driving in those regions until it develops enough economics to create its own network.

(v) Cash-generation: We understand those investors who are reluctant to invest in companies that are not yet generating strong cash flows. This is still the case for MásMóvil, as in 2020e recurrent cash flow generation should gobbled up by the 5G spectrum licence and management’s stock option plan. That said, I would note this is very normal for smaller alternative Telco operators as the business needs a certain scale, given the large fixed costs.

In my view, the critical issue is properly assessing the drivers that should support market share gains (price discount + lack of differentiation by large players). If those are solid, subscribers will grow and cash will follow. Moreover, in the case of MásMóvil, breakeven is around the corner, as even in a conservative case, cash breakeven should flow in 2021e with management guiding consensus at c. 200 mm positive cash in 2021e once capex cycle is completed and fixed structure is leveraged by additional subscribers.

(vi) Opportunistic M&A Acquisitions: In general I am always sceptical of any M&A transactions in the telecom sector as the relative synergies visibility of network integration and fixed costs base split leads operators to overpay and make inefficient use of capital.

However, I believe that the Company's capital discipline, which is the result of a management highly aligned with the shareholders, allows the right price to be paid on operations that can bring real value to the shareholder.

In March 2020, the Company announced the acquisition of LycaMobile, a Spanish pure-mobile MVNO operator with 1.5 mm lines (€132 mm revenues / €45 mm EBITDA) for a total consideration of €372 mm (8.2x pre-synergies / 4.8x post-synergies) which seems a reasonable valuation once synergies are crystallized.

MásMóvil is targeting yearly synergies of €30mn which looks like a reasonable number, in our view. I estimate this would stem from i) €23 mn yearly wholesale cost savings as the company migrates 60 % of the traffic to its own network and ii) €7mn general SG&A cost savings, 8% of the total.

This would imply a 4.8x EV/EBITDA transaction multiple post synergies and a €370mn NPV of synergies, suggesting the acquisition would be fully funded with fully with "potential" synergies".

Valuation

With the share price stagnating for more than a year, despite underlying EBITDA growing by c.30% in 2020e, multiples now seem much more reasonable at 8x EV/EBITDA 20e (7x 21e), while the scope for growth is still significant, as the company has only a 9.7% of share in BB and 12.8% in mobile. Additionally, the current situation of COVID-19, where management has reiterated guidance and the company is well-positioned in an economic downturn, generates a positive window for opportunistic acquisition with a drop of c. 10-15% from March prices (and thus, increasing upside from current valuation)

We estimate the company could generate a decent amount of cash in 2021e, when it would trade roughly in line with the rest of European alternative Telcos, but with greater scope for growth, in our view.

I have been always kind of disappointed with capex management in the telco space, so I warned investors against Telco companies’ general optimism towards capex needs, so I am kind of sceptical about MásMóvil’s ability of to meet its 2021 capex guidance. However, we have to acknowledge the group has so far been relatively strict with guidance, over delivering on EBITDA growth, and with capex increases largely stemming from the extended network roll out.

So even if small there is a chance MásMóvil could meet its €200 mm FCF guidance for 2021, it could take our valuation up to €42/share.

If we stick to our current capex estimates but assume the company’s 2021 EBITDA guidance (€670-700mn), which we see as more reasonable, then valuation would rise to €32/share.

In either case, current price (€ c. 17/share) offers attractive upside and multiple de-rating cover much of the risk of buying growth-histories.

What can go wrong?

The problem with a thesis like MásMóvil is that even though the company has kept its guidance intact (after its upward revision) and has been growing at a rate of c. 200k subscribers during the last 9 quarters, the market will not put all of this into value because the lack of a specific catalyst (special situations opportunities, etc.) but rather the Company offers a clear growth history, in a market where incumbents cannot compete due to the cost of migrating their ARPU to lower rates and the impact this would have on their revenue base.

In addition to the lack of a clear catalyst in the short term, the absence of cash generation caused by upgrading the network in the short term, although it has a very clear economic rationale, can be a risk for investors who prefer to buy a consolidated history in a sector where capex surprises are mostly negative.

The financial leverage (3.8x vs. c. 2.0x in 2018) due to the purchase of the convertible bonds from Providence Equity Partners (€883 mm, EPS +10%) together with the recent acquisitions may pose a risk for the Company, despite having lower leverage than other European telcos and having a maturity schedule with enough headroom.

Liquidity risk, despite having a market cap of c. €2Bn, which is sufficient to form part of the IBEX 35, is a value that is not well known by a large part of the investment community, in a sector that is not very well loved among investors, which may make it difficult for the thesis to crystallize in the short term, despite positive delivery by the Company.

Catalyst

(i) Well-positioned and unique challenger in a incumbent market where other players cannot assume the risk of competing
(ii) Upgraded Guidance even with COVID-19 situation
(iii) Spanish market faster than expected migration to mid-low market tariffs due to economic uncertainty