Description

1. Summary of the investment opportunity

·         (+) Sunrise is a fairly defensive business: a domestic Swiss telecoms operator in a consolidated, rational, high ARPU market.

·         (+) The company could be trading at a stable c. 10 to 11% dividend yield by 2017E, a complete anomaly vs. Swiss companies/peers. We think the company can pay out much more than the guidance of 65% of eFCF and still meet its leverage targets, which is at odds with sell-side estimates (and perhaps investors' estimates, too). We see scope for dividend guidance to be raised through 2016/17E. Even with a payout ratio of only 65% of eFCF, i.e. no upgrade to dividend guidance, Sunrise is trading on a c. 7% dividend yield (and will de-gear below the target leverage ratio), which is very low vs. comparable peers with similar growth profiles, e.g. Swisscom (particularly in a negative Swiss rate environment, where investors are 'yield hungry'). 

·         (+) We think there is a simple path to c. 30 to 50% upside to today’s price in a relatively low risk, defensive business, even if we assume only c. 1% top-line growth into perpetuity and no margin expansion (from both DCF and multiples-based valuations). This conservatively ascribes no value to M&A or cash returns, both of which are potential upsides vs. expectations that we believe investors (and the sell-side) are underestimating.

o   (+) In actuality, there is good scope to drive margin expansion (e.g. the company is removing 10% of FTES in 2016e, etc.), so we think the no margin expansion assumption is conservative. There is a new CEO, Olaf Swantree, who recently joined from EE in the UK (where he had a very strong operational record).  Having spoken with the company (including some members of the board of directors), it seems that Swantree is going to place much more emphasis on improving margins and the cash profile of the business vs. the previous CEO, which could also excite investors, given time.

o   (-) We are less confident in general re. the long-term normalised growth of telecoms businesses in developed markets: the last five to eight years have shown revenue declines for many telecoms operators, in marked contrast to most industries. We therefore prefer to assume very limited top-line growth: 1% growth and flat margins is fairly conservative, but we still see good upside on a risk-adjusted basis.

·         (+) There is (very) good scope for a merger with Salt within the next c. 18 months, offering serious upside potential. We think there is a c. 20% chance it could happen over the next 12 months (it may sound low, but that is actually pretty high vs. most other opportunities we see, and we do try to invest in these sorts of latent optionality situations).

o   A full merger is less likely, but could be worth c. CHF 25 per share, e.g. c. 40% upside to today’s share price.

o   A network sharing merger (where tower infrastructure is shared) is more plausible (given commentary from Salt and Sunrise) and could be worth c. CHF 12 per share, e.g. c. 20% upside to today’s share price.

o   Both companies have openly talked about their interest in fully merging, which both companies were close to doing so back in 2010. It is definitely plausible. We assign a c. 20% probability each year that the two companies merge (in some form, more likely to be a network sharing merger) during that year, which leads to c. CHF 4 per share in M&A optionality by FYE 2016E, e.g. c. 7% of the current price.

o   Factoring in M&A optionality into our valuation assessment, there is perhaps c. 50 to 60% upside to our estimate of fair value.

·         (+) There is also compelling strategic logic for SRCG to merge with UPC (owned by Liberty Global).  

o   UPC acquiring Sunrise would be the Swiss equivalent to Telenet acquiring Base in Belgium: providing a stable mobile customer base to combine with UPC’s BB/TV subscriber base, which would allow UPC to lower churn (and cut MVNO fees). UPC has been trying to grow its MVNO base but with little success; a merger could be a big step forward for UPC. 

o   The synergies could be very large (potentially c. CHF 1.0bn) and would prompt no anti-competitive issues, as UPC is very small in mobile, where Sunrise is strongest.

o   UPC has the balance sheet capacity to effect such a transaction.

o   On the flip-side, Freenet recently bought out CVC’s stake in 25% in Sunrise. It would seem logical that CVC, a PE firm that IPOed Sunrise, would’ve shopped their stake to UPC (given the strategic value). This may indicate UPC’s disinterest in acquiring Sunrise, or they may wish to made a full formal offer for the company in one go, rather than buying bits piecemeal (and therefore bidding up the price they need to pay on the other 75% of the share count). Having spoken to Freenet, it is clear they are willing sellers if they can get a premium to their CHF 73 per share entry price.

·          (+) We think there is a (very) interesting opportunity for cash returns that the market is not picking up on.

o   If Sunrise maintains a 2.5x ND/EBITDA level (as guided) and a 65% dividend payout ratio from 2016E onwards (of eFCF, not net income, as guided), Sunrise can also return a further c. 25 to 30% of the current market cap. by 2017E.

o   We think Sunrise could return c. CHF 15 per share (c. 25% of the current share price) p.a. by 2016E, in addition to the c. 7% dividend yield at a 65% payout ratio. This is very substantial in a yield hungry world.

o   We think the most likely means for the cash to be distributed is via an increased dividend payment, and therefore see good scope for management to increase guidance re. the payout ratio to beyond 65% of eFCF. This would be meaningfully above sell-side estimates, and would likely be very well received by the market. 

·         (+) ‘Looking around corners:’ in many ways, Sunrise is an interesting example of a transformative style of investment. Sunrise’s historical financials paint an inaccurate picture of Sunrise’s future potential. This is compounded by temporary and non-fundamental reasons for investors misunderstanding the Sunrise investment story. All of this comes together, for us, to provide strong evidence as to why the company is temporarily mispriced:

o   Accounting confusion. Sunrise has been changing the way it offers products (it is unbundling phones and tariffs), which alters the way revenue is accounted for. This is still causing confusion for investors and analysts, as revenue and EBITDA appeared to accelerate rapidly in 2014 and then decline in 2015: in reality, neither is true. This phenomenon will wash out by the end of 2015 / early 2016. The underlying business has been fairly flattish, and the cash impact is zero.

§  Management didn’t do a great job of education investors around these issues, which led to inaccurate forecasts by some sell-side analysts and then perceptions of a reduction in guidance in 2Q 2015. We think most of these issues are largely optical / miscommunications, rather than fundamental issues, and will ‘right themselves’ over time.

o   Declining capex. Sunrise is coming out of a major investment phase, meaning FCF will be boosted by capex intensity falling from c. 17% to c. 11% of sales. Historical capex is not representative of future capex investment requirements.

o   Debt refinancing. Sunrise’s debt has recently been refinanced, which should reduce interest costs from c. CHF 170m p.a. to c. 50m p.a.. This will substantially boost net income and equity FCF vs. historical levels.

o   Amortisation hurting EPS. A large amount of intangibles were created prior to the IPO due to PE ownership (e.g. brands, customer lists, etc.). These intangibles are being amortised, creating a major drag on EBIT and net income. This amortisation is a non-cash expense (whereas depreciation is a proxy for capex requirements) and is distorting EBIT and net income. As amortisation declines, it could add c. CHF 30m p.a. to EBIT, which is very sizeable vs. EBIT in 2014A of CHF 176m.

·          (-) We think that the risks re. an investment in Sunrise look largely manageable, and include:

o   Salt could move into the broadband market and take share and/or act as a low-price leader. This is our base case assumption, though we don’t think it will affect Sunrise’s pricing or market share much, as Sunrise is, itself, a relative minnow in this area too vs. Swisscom (it may hurt future growth rates, though).

o   Salt and/or Swisscom could get less rational re. pricing in mobile. Both competitors would be hurt the most by these actions (Salt is very levered, has thin margins and large reinvestment requirements, whilst Swisscom has the largest market share). It cannot be ruled out, though we think it is relatively low probability. We have seen no indications that this is happening in a substantial way (though Xavier Niel, as the owner of Salt, is very much seen as a ‘boogeyman’ that scares some Sunrise investors who have not done detailed work into Salt’s strategy. We have been fortunate enough to speak with the (ex-) management team at Salt and are comfortable that this risk is unlikely to materialise in a major way.

o   General muted growth and/or weakness re. guidance could concern investors, irrespective of the potentially attractive yield

o   Some misc. further communication stumbles and/or further ‘noise’ around the changing accounting reporting that leads to further investor confusion / eroding sentiment.

o   Potential for new MVNOs looks limited, ie. no real risk of new market entrants

o   All in all, we think the risks are fairly manageable when the upside is considered. 

2.        The key drivers of the Sunrise investment thesis and the path to value creation

·     There are a number of catalysts / improvements that should occur over the coming 12 months

o   Improving clarity re. financials / investor understanding of the business through 2H 2015 into 1H 2016E. This may sound like a very woolly catalyst, but Sunrise is a failed IPO. It was pushed far too aggressively by investment bankers, CVC (and, it must be said, the ex-CEO and CFO are somewhat complicit), stumbled, and the shares collapsed. The investor base is now refreshed, but it will take time for the company to prove to investors that it is worthy of trust: ‘once bitten, twice shy’.

o   Major payouts in 2016E, via: SBBs, special dividends, or an increase in the regular dividend vs. market expectations

o   Highly accretive potential M&A with Salt or UPC, which could happen at any time in 2015 or 2016E

o   Underlying fundamentals staying roughly stable. We are not banking on anything superb happening, but any upside to ourconservative forecasts would be ‘gravy’ and would likely drive upgrades to sell-side estimates, etc.

3.        Brief description of Sunrise’s business

·    Sunrise is the second-largest telecom operator in Switzerland. It has c. 27% of the mobile market, c. 9% of the broadband market and c. 2% of the Pay TV market.  

o   Swisscom, the incumbent, has c. 55% of the mobile market, c. 54% of the broadband market and 24% of the Pay TV market. Swisscom is not aiming to grow share, recognising it is at the limits of what is deemed competitively fair.

o   Salt, the third competitor, has c. 18% of the mobile market, and may (likely will) branch into broadband and Pay TV. Xavier’s Niel (founder of Iliad) acquired Orange Switzerland, which he then rebranded Salt.

§  Niel is renowned for having aggressively cut pricing in France, hurting the profitability of all competitors. In France, he could do this as he did not have any existing mobile customers in his ‘back book’, and therefore was not cutting his own mobile profits. The situation is very different in Switzerland.

§  We believe he is less likely to be aggressive than many investors think, given high financial leverage, lack of convergence and the legacy subscriber base, which will massively hurt Salt’s short-term profitability as it would require a repricing of Salt’s back-book.

§  We have spoken with various ex-senior managers at Salt and believe Niel to be much more rational re. the Swiss market than investors are concerned about (Almost all Orange management have been sacked, putting Salt into quasi-disarray). The Salt chairman also gave an interview a few months ago where he spoke in a very rational, conciliatory tone about Salt’s desire to maintain / grow pricing in Switzerland.

§  Lastly, Salt’s network quality is the lowest of the three MNOs and their customer service quality is relatively weak vs. competitors. With an under invested network that needs significant to be upgraded to match Swisscom and Sunrise’s quality, very high leverage, a big back book of existing customers, etc., we believe Salt will be more cooperative than many investors are concerned about (we also believe it is a big potential risk to the investment thesis, but assign a much lower probability to it occurring than other investors).

o   UPC, a cable company that is a subsidiary of Liberty Global, has c. 21% of the broadband market and 31% of the Pay TV market. UPC has tried to grow its MVNO franchise, similarly to what Liberty Global has done in other countires, but with little success. We believe this may prompt UPC to consider merging with Sunrise (or Salt, though we believe that to be less likely, as Salt’s owner, the telecom’s baron, Xavier Niel, is probably less willing to become a minority shareholder in Liberty Global).

·    Sunrise operates in an attractive, though relatively low-growth, environment. The Swiss population is wealthy, with GDP/capita nearly double the European average. Economic growth has been robust. Meanwhile, growing immigration is leading to relatively higher levels of population growth, thereby growing the pool of subscribers.

·    Well invested commercial proposition for retail + corporate customers. After three years of heavy investment (2012-15E), Sunrise now has c. 85% LTE coverage, c. 85% for ULL and, thanks to its access deal with Swisscom, c. 80% VDSL and c. 35% fibre coverage. Back-book repricing is almost over and commercial momentum is solid.

·    Sunrise’s relatively new Freedom tariffs, which split the cost of the handset from the service contract, could be an important driver of market share growth for Sunrise, in our view. In fixed line, we expect Sunrise’s position to improve post the recent fibre wholesale deals with Swisscom, SFN and local utilities.

·    Switzerland also has the most benign telecoms regulation in Europe. Regulation is based on an ex post principle rather than ex ante, as is the case in other markets. This means that there is limited proactive regulation, with the regulator only intervening in the case of disputes between operators. Switzerland has regulatory independence from the EU (only ex-post pricing regulation).

4.        Growth potential and secular trends affecting Sunrise

·         We have assumed no market level growth. Largely for conservatism, even though Swiss GDP is forecast to grow at c. 1.0 to 1.5% in 2015/16E.

·         We have assumed 1% volume growth in mobile subscribers, which is 30bps of market share gain p.a.. We think this is appropriately conservative. There is scope to take share from Swisscom.

·         Limited competitive risks/opportunities. The market is highly consolidated between Swisscom, Sunrise and Salt. No new entrants can win mobile licenses until c. 2028. We expect the market shares to remain roughly stable.

·         FX is largely irrelevant. All revenues are in CHF and most costs are in CHF (some capex is USD). I need to check the debt schedule to see if any is EUR or USD, but I think it is a minor issue.

5.        Sunrise’s historical and future pricing power

·         We assume no ARPU improvements to 2020E. On one hand, bulls argue that increasing data demand should drive pricing power. We are more sceptical (in general for telecoms companies in developed markets, not just for Sunrise): thus far, this has been more wishful thinking across the industry than reality.

·         MTR risks to ARPU. Sunrise makes a fair amount of money from mobile termination rates (it also pays out a lot). If MTRs were cut, it could hurt EBITDA by c. CHF 10 to 20m. This looks unlikely, given Swiss regulation, but it is a risk to ARPU. 

6.        The economics and capital intensity of Sunrise’s business

·         Net debt is at the target 2.5x level already; benefited by the company de-gearing rapidly. After taking into account other liabilities (pensions, etc.), 2016E economic ND/EBITDA is c. 3.2x (we capitalise future (long-dated) spectrum costs and add them as a debt-like item, to be conservative. This is more conservative than most sell-side analysts.

Overall, we are comfortable w/ Sunrise’s net debt levels and target of 2.5x ND/EBITDA gearing. We think 2.5x is very sustainable. Sunrise competes in a fairly benign market and has access to very, very low cost debt financing. One could easily argue that anything less than 2.0 or 2.5x ND/EBITDA is ‘sub-optimal’, though perhaps we are getting too aggressive here… 

·         Returns on capital are decent, particularly for a telecoms operator. ROIC is much higher than ROE, due to non-cash amortisation charges depressing ROE. This could be one of the reasons for some investor confusion.

o   Historical and forecast post-tax ROIC is c. 11%. This is actually not bad at all for a telecoms company, and is particularly good when considering that Sunrise’s WACC is probably c. 6%, given Swiss rates, etc. (In fact, with a ERP of 6%, a beta of 0.7 and a cost of debt of 3% (which is from legacy, pre-IPO levels; new issuance would be at lower rates), Sunrise's calculated WACC is actually 3.5%. We ignore that for our analytical purposes, as it feels faintly ludicrous. But we mention it as a reference point). 

 ·         Historical EBITDA margins have expanded from 25 to 30% over the last five years. This is probably the result of PE ownership. The trend has been steady and positive.

·         Forecast margins are largely flat, as discussed. This is (a) a simplifying, and (b) conservative assumption that we’ve made given the stable business profile and stable competitive landscape.

o   Thinking about operating leverage at a telco is important, typically a c. +/- 1% change in ARPU can lead to a c. +/- 4% change in EBITDA and a c. +/- 8 to 10% change in EPS. We think Sunrise is operating in a particularly stable geography, so this is less of a risk to our forecasting, but it’s worth thinking about from both a positive + negative angle.

·         Capex is falling: from 17% of revenue to c. 11% by 2016E. 11% is a fair, normalised number for capital intensity, as Sunrise has covered most of the country in 4G / LTE coverage.

o   Overall, it looks like Sunrise has done a good job of investing intelligently to date (as indicated by their industry leading post-tax ROIC of c. 11%).

o   We are naturally sceptical of businesses that have been in PE ownership (has the company just been run for cash and under-invested, etc., etc.). Everything we have read on this topic suggests that this risk is a non-issue, but we have wanted to be really careful here. Who knows, perhaps we are too sceptical of PE owners…

7.        Management quality and alignment of incentives

o   There is a new CEO, Olaf Swantree, who recently joined from EE in the UK (where he had a very strong operational record).  Having spoken with the company (including some members of the board of directors), it seems that Swantree is going to place much more emphasis on improving margins and the cash profile of the business vs. the previous CEO, which could also excite investors, given time.

o   Freenet, the German telecoms company that now owns 25% of Sunrise, has stated that they see their stake as an investment in an under-valued business and are not intending to block the business being sold, etc. In fact, having spoken with Freenet at length, it seems clear that would welcome orchestrating a trade sale in some form. They are also very focused on Sunrise improving its margins and cash generation. We are somewhat sanguine on these fronts (as discussed), but any improvement or ‘noise’ here would likely be well received by investors.

8.        Sunrise’s quality of capital allocation

·         Management commentary re. potential M&A sounds sensible and well-considered. The scope to merge w/ Salt looks v. sensible, if regulatory approval can be acquired. Not sure if it can, though. Also, Sunrise and Salt’s predecesors tried to merge (c. 2010) and annoyed the regulatory, so there is some sensitivity here. M&A would need to be handled delicately.

·         Cash conversion (unlevered FCF as % of NOPLAT; disc. eq. FCF as % of net income) is greater than 100%, as amortisation of intangibles distorts EBIT and net income.

·         The scope to pay out big dividends, do SBBs, M&A, etc., suggests that management have significant scope to create value for shareholders via sensible capital allocation. As such, it’s important to get comfortable w/ management’s ability to allocate capital. Evaluating the new CEO will be a priority.

9.        Risks to the investment thesis

·         All in all, we think the risks are fairly manageable when the upside is considered. 

·         Salt could move into the broadband market and take share and/or act as a low-price leader. This is our base case assumption, though we don’t think it will affect Sunrise’s pricing much (it may hurt future growth rates).

·         Salt and/or Swisscom could get less rational re. pricing in mobile. Both competitors would be hurt the most by these actions (Salt is very levered, has thin margins and large reinvestment requirements, whilst Swisscom has the largest market share). It cannot be ruled out, though I think it is relatively low probability.

·         Some misc. further communication stumbles and/or further ‘noise’ around the changing accounting reporting. This could lead to further investor confusion / eroding sentiment (more of a multiple contraction risk, rather than a fundamental risk).

·         The risk that we’re misunderstanding the accounting changes. We think this a non-issue fundamentally, but makes the P&L noisy. What’s worse, it makes the KPIs that people track (ARPU, service revenues, EBITDA margins, etc.) very noisy, which is even more confusing for investors. We don’t think the company has done a great job explaining this topic to investors, though it is improving on that front.

·         We will note that the sell side all came out bullish at IPO (as expected?) and have totally missed the slide in the shares, from CHF 90 to 56. So they could well be wrong again / stupid analysts / this could be a hard company to analyse. We are fairly sceptical of most of what the sell-side forecast on the company, given how wrong they have all been to date, but it’s always worth forming your own view. Most analysts have now had a good enough amount of time to get familiar with the business.

·         Liquidity is fine at $7m ADTV, but not great. Sunrise is not that big (CHF 2.5bn market cap., CHF 4.5bn EV).

·         Growth may disappoint, in which case investors will be unlikely to apply a premium multiple to Sunrise's business

10.     So why are Sunrise’s shares currently mispriced?

·         Sunrise needs investors to ‘look around the corner’, as Sunrise’s historical financials paint an inaccurate picture of Sunrise’s future potential. There are a number of temporary and non-fundamental reasons for investors misunderstanding the Sunrise investment story. Without wanting to sound complacent, we don’t really see a lot of genuine, fundamental concerns re. the investment at these valuation levels.

·         Some of the commentary from the sell-side (e.g. spec sales, e.g. Redburn, etc.) is very backwards looking. They want their cake, and they want to eat it. Investing doesn’t work like that. We think these commentators are waiting for everything to be hunky dory, all the ‘noise’ in the P&L gone, etc. By that time, the shares will be back at c. CHF 80. We think that NOW is the time to begin buying. This ‘risk aversion’ could easily change tone very quickly. We think it probably will.

·         Accounting confusion. Sunrise is changing the way it offers products (it is unbundling phones and tariffs), which alters the way revenue is accounted for. This is causing confusion for investors and analysts, as revenue and EBITDA appeared to accelerate rapidly in 2014 and then decline in 2015: in reality, neither is true.

This phenomenon will wash out by the end of 2015 / early 2016. The underlying business has been fairly flattish.

Management didn’t do a great job of education investors around these issues, which led to inaccurate forecasts by some sell-side analysts and then perceptions of a reduction in guidance in 2Q 2015. I think most of these issues are largely optical / miscommunications, rather than fundamental issues.

·         Declining capex means FCF will be higher than net income. Sunrise is coming out of a major investment phase, meaning FCF will be helped by capex intensity falling from c. 17% to c. 11% of sales. Historical capex is not representative of future capex investment requirements, with 2014A capex of CHF 357m likely to fall to c. CHF 230m by 2016E.

·         The IPO and associated debt refinancing is lowering Sunrise’s cost of debt (and total debt burden), which will boost future earnings and eFCF vs. 2014A. Sunrise’s debt has recently been refinanced, which should reduce interest costs from c. CHF 170m p.a. to c. 50m p.a.. This will substantially boost net income and equity FCF vs. historical levels.

·         Amortisation hurting EPS. A large amount of intangibles were created prior to the IPO (e.g. brands, customer lists, etc.). These intangibles are being amortised, creating a major drag on EBIT and net income. This amortisation is a non-cash expense (whereas depreciation is a proxy for capex requirements) and is distorting EBIT and net income. As amortisation declines, it could add c. CHF 30m p.a. to EBIT, which is very sizeable vs. EBIT in 2014A of CHF 176m.

11.     Margin of safety, current valuation and potential IRRs

·         Sunrise looks pretty cheap vs. peers (and in absolute terms) from 2016E onwards, on almost any cash-based metric (FCF, OpFCF, etc.). The below metrics look compelling, particularly given the low-risk nature of the Sunrise business.

·         A reverse DCF of the current share price at 6.0% WACC and normalised margins in line with current levels implies c. (2)% p.a. top-line growth into perpetuity, which we think is too bearish. We think it is hard to definitively say what will happen with the top-line, but negative top-line and flat margins is most likely too bearish.

·         A dividend yield of c. 11% is possible by 2016/17E. If the company paid out 100% of eFCF (and, frankly, we don’t see why it shouldn’t in the mid-term; the mgmt. has said as much), the hypothetical dividend yield in our ‘base case’ is substantial.

·         A dividend yield of c. 6% applied to management’s payout guidance implies c. 90% returns by FYE 2017E, equivalent to a c. 45 to 50% IRR. Clearly this is ambitious; we are not suggesting the company will pay out 100% of eFCF immediately and that the market will re-price Sunrise onto a 6% dividend yield. But it is not implausible, with peers on less, so we outline the scenario to illustrate the potential returns. You can decide what is feasible.

·         Sunrise has guided for paying out at least 65% of equity FCF from 2016E, which leads to a stable c. 8% dividend yield.

We think this target payout ratio is too low and that the company could pay out more. In fact, we believe it will. The company is highly cash generative and has limited future capex requirements. But, if we assume that the company pays out 65% of eFCF, as guided, and assign a 5% yield (still a 5%+ spread vs. govt. bonds), there is c. 60 to 65% upside by FYE 2016E, including dividends.

·         Multiples-based valuations (below) imply c. 50% upside to FYE 2017/8E, or c. CHF 80 per share. Adding on the probability-weighted M&A optionality of c. CHF 4 gets you to c. 55% upside to fair value. This is particularly attractive given the low-risk and defensive nature of Sunrise’s business model.

12.     What are the catalysts for Sunrise’s shares re-rating over our investment horizon?

·         A merger with Salt or UPC could be worth c. 20 to 40% upside to the current share price. Given management’s positive commentary (and from Salt’s commentary, too), there is scope for this to happen in 2016 or 2017E. There are three possible ways for a deal to be structured:

o   A full merger is less likely, but could be worth c. CHF 25 per share, e.g. c. 40% upside to today’s share price.

o   A network sharing merger (where tower infrastructure is shared) is more plausible and could be worth c. CHF 12 per share, e.g. c. 20% upside to today’s share price.

o   Both companies have openly talked about their interest in merging. Both companies were close to doing so back in 2010. It is definitely plausible. The two companies have been working very closely in recent quarters on trialling a network sharing operation, which suggests the change of reaching a formal agreement is fairly high.

o   None of this is baked into our fundamental assumptions above, but provides an added kicker.

o   We assign a c. 20% probability from 2016E onwards that the two companies merge during the year in question, which leads to c. CHF 4 per share in M&A optionality by FYE 2016E, e.g. c. 7% of the current price, and c. CHF 7 per share in M&A optionality by FYE 2017E, e.g. c. 12% of the current price.

·         Improving clarity re. financials / investor understanding of the business through 2H 2016 into 1H 2017E should help investors get comfortable with the sustainability of the investment thesis, which should lead to multiple expansion.

o   We think that underlying fundamentals staying roughly stable would be helpful. But any fundamental upside to our conservative forecasts would be ‘gravy’ and would likely drive upgrades to sell-side estimates, etc.

·         Major cash pay-outs in 2016/7E, as discussed in the valuation section. There is sizeable scope for SBBs, special dividends, or an increase in the regular dividend vs. market expectations.

Catalyst

See main write up