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Play – 1Q19 results’ review: Cost-driven positive surprise

The share market prices of the WSE-listed MNOs (inclusive of Play) rallied in June as the market abruptly and enthusiastically discounted the theme of ‘end-of-mobile-price-war’, changing its perception of local telecommunication companies from ‘heavy-capex, no-growth’ to ‘heavy-capex, some growth’. Whereas the early reaction by the market (Play’s share market price at >PLN 36 per share) seems to us as well overdone (it discounted, in our view, not only the full adoption of the latest hike in B2C contract tariffs, but also further hikes in prices which – in our view – are unlikely in the mid-term (next few years)), following some moderation (that came earlier this month) the current share market price of Play seems to us as broadly reasonable (still overdone, but only moderately). Whereas from the fundamental angle we do not see room for further justified advances in the Company’s share market price (hence, LT fundamental Hold rating), in terms of prospective possible news flow the potentially positive factors seem to prevail (hence, ST market-relative Overweight bias): (i) robust (c. 11% yoy growth in adjusted EBITDA) 2Q19E financial results on the horizon (August 26), (ii) upside risk to management’s FY19E adjusted EBITDA guidance, (iii) possible upward drift in market’s mid-term (2020-21) consensus expectations of adjusted EBITDA, (iv) upside risk to our current mid-term (2020-21) forecasts for the Company (faster than assumed adoption of the June’19 B2C tariff hikes by the active contract customer base, impact of starting to sell Vectra’s fixed broadband, impact of UPC starting to offer mobile telecom services based on Play’s network). Among the potential negative factors on the near-term horizon we see possible share supply overhang (lock-up on 40% of reinvestment shares and VDP4 shares elapses on July 27), and on the mid-term horizon (next year) – possible downside to (post-2020) dividends (if G5 spectrum and Virgin Mobile takeover turn out costly and the Company prioritizes de-leveraging over shareholder distribution).