Joshua Mills

When will the uncertainty end?

MVNO price dispute and network build plans remain an overhang
1Q20 was fairly uneventful for both 1and1-Drillisch and United Internet, with no new detail on how (or when) the 5G network build will commence or when investors will get more clarity on MBA-MVNO extension and/ or ongoing pricing disputes. Management''s view that the latter may not be resolved for another 12-18 months was a negative update in our view - meaning that a final conclusion may not be reached until 4 years after the first price review was started. In the meantime, we remain sceptical that a standalone 5G rollout strategy can be successful, though Drillisch is unlikely to change strategy until roaming discussions and regulatory appeals have been exhausted. Ultimately we continue to see downside risk to 1and1-Drillisch earnings (Exane BNPP FY20 service revenues/EBITDA are -3%/-6% below company consensus). We do see potential upside in UTDI''s B2B Applications business (particularly as it can benefit from the online shift precipitated by COVID-19), but with an IPO unlikely until 2021/22, we see few near term catalysts.
What do we know today that we didn''t know on Tuesday?
Very little - Drillisch net add and service revenue trends were broadly in line with expectations, and we are still awaiting further updates on Drillisch''s network strategy, which we expect to be the biggest near term catalyst for the stock.
Has our thesis changed? No
As detailed in our report Lifting the Veil, we think Drillisch is unlikely to receive significant, retrospective price discounts from Telefonica Deutschland (+, EUR 2.90). That is likely to lead to further earnings downgrades and will make it even more challenging to roll out its own mobile network (see A Teutonic Shift? for more detail).
Changes to estimates
We make some adjustments to numbers for both 1and1-Drillisch (-, EUR 15) and United Internet (=, EUR 26) - up from our previous EUR 24 TP.
1&1 Drillisch

Drillisch is a holding company. Co. through its subsidiaries, is a mobile virtual network operator in Germany. The services acquired from the network operators Telekom Deutschland GmbH, Vodafone D2 GmbH, E-Plus Mobilfunk GmbH and Telefonica O2 Germany GmbH & Co. OHG are sold further to the end consumers for Co.'s own account and at rates established by Co. Co. organizes its operations into three segments: telecommunications, which includes its activities in the sector of wireless services; freenet holding, which comprises the operations of its freenet AG subsidiary; and software services, which involves activities related to the development and marketing of a workflow management software.

United Internet AG

United Internet AG. United Internet AG is a Germany-based Internet service provider (ISP) and holding company of the United Internet Group. The Company's products and technical services are divided into two key segments. The Access segment comprises narrowband, broadband and mobile access subscriptions, including the corresponding applications. The Applications segment includes such applications as home pages, e-shops, Personal Information Management applications, group work, online storage and office software. The Application segment also includes the operations of the Company's brands Sedo and affilinet, which serve customers performance-based advertising and sales possibilities. The Company's brand portfolio also includes GMX, WEB.DE, 1&1, united-domains, Fasthosts and InterNetX. In addition, the Company develops Internet based applications, such as cloud applications. The Company acts primarily via its wholly owned subsidiary 1&1 Internet AG, and Sedo Holding AG, in which it holds a majority stake.


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Joshua Mills

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