Cyfrowy Polsat – Stale Earnings, Cash Boost From Cell Site Sale Unlikely
Cyfrowy Polsat stock has underperformed rival OPL by 24.3pp and PLY by 10.0pp in the last six months. The financial results for Q3 2019 also paled by comparison, with EBITDA down 2.0% y/y vs. 7.1% EBITDAaL growth at OPL and a 17% rebound at Play. Cyfrowy also demonstrates relatively low cash-generation potential vs. PLY: FCFE’19 = 6.9% vs. PLY 11.8%, DivYield’20 = 3.2% vs. PLY 4.8%. Summing up, CPS currently makes a less worthwhile investment opportunity than its rivals. Cyfrowy does deserve credit for its consistent multiplay strategy (in Q3 the number of customers using the 'SmartDom' smart-home packages increased by >13% y/y) and low churn rates (only 6.8% in 3Q’19). At the same time, however, as a pay-TV operator, the Company is experiencing revenue and profit contraction this year (-2% y/y segmental EBITDA) led by decreasing advertising expenditures (-0.7% y/y in 9M'19). The rumored sale of cell phone towers would greatly improve Cyfrowy's balance-sheet position, but unlike most analysts we do not think it is an option that Cyfrowy is actively pursuing. The current balance-sheet position is relatively good with net debt/EBITDA at 2.6x as of 30 September. It is true that Cyfrowy has spun the base stations out into a separate company, but we would view this as a precautionary measure against potential future hard times. Meanwhile the Polish mobile market is slowly regaining momentum. We have updated our earnings expectations for Cyfrowy, whose shares at the current level show downside potential of 10% to our new price target of PLN 26.10. At 7.1x 2019E EV/EBITDA, CPS is trading at a >15% premium to peers (note that the median ratio for TV broadcasters is currently only 5.7x).
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