Play – High FCFE Unaffected by Epidemic
As predicted, telecoms are doing much better than the broad market amid the current equity sell-off, as evidenced by a 15.3% slide in the WIG-IT index versus a 26.9% fall in WIG over the past month. Key risks to the industry at the moment include (1) mobile network disruptions due to increased data traffic, (2) customer losses, (3) lost revenues from smartphone devices after the closure of physical sales locations, (4) weaker roaming demand, and (5) high leverage. With those risks factored in, our current base-case scenario for Play assumes a decline of 3.1% in the adjusted EBITDA for FY2020, driven primarily by lower revenues and margins from smartphone sales. We further expect to see free cash flow to equity of PLN 733m this year (vs. Play's current guidance for PLN >800m), implying high FCFE Yield at 9.9%. We assume Play will be able to cut back on advertising thanks to reduced carrier switching among phone users, while generating rising ARPU in line with increasing data traffic (+30-40%). After updating our models, we set our new 9-month price target for Play at PLN 33.50, and we continue to view the stock as our top Telco pick. Play does currently report relatively high debt, which might reach 2.9x EBITDA by December 2020 if the Company pays PLN 550m for 5G spectrum at this year's auction. That being said, we do not see the high leverage as a threat to solvency, but rather as a potential risk if the telco sector gets derated. Crucially, assuming no changes in dividend policy, Play might offer 2020 dividend yield as high as 5.0% – a major upside catalyst in an environment of low interest rates. In addition to an updated base-case scenario, we also provide a best- and worst-case view on Play to give a range of possible outputs in the face of extreme uncertainty and volatility.
Play Communications SA Formerly known as Play Holdings 2 SARL. Play Communications SA, formerly Play Holdings 2 SARL, is a Luxembourg-based provider of financial investment services. The Company is the owner of mobile operator P4 Sp z o o, that provides a wide range of mobile telecommunications services, including voice, data transmission services, messaging, video service (PLAY NOW), as well as Value Added Services and sales of handsets and other devices, to individual and business subscribers in Poland.
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