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Morningstar | Altice Reported Mixed 2018 Results; Shares Undervalued, but Company Highly Leveraged

Altice reported mixed 2018 results with revenue a bit higher and EBITDA lower than we expected. We anticipate these two issues to basically offset each and don’t expect any significant change to our EUR 2.40 per share fair value estimate or narrow moat rating. We believe the shares are undervalued but note that the stock’s very high uncertainty rating is due to its high level of leverage. Thus, we think only aggressive investors should consider investing in Altice’s stock at this time.

The firm reported revenue of EUR 14.3 billion versus our projection of EUR 14.1 billion. Altice spun off its U.S. operations during the year, so our almost 40% revenue reduction from 2017’s reported revenue including the U.S. isn’t comparable to Altice’s claim of a drop of 3.5% on a pro forma basis as if the U.S. was spun off at the end of 2016. While we are pleased to see the company report revenue higher than our estimate, it continues to struggle due to heavy promotional activities in France by all operators. While these allowed it to grow its postpaid wireless subscriber base by 8% to 13.5 million and its broadband base 5.6% to 6.1 million, its revenue still fell 4.3% year over year to EUR 10.2 billion due to prepaid wireless customer losses and lower average revenue per user, or ARPU.

A similar scenario occurred in Portugal, despite less intense competition. Thus, revenue fell 3.1%, while its postpaid wireless base only grew 5% to 3 million, and its broadband base gained less than 2% to 1.6 million. However, we think Altice is better positioned in Portugal than France as it is the largest wireless phone company and has the most homes passed by fiber in the country. Thus, we expect its converged service to be more successful in Portugal.

The heavy promotional levels pushed down ARPU and margins, with the company’s EBITDA margin only reaching 35.7%. While this was an improvement from 2017’s 33.6%, it fell short of the 37.1% we projected.

Altice’s operations in Israel and the Dominican Republic also struggled, but they are much smaller. The firm saw significantly lower revenue losses in the fourth quarter than earlier in the year, which makes us think the turnaround is proceeding well. However, we remain more skeptical than management, which expects France to generate 3%-5% revenue growth in 2019 and grow its EBITDA. While we expect continued EBITDA margin expansion, we think revenue growth will take longer. Management has historically been good at cutting costs but poor at generating revenue growth. We don’t expect the company to return to revenue growth until 2021.