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Morningstar | Liberty Global Reported Weak 2018 Results, but Selling Its Swiss Operations; Shares Undervalued

Liberty Global reported weak fourth-quarter results that took revenue slightly below, and EBITDA margins below our projections. Management also provided weak 2019 guidance, especially on the margin side. However, it announced an agreement to sell its Swiss operations to Sunrise for CHF 6.1 billion ($6.1 billion), or about 10 times its expectation for 2019 operating cash flow. Liberty Global has been trying to turn this business around for several years without much success, so we think this is a good deal. The Swiss business has high EBITDA margins in the mid-50% range, but its 2018 revenue fell 3.7%, and is lower than it was in 2014. We believe the price of the deal shows the value in Liberty Global’s stock. Thus, despite the deal not being a sure thing, the weak fourth-quarter results, and poor margin guidance, we don’t expect to make a change to our $38 fair value estimate. Our narrow moat rating remains and we believe the shares are undervalued.

In the quarter, revenue from continuing operations declined 1.2%, but increased 6.2% for the year primarily due to currency movements. On an organic basis, revenue grew 2.2% year over year. While discontinued operations declined 10.3% for the quarter due to closing the sale of its Austrian operations. For the year, revenue grew 5.3%. The whole company’s revenue grew 6% from the year-ago period versus our projection of 6.1%. Part of the issue with the fourth quarter was due to currency movements reversing. Thus, on an organic basis, revenue grew 1.2% in continuing operations, with the U.K. growing 2.4%. If all the proposed transactions go through, the U.K. will account for over 60% of the firm’s revenue, so its prospects are the most important. The U.K. is benefiting from “Project Lightning”, where Liberty Global is expanding its cable TV network past an additional 400,000 to 500,000 premises annually. This expanded footprint to market to and continued price increases should enable revenue and margins to increase.

The main operation in the discontinued group is Germany, which has been a strong performer for several years and grew 5.9% organically for the year. However, even it struggled somewhat in the fourth quarter with organic revenue growth of 3.6%. On a reported basis, it was much worse with revenue growth of just 0.4%. That said, there were some unusual headwinds in the fourth quarter, so we do expect Liberty Global’s revenue to grow better in 2019 than in the fourth quarter, but less than in 2018.

Including continued and discontinued operations, the firm generated an EBITDA margin of 43.3% versus our expectation of 44.4%. While the company is selling some of its highest-margin operations, we think the price being received will be sufficient to offset the likely lower EBITDA margin going forward if the deals are successful.