EUR 850.00 For Business Accounts Only

Morningstar | Koninklijke KPN Reported in Line Q4 Results When Adjusted for iBasis; Shares Slightly Undervalued

Koninklijke KPN reported fourth-quarter results that were generally in line with our expectations, and we plan to maintain our EUR 3 per local share fair value estimate and narrow moat rating. While the firm’s reported full-year revenue of EUR 5.64 billion looks light versus our estimate of EUR 5.73, and its adjusted EBITDA margin of 40.8% looks strong versus our projection of 39.4%, this is basically due to the differences in how we accounted for its iBasis unit. KPN agreed to sell the division in March and stopped consolidating the business. We continued to count iBasis’ results, which have very low margins. The long time it has taken to close the deal, makes us skeptical if it will actually close. We will continue to count iBasis for now, which will keep our estimates different from those reported. While we think KPN’s shares are a bit undervalued, there are better options in European telecom, such as Telefonica, Vodafone, and BT Group.

The firm continues to make progress with its convergence strategy. The number of fixed-line and mobile converged customers grew 32,000 in the quarter to 2.07 million, and now represents 57% of its postpaid subscriber base. More importantly, on its high end KPN brand, it reached 70% converged. However, competition in the low end wireless segment continues, particularly for those with only a wireless service, which pushed consumer revenue down 1.1% from the year-ago period.

On the business side, fourth-quarter revenue fell 2.2%, slightly more than the full year. While revenue from professional services and consultancy grew 15%, this segment is too small to offset the declines in other segments. We expect these trends to continue with declining revenue in both consumer and business in 2019, but at a lower rate.

KPN continues to work on cost control, which enabled it to increase its pro forma EBITDA by 1% in the quarter and 0.8% for the year. We expect continued cost-cutting will enable slow but steady EBITDA margin expansion.