Telenet : Shareholder distributions on the agenda for 2018

Despite higher competition and regulatory headwinds, both in fixed and mobile, we believe that EBITDA growth will accelerate in 2017 and in 2018 (vs. +3% organically in 2016) thanks to the cross-selling of triple-play and mobile products, growth in the B2B segment, cost discipline and, last but not least, material extraction of synergies from the SFR BeLux and BASE acquisitions. The latter should speed up from 2H17 onwards thanks to the progressive migration of the MVNO base onto BASE’s mobile network. We expect a material re-leveraging in 2018, and we believe that Telenet can decide on a EUR 1.5-2.5bn distribution and still comply with its historical leverage target of 3.5x-4.5x (based on Telenet’s definition). Bonds could be hit by the recap, but we are confident that over time, the net leverage will stay around 4.0x (i.e. 4.5-4.7x on a reported basis) as a result of higher EBITDA, combined with higher FCF from 2019. - We maintain our Reduce recommendation on the 2024 notes (tight Ytc compared with bond peers) and our Neutral recommendation on the 2027 notes (they already factor in Telenet’s solid results). - - >Supporting factors - • Integrated fixed-mobile operator in Belgium with leading market shares for fixed services and a #3 position for mobile services.• Material synergies from the integration of BASE and SFR Belux. Management targets more than EUR 220m and EUR 16m of annual synergies, respectively, from these two acquisitions.• Solid operating performance. EBITDA should further improve in 2017 after a good performance in 2016 (revenues and EBITDA were up +3% organically) thanks to the following drivers: 1/ selected price increases for fixed products, 2/ significant room to cross-sell triple-play and mobile products, 3/ first synergies from the BASE acquisition and 4/ cost control.• Advanced cable network providing an advantage over DSL technologies.• Positive FCF (EUR 232m in 2016, EUR 241m forecast for 2017e) despite heavy investments to improve BASE’s network.• Telenet might benefit from a full-merger between its controlling shareholder Liberty Global (Ba3/BB-) and Vodafone (Baa1/BBB+), should this scenario materialize (unlikely in the near term).Points to watch - • Intensifying competition in the Belgium telecom market, driven by the wholesale cable regulation.• Expected re-leveraging. The current leverage of 3.4x (as defined by Telenet) is below the 3.5x-4.5x historical target. The group is a natural buyer of VOO (the main cable operator in the Wallonia region which is not currently for sale) and we expect an extraordinary shareholder distribution in 2018. The leverage target of Liberty Global (Telenet's controlling shareholder) is 4.0x to 5.0x.