Financial analysis and valuation of Neuf Cegetel

Résumé du document

Neuf Cegetel recent proactivity in external growth is not fully valued at current share price, which should also better reflect organic opportunities, leading to a 14% upside. Synergies are not fully valued Recent operations (merger with Cegetel, IPO, acquisition of AOL internet subscribers base) currently delivers synergies (headcount, SG&A, lower access costs, less competition) EBITDA margins remain below those of peer companies Neuf Cegetel model should finally yeld major cash flows in the short term Margins should also improve through migration from DSL wholesale to LLU Well positionned to capture growth opportunities Current businesses are on the rise till the end of the decade ( and provide strong cash flows) FTTH race has begun, needing capex but also previsible and high returns Neuf mobile model appears to be successful, to be confirmed in 2007 We therefore conclude to a 12 months price target of EUR32,0, leading to a 14% upside.

Extraits

[...] DCF valuation : target price of EUR32,0 Appendice Reminder : strong track record in external growth Neuf Cegetel : first french alternative operator since its creation in august 2005 (merger of Neuf Telecom and Cegetel), two major events in Q4 2006: Listed since October 2006 through a successful IPO : Introduction at the top of the range (EUR22,0 per share), + on closing, implying a EUR4,8bn market cap 3rd 2006 IPO on the french market 20% free float since IPO but Neuf Cegetel share remains below our target price EUR280m raised Main shareholders after IPO : SFR Louis Dreyfus public External growth : acquisition of AOL ISP business (from Time Warner) EUR288m, for new customers : Consequence : first altnet in France, ahead Iliad (Free) : 2,2m ADSL subscribers (dec 2006) Share price and relative performance Products and markets: a well balanced breakdown Synergies should continue to deliver profitability Margins analysis highlight real potential for growth, not fully achieved in 2006 : EBITDA margin should amount to in 2006, according to the results published this week, to compare with 11% in 2005 We still believe that the merger between Neuf Telecom and Cegetel has not fully delivered its synergies potential (especially SG&A and scale costs) : in comparison, Iliad EBITDA margin amount to 28% in in 2005 We consequently consider that margins improvement is the key upside factor for Neuf Cegetel in the short term : we assume a 23% ratio in 2007, and a constant 28% ratio after 2008 Introduction Strong external growth, still unfairly valued Business opportunities : medium risk, high return? DCF valuation : target price of EUR32,0 Appendice Investments opportunities : the FTTH issue Reminder : following Free announcement in October 2006 to invest EUR1bn in FTTH development (Fiber to the home), Neuf Cegetel management announced a commercial offer for H12007 : starting the race as an outsider, Neuf Cegetel is now trying to gain the leadership Undoubtly risky . [...]

[...] Iliad share price lost 10% following the annoucement FTTH development implies strong capex (EUR1bn for Iliad) EUR2000 investments per subscriber (ARCEP) but rewarding : Attractive gross margin because FTTH reduces reliance to the incumbent network in comparison with unbundling Less competition since others, except FT and Iliad, are not likely to invest in FTTH in the coming years Unequalled performance in comparison with ADSL2+, FTTN/VDSL,,, IDATE forecasts : 4m subs in 2012 In quest of new markets : Neuf Cegetel Mobile Neuf Cegetel Mobile : an MVNO launched in april 2006, with highly competitive prices and original products (combination of GSM and Wifi), focused on Neuf Cegetel clients (ADSL) Neuf Liberté : free mobile contract for Neuf Cegetel ADSL subscribers TWIN and TWIN version two : GSM and Wifi combined Successful : 100K clients, of which 75% were already clients of Neuf Cegetel before Key issue to consider : SFR and Neuf Telecom consequently become competitors, whereas SFR holds a 41% share in Neuf Cegetel : an attempt from SFR to reach the 50% threshold would not be surprising (not valued here, but SFR would have to pay a significant premium since free float is limited to In a nutshell: SWOT analysis Introduction Strong external growth, still unfairly valued Business opportunities : medium risk, high return? DCF valuation : target price of EUR32,0 Appendice Underlying assumptions to our valuation Running the numbers: DCF valuation leads to EUR32,0 Risks to our valuation : sensitivity analysis Peer comparison confirms upside expectations Introduction Strong external growth, still unfairly valued Business opportunities: medium risk, high return? [...]

[...] Analyse financière et valorisation de la société Neuf Cégétel Introduction Strong external growth, still unfairly valued Business opportunities : medium risk, high return? DCF valuation : target price of EUR32,0 Appendice Business case Synergies are not fully valued Recent operations (merger with Cegetel, IPO, acquisition of AOL internet subscribers base) currently delivers synergies (headcount, SG&A, lower access costs, less competition) EBITDA margins remain below those of peer companies Neuf Cegetel model should finally yeld major cash flows in the short term Margins should also improve through migration from DSL wholesale to LLU Well positionned to capture growth opportunities Current businesses are on the rise till the end of the decade ( and provide strong cash flows) FTTH race has begun, needing capex but also previsible and high returns Neuf mobile model appears to be successful, to be confirmed in 2007 We therefore conclude to a 12 months price target of EUR32,0, leading to a 14% upside Introduction Strong external growth, still unfairly valued Business opportunities : medium risk, high return? [...]