SFR most profitable Belgium operator, Proximus most stable

Wednesday 23 March 2016 | 15:05 CET | Background

Five operators in the Belgian market report detailed enough financial results to analyse their cost base: Proximus (previously Belgacom), Mobistar (soon Orange), SFR (previously Numericable, owned by Altice) and the merger partners Telenet (Liberty Global) and Base (previously KPN). The figures show a stable financial basis at Proximus, while SFR is the most profitable operator. Base has thin profit margins, but has been improving in the run-up to its merger with Telenet. Mobistar has been preparing its launch on cable networks, but this has had limited impact on its costs. 

We have limited figures from the other cable operators (mainly Voo). The figures used do include Luxembourg for some operators, but these are difficult to separate for Proximus, Mobistar and SFR and only account for a small portion of their activities. Our analysis covers the operating costs from the profit and loss accounts and investment costs in the cash flow overviews, in order to avoid differences in accounting. We also look at EBITDA margins and free cash flow, defined as EBITDA minus capex.

Proximus stable, SFR profitable

Proximus appears the most stable company, with little variation in its ratios and margins over time. Total costs reach around 90 percent of revenue, leaving around 10 percent for free cash flow. There are no major network or organisational programmes underway at Proximus, and the costs of licences (football in Q2 2014 and spectrum in Q2 2015) show little impact.

Mobistar in contrast has been working for several years to prepare its re-entry on the fixed market, via wholesale cable access. Its first attempt in the fixed market, using access to both Belgacom's network and satellite TV, was not successful. Since early this year it has gained regulated access to the major cable networks. The costs for this were booked earlier. A spike in capex in Q4 2015 puts the ratio of total costs to revenue at over 100 percent. This resulted in negative free cash flow, compared to a more usual margin of 10 percent. Mobistar's EBITDA hovers in the 20-30 percent range, but in the last quarter was just 15 percent (excluding a one-time gain of EUR 54 million from a settlement with Proximus). 

Telenet knows how to make money from telecom services. It has a high EBITDA margin thanks to relatively low operating costs. Even including capex, Telenet manages to keep a good portion for itself, although it suffers from volatility in the results. With a tight balance sheet, as is common for cable operators, this extra cash is needed for servicing its debt. The latter is relatively high, but with the current ultra-low interest rates, hardly a problem. In Q4 2015, it did see a jump in capex, which led to a sharp fall in free cash flow.

Telenet's merger partner Base has historically has less cash available, likely due to its limited scale as the smallest mobile operator. In the past three quarters, it has cut opex and capex sharply, leading to a strong improvement in free cash flow. This was likely in preparation for the merger and integration with Telenet. The takeover of Base by Telenet was completed in February 2016. In the comparison of Q4 2015 results, we excluded a gain of EUR 66 million at Base from the settlement with Proximus.

Numericable, part of the Altice group and recently rebranded as SFR, is a remarkably profitable operator, especially given its small scale. Free cash flow is equal to almost half of revenue, and the EBITDA margin is extremely high. This provides room for investment, and its capex to sales ratio is structurally higher than the other four operators. It also provides cash for interest payments, as the same as Liberty Global, Altice is highly leveraged, with net debt at 5.3 times EBITDA. Mobistar points to a high level of prices on the fixed market in both Belgium and Luxembourg, which suggests that increased competition could lead to price pressure. The question is whether Mobistar can achieve this on its own.

Mobistar on cable

To finish, a word about capex. Investing in VDSL (Proximus), LTE (Proximus, Mobistar, Base) or cable network capacity ('De Grote Netwerf' at Telenet) has not resulted in major peaks in spending. This suggests to use that these network upgrades are not any form of 'step change', but more business as usual. This is less the case for Mobistar's entry on the cable market. The company is undergoing a major change in its activities, although it is not building its own network, rather building on components of a wholesale network.

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