MMAASSTTEERRSS IIINN FFIIINNAANNCCEE
EEQQUUIIITTYY RREESSEEAARRCCHH ZON MULTIMEDIA COMPANY REPORT
TELECOMMUNICATIONS 06 JUNE 2011
STUDENT: LUÍS CORREIA [email protected]
Positive market growth, strong Recommendation: BUY competition and potential for ZON Price Target FY11: 4.30 €
The fight for the best fibre network
Price (as of 5-Jun-11) 3.57 € Reuters: ZON.LS, Bloomberg: ZON: PL . Our study of the company ZON Multimedia indicates a price target of 4.30€ (BUY), an upgrade of 20.4%, relative to the 52-week range (€) 2.77-4.12 th price of the 3 June 2011. Market Cap (€m) 1,190.023 Outstanding Shares (m) 309.067 . ZON has a short term competitive advantage over its main competitor, PT, due to the difference in the technologies used Source:Bloomberg (HFC vs FTTH) and due to the market structure (ZON has been ZON vs PSI20 the PayTV market leader,57.9% in 2010) since the Spin off. 0.4 . Free Cash Flow levels will improve significantly for the 0.2 next years (€0M for 2011, +€83M for 2012), because of the end ZON of the cycle of non-recurrent investment (Capex in long term 0 PSI20 contracts, the upgrade of the cable network, and Data Centre 2009 2010 2011 -0.2 investments), initiated in 2008. Capex to revenues has been around 35%, and we estimate a reduction to values around 20% -0.4 starting next year. EBITDA margin increase of 3% expected. Source:Bloomberg . PayTV market still growing (+9.7% FY10) and high potential in Broadband (+11% FY10 and penetration rate of 51%, (Values in € million) 2009 2010 2011E Revenues 823 872 905 below Euro-average). EBITDA 268 289 327 . Triple Play strategy has been a success (55% of the Net Profit 45 38 81 EPS (€) 0.14 0.12 0.25 ZON cable customers have 3play plans). It allowed a Blended ROIC 6.1% 4.8% 8.3% ARPU change of + 15.2% since 2007 for €35.4 in 2010. Dividend Payout 113% 135% 72% FCF 23 -25 0 . International expansion to Africa (through DTH). Joint Dividend Yield 4% 4% 4% venture in Angola, with SOCIP, a company owned by Ms. Isabel EV/Sales (x) 2.02 1.9 1.87 dos Santos (shareholder of ZON, 10% of the shares) will allow the EV/EBITDA (x) 6.2 5.75 5.08 exploration of a country with high potential and low competition. Source: Company data and Nova Equity Research Team After Angola, we believe that ZON will expand to other sub-
Saharan African countries, due to the low incremental cost, since the satellite already installed is able to broadcast to these new countries.
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Table of Contents
Company Overview…………………………………………...3
Shareholder Structure………………………………………...5
Technology…………………………………………………….5
Multiple Play Market
PayTV market analysis…………………………………8
Impact of the acquisition of TvTel……………………11
Zon vs Meo……………………………………………..13
Digital Terrestrial Television…………………………...14
Fixed Broadband market analysis……………………15
Fixed Telephone………………………………………..17
Mobile…………………………………………………..18
Cinema and Audiovisuals…………………………………….19
International Expansion - ZAP……………………………….21
Valuation…………………………………………………….…22
Comparables…………………………………………………...31
Appendixes (Financial Statements)…………………………...32
Disclosures and Disclaimers…………………………………..36
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Company Overview Pay Tv Market share 100.0% ZON Multimedia is a portuguese company, with main activity in areas like PayTV, Broadband and Phone (represent around 89% of the revenues). Audiovisuals 50.0% and Cinema constitute the other business units of this firm.
0.0% ZON results from the Spin off between Portugal Telecom and PT Multimédia, 2Q08 1Q09 4Q09 4Q10 and on the 6th November of 2007, emerges this new company. The CEO is Grupo ZON TV CABO PTC Rodrigo Costa and in 2008 it was agreed a change in the name, becoming ZON Exhibit 1;Source: ICP-ANACOM Multimedia. Pay Tv subscribers market ('000) Leader in the PayTV market with 58% market share (1.6million customers) , 3,000 ranks in the 2nd position in the Broadband market (33% market share) , as well as 2,000 the Fixed Phone one (18.6% market share). Nowadays, it faces great 1,000 competition by the incumbent operator, PTC (Portugal Telecom), which makes 1 0 the Telecoms market in Portugal very active and innovative. 2Q08 1Q09 4Q09 4Q10 These services are provided by means of its vast cable network, mainly based Exhibit 2;Source: ICP-ANACOM % revenues per business unit on the Hybrid Fibre Cable (HFC) technology. ZON also counts with Fibre-to-the- Pay tv,broadband and home (FTTH) (and with Direct to Home - DTH), and for this contributed the phone acquisition of TVTel (investment of around €98 million) in 2008, which had the 6% 5% Cinema greatest FTTH network at that time. Besides TVTel, ZON also acquired Pluricanal Leiria,Torres Vedras and Santarém, as well as BragaTel (investment around €45 million)2. ZON Multimedia has strongly invested in the last 3 years 89% (around €80M per year), in order to have an upgraded network (Upgrade for EuroDocsis 3.0 technology), capable of providing better services. The PayTv Exhibit 3;Source: Company data, 2010 service has the highest offer in terms of channels (either in SD3 or HD4) and an
Impact of Eurodocsis 3.0 excellent Video club service, possible through the contracts between ZON Cost per Mbps (€) Audiovisuals and some movie studios, like Universal. The exploration of the
100 Audiovisuals unit allows not only the access to more than 5000 movies, more 60 than the double of the main competitors’ service, but also important synergies 35 20 regarding the premium TvChannels, like Sporttv or TvCine (participations in Sporttv and Dreamia, both with 50% of the capital). 2007 2008 2009 2010 Exhibit 4;Source: Company data ZON has been losing market share in PayTV, however has been capable of sustaining its revenue levels because negative net adds of the last quarters are not very significant due to the very large market share of Zon, and on the other
1 Further information on the Market Analysis section 2 The investment made in acquisition is analysed on the section Impact of TvTel and Grupo Parfitel on Zon 3 Standard definition 4 High Definition
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Exhibit 5;Source: Company data hand ARPU is increasing, so it balances the process. We highlight this considerable increase in the ARPU, achievable with a strong commitment in Triple Play Market Shares - 2009 providing a good Multiple Play service. This type of service which consists in double or triple play is a way of captivate more clients and achieve more fidelity ZON PT Cabovisão others of the old ones. Also, this has allowed ZON to increase the blended ARPU 8% 14% (nowadays in 35.4€). In the multiple play area, ZON is the leader, and 55.2% of 45% 33% the cable clients are 3play customers. Lately, in 2010 ZON launched the new
software IRIS, a new way of watching TV, with several new functionalities, like
Exhibit 6;Source: Company data better VOD service, new box, allows interactivity between the computer (internet)
Triple Play Market Shares - 2010 and the TV, among others. This Triple play package will continue the consolidation in the leadership of the Multiple play market. ZON PT Cabovisão others Besides these three main services, in 2009, ZON launched its mobile operator, 11% 7% 44% based on a MVNO (Mobile Virtual Network Operator). This consists on the 38% utilization of the Vodafone network, after an agreement between these two
operators.
The other business units, Cinema and Audiovisuals, despite of generating lower Blended ARPU (€) - Zon margins, are strategically important. ZON Lusomundo Cinemas has 217 cinema 35.4 theatres spread by Portugal and it is seen as a cheap way of entertainment by 30.8 32 33.8 the portuguese people. It is the market leader in this segment and also leader in terms of innovation, having introduced the digitalization of the cinema screens 2007 2008 2009 2010 and also the 3D digital platforms. Regarding ZON Lusomundo Audiovisuals, this Exhibit 7;Source: Company data area purchases and manages the movie transmission rights, allowing some Shareholder Structure - 2010 advantages in otther business units, such as Cinema or the Video Club function, Caixa Geral de Depósitos S.A 10.93% available in ZON box (PayTV). Finally, ZON started in 2009, the process of Grupo Banco Espírito Santo 11.07% internationalization in Angola, through a joint venture ZAP, (30% ZON and 70% Kento Holding Limited 10.00% SOCIP) due to the good relations with Ms. Isabel dos Santos, shareholder of Banco BPI, SA 7.76% Telefónica, SA 5.46% ZON. This project consists on DTH basis, where a satellite, similar to the ones Cofina SGPS, SA 4.91% used in Portugal, broadcasts to the African market. ZON’s management is Grupo/Fundação José Berardo 5.63% considering the expansion for other african countries in the future, since it has Joaquim de Oliveira 4.84% Ongoing Strategy Investments 3.45% low incremental costs. This way, with the same satellite, ZAP can broadcast for Estêvão Neves SGPS, SA 2.94% these new countries. Cinveste, SA 2.82% Grupo Visabeira SGPS, SA 2.15% SGC, SGPS, SA 2.00%
Credit Suis e Group AG 1.83% Free float 24.21% total 100.00% Exhibit 8: Shareholder Structure Source: Company data
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Shareholder Structure
As we explained before, the creation of Zon was due to the spin-off between PT and PTM (now Zon). This leads to the fact that the shareholders of PT at that time were similar to the ones of the new company, Zon. So, we can find that Telefónica, Grupo Espírito Santo, Caixa Geral de Depósitos and Grupo Visabeira are present in the capital structure either in Zon or PT, with important positions. Then, in December of 2009, an important change in the shareholder Exhibit 9;Source:Useit.com,2009 structure occurred. Kento Holding Limited, owned by Ms Isabel dos Santos Nielsen's Law of Internet bandwidth bought 4.53% of ZON. Currently, Kento has 10% of the ZON’s shares and this entrance of Ms Isabel dos Santos had great importance. We believe that the International expansion, of ZON, namely in Angola, was triggered by this event. The remaining shareholders and respective percentages are illustrated on table 8.
Also related to this topic, are the news and rumours, in 2009, about a possible merger between Sonaecom and Zon. It was not a good solution by Zon shareholders’ perspective. One of the reasons was that this merger could worsen the situation of PT (the main competitor) and the benefits gained by the shareholders of Zon with the merger would be balanced with some more competition that would threat PT. Even though the entrance of Ms Isabel dos
Optical fibre Santos is important and is believed that she is favourable to a possible merger, Exhibit 10;Source:Howstuffworks.com we believe, according to the news published on the last two years, that a merger
for the next months is unlikely. Moreover, the president of Sonaecom Paulo Azevedo (Sonaecom was the most interested part in the merger) told to the press in March of 2011, that in his opinion the hypothesis was in stand by and would not consider the option of the merger in the upcoming period.
The technology
The intense competition between the different operators (mainly ZON and PTC) can be noted not only on the advertisings and market shares evolution but also on the type of technology used and its investment for constant upgrades. The hot topic of the moment, regarding the Telecommunications sector, is the fibre optic and the different speeds and bandwidths offered by each one of the competitors. In this section, one can see a brief definition of the different technologies and how they work. First of all, the society is becoming more and more demanding
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(figure 95) regarding quality of TV services and Internet connection speeds and the previous technologies (copper) will not be capable of providing such characteristics.
A new trend that makes this new scenario possible is achievable through the use of the NGN (New Generation Networks). These ones are based on fibre optic lines (exhibit 10 ), strands of very clean and pure glass, with the thickness of approximately a human hair and able to move digital information for many kilometers. Nowadays, there are four big groups of access networks available in Exhibit 11; Source:Useit.com,2009 the market: Wireless (UMTS, LTE, Satellite and others); xDSL; Technologies
No of No of Downst Ups twisted metallic pair (includes FTTN/C); Hybrid fibre-coaxial (HFC) and Fibre to carriers carri ream trea the end customer FTTH/B/P. We are going to focus our attention especially on in ers in (Mbps) m downst Upstr (Mb the HFC and FTTH, the technologies used by ZON, PTC and Sonaecom. Version ream eam ps) To start with, Hybrid fibre coaxial, the technology mainly used by ZON, mixes EuroDOCSIS 1 1 50 9 1.x fibre optic cables on the main network, with coaxial cable on the distribution and EuroDOCSIS 4 4 200 108 access network. As it is illustrated on the graph below, ZON installs fibre optic 3.0 8 4 400 108 cables from the Head End or Distribution centre until the optical nodes, located close to the neighbourhood and then, from the optical nodes to the home of the
Exhibit 12; Some Advantages of optical fibre customer, a coaxial cable provides the services requested. The use of fibre optic on the backbones allows ZON the possibility of having more data carried than with Less expensive Ideal for Digital signal the coaxial cables. Some more advantages are presented on table 12.
Thinner Less signal degradation Higher carrying Less power required capacity
The HFC network is defined by the Data Over Cable Service Interface Specification (DOCSIS) which transports the digital information to a set of clients that belong to the same cell providing speeds up to 50Mbps. This speed was attainable with DOCSIS 1.0, but ZON made a big investment to update this system and the majority of the network is now equipped with DOCSIS 3.0.This new technology permits an evolution to 400Mbps per cell (which is divided by a set of
5 A Study conducted by Jakob Nielsen states that a high-end user's connection speed grows by 50% per year. The trend line has been verified along the years, as it is shown on graphic 9.
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customers). This upgrade for EuroDOCSIS 3.0 has impact on the network’s organization. For example, with EuroDOCSIS 1.0 the transportation of the data was made through one carrier, while with the update for 3.0, it is made with help of 4 or 8 carriers (depending on the speed – table 11) originating a change in cable spectrum management. A disadvantage of this service (and we can see many complaints about that on forums of the speciality) is that the broadband is divided by a set of customers, so the speeds achieved in Internet connection depend not only on a customer usage of the network, but on the usage of all the customers that are receiving data from the same cell. The variation of real speeds verified is higher than in other competitors because it also depends if the other users that “share” the same node/cell are heavy users or not. Sometimes, in order to prevent Exhibit 13; Types of FTTx; Source: Howstuffworks.com this high traffic on the same node (because the customers of that particular node are heavy users), ZON installs more nodes, in order to decrease the number of customers served by the same node. The objective is to normalize the traffic, allowing speeds close to the ones contracted.
Now, moving to the analysis of the technology used mainly by the competitors of ZON (PTC and Sonaecom), it is important to consider that Fibre-to-the-home (FTTH) is exclusively made by fibre optic. A connection based only on fibre optic is better (in terms of speed and reliability) than HFC and, FTTH is believed to be the big trend for the future. Source: ICP-ANACOM
This consists on the deployment of fibre optic from the central to the home of the customer. Unlike the HFC, with this technology, the digital information is carried 100% by fibre optic leading to more quality for the client. As it can be seen from the figure 13, there are many variants of the use of fibre, namely the term FTTx can be divided into: the above mentioned FTTH (fibre to the home) 100% fibre until the customer; FTTC6 (fibre to the curb); FTTB7 (fibre to the building); and FTTN8 (fibre to the node).
6 FTTC-the optical cable is left from 200 to 400meters of the home of the client
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Once again, even though the majority of the access network of ZON is based on the technology HFC, ZON has also some points of access that permit the technology FTTH. The acquisition of TvTel by ZON, in 2008, potentiated the appropriation of TvTel’s fibre optic network which was the largest in Portugal, at that time9.Besides that, in 2010, ZON established a contract with Alcatel-Lucent where with the help of this French company, it will be installed a GPON network, based on the FTTH technology, in order to provide more bandwidth. All in all, there are some advantages and disadvantages regarding the use of these different technologies and from the corporate point of view, a strategic cost vs Exhibit 14; Source: John A. Brouse, Jr. Director of revenues analysis has to be made. A study conducted by the International Network Implementation Charter Telecommunication Union (ITU) shows that the investment necessary in the Communications, Inc. Life-Cycle Cost short term for HFC networks is reduced, comparing with the introduction of
FTTH. Implanting FTTH is more expensive in the short-run, because it is Analysis HFC vs FTTH PON necessary to install the fibre optic over the last links from the existing fibre optic cables to the house of the client. Moreover, the cost of the last meters of fibre optic installation grows exponentially. This results in very large investments (it is required to replace the old cables by new ones), resulting in the abandonment of the old cables, since they get useless, and also very prolonged times to deploy.
On the other hand, and this is one of the biggest advantages of ZON, the HFC HFC network allows incremental changes in order to update the network (example of PON the upgrade from DOCSIS 1.0 to 3.0). This way, ZON can provide speeds up to 400Mbps for downloads (108Mbps for uploads) with relative low cost. Furthermore, by the fact of this technology being demand driven, whenever the
1 2 3 4 5 6 7 8 9101112131415161718192021 speeds offered to a set of customers are below the normal, ZON can install more
Cost per Mile of Outside Plant Outside of Mile per Cost Years in Operation nodes, to bring back the speed per user to normal levels again, only on that “heavy users’ area”, enabling a significant costs saving.
Pay TV market
The Pay TV market in the last years has been changing significantly and it is expected to continue a sharp evolution in terms of quality of the contents
7 FTTB- the fibre optic ends at the building and then the remaining meters until reaching the house of the customer are covered through copper or coaxial 8 FTTN - the fibre optic terminates usually at the entrance of the neighbourhood and the remaining distance (from the node to the customer’s house - few kilometres) is carried by copper. 9 This topic will be developed further on
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Exhibit 15; Source: ICP-Anacom (constant upgrade in technologies), prices offered by the operators and finally in Total subscribers of the PayTv the number of subscribers. There is definitely a market before the Spin-off of service PTM and another one after the Spin-off (2007). Today’s trends are being clearly 3,000 defined by intense competition between the two main operators (ZON and PTC) 2,000 and we believe that in the future, the domination of these groups will be even 1,000 higher. Nowadays, there are different tecnhologies available in the pay tv 0 market: CATV (Cable TV) by means of the hybrid fibre coaxial platform; DTH10 2T08 1T09 4T09 1T10 4T10 (Direct to home Satellite Television); Internet Protocol Television (IPTV) and
digital terrestrial television broadcasting system (DVB-T); FTTH (Fibre to the Home); 3rd generation mobile networks; and the new Digital Terrestrial Television Exhibit 16; Source:ICP-Anacom (DTT) which will have a deep impact from 2012 onwards, as we will see on the Subscribers of the cable TV service DTT section, further on. (thousands) For a better understanding of the global pay tv market, we believe it is 1,500 1,450 important to make a brief explanation about the market, divided by each type of 1,400 1,350 technology. Starting by the CATV, with the help of figure 16 , one can observe 1,300 that the number of subscribers has been decreasing during the last 3 years 1,250 (1.438million in 2010). In this platform, (unlike the global pay tv market as it will be shown a few pages next) a slowdown has been noticed and the forecasts for the next quarters are in line with the recent past, so we think that this segment will stay constant with a slight negative trend. These forecasts will have special Exhibit 16-A; Source:ICP-Anacom impact in our valuation, since ZON is the company that has the majority of the
Subscribers of the DTH service market share and big part of revenues come from this segment. (thousands) Regarding DTH Satellite Television, the scenario is relatively different 800 from the previous one. Through figure 16-A, a notorious evolution is seen, having 600 reached the number of 670,000 customers. An interesting note for the report is 400 200 the fact of the more developed regions like Lisbon or Oporto have much lower 0 rates in this segment (DTH) than the less developed ones, like the regions of the interior of Portugal. For example, the percentage of subscribers of DTH in Lisbon is only around 10%, compared to 47% in CATV, and this is due to the fact that
the cable network in the interior of Portugal is not so extensive and developed as it is in the big cities.
Moving to another technology, FTTH is currently the one with the biggest potential. Big investments have been made by the operators (especially PTC) and even by the government with the plan to equip Portugal with a large
10DTH - available since 1998, it consists in an alternative to cable where the customers have to buy a satellite dish, a receiver and an access card.
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Exhibit 17; Source:ICP-Anacom fibre optic network which. FTTH is more recent than the previous technologies analysed and it is yet in an early stage, not being offered all over the country. Subscribers of the xDSL/IP e FWA The service is offered by PTC, Sonaecom and ZON and there are currently services (thousands) around 143,000 customers. Once again, Lisbon and Oporto have the vast 600 majority of FTTH subscribers (87%). We predict that in the next 5 to 10 years, the 500 competition in this area (and also HFC) will be very high, and a big part of the 400 300 other technologies’ clients will change to this one. So, the operator which can 200 assure the best service in this segment will have a big competitive advantage, in 100 our opinion. 0 2Q08 4Q081Q094Q091Q104Q10 Finally, there is the public telephone network (xDSL/IP) and three main competitors can be identified. Sonaecom, PTC and Vodafone .Using the table 17, it is possible to observe the fast expansion of this service. Driven by the strong action of PTC (Meo), nowadays, this market counts with around 523,000 Exhibit 18; Source:ICP-Anacom customers and the tendency is to keep growing. As we said, the whole market Subscribers of the FTTH service has been evolving and a good indicator is the constant increase in the number of (thousands) subscribers. (table 15) 200 150 Besides these services there is another one, offered by ArTelecom, 100 which is FWA (Fixed Wireless Access), but we are not going to focus our 50 attention beyond this note, since it is a small segment, a small operator, and 0 ZON does not operate through this technology. 1Q074Q074Q081Q094Q094Q10 As a result of these different segments, we can understand better the global Pay Tv market. The data provided on tables 19 and 15 indicate the total Exhibit 19:Trend in total number of paytv subsbribers in terms of households Source: ICP- number of Pay Tv subscribers and it is a clear demonstration of the evolution of ANACOM,INE; unit:subscribers per 100 inhabitants this service along the quarters and good news for this industry. The growth was mainly driven by FTTH and xDSL/IP (even though ZON is not competing on this segment) which represented 97% of the new customers in the 4Q2010.
We are cautiously optimistic about the future of ZON, since we believe the market still has potential to explore.
A more detailed analysis has to be performed, in order to justify our optimistic reasoning. A very important statistic is the penetration rate, provided by ANACOM, which is visible in graph 19. By itself we can only have an idea about the rate of Portugal, around 48.5% (48.5 households subscribe Pay Tv service per each 100 households). However, when we add to the analysis the penetration rate of other countries, we can get a good perception about the growth potential, since Portugal is currently many percentage points below its european peers. We believe that even though Portugal is facing a severe crisis
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Exhibit 20; Source:ICP-Anacom (Portuguese people will be punished by the austerity measures and lose disposable income), the trend will be that Portugal will follow the more developed PayTV Penetration rate in Europe countries in terms of penetration rates and increase the actual level of 48.5%. In fact, Portugal has one of the highest values in respect to the time spent watching TV, so we believe the PayTv service has big importance in the day to day life of the portuguese family. Hence, this will be an area that will suffer few losses in terms of subscribers. Our only remark goes only to the case of a change for more lower income plans (and less premium channels) in case of financial distress of the families, leading to a possible decrease in ARPU levels.
PayTV market 4Q10 4Q11 E 4Q12 E 4Q13 E 4Q19 E 4Q20 E 4Q21 E share Exhibit 21; Source:ICP-Anacom Grupo ZON TV 57.9% 53.9% 51.9% 49.9% 45.4% 44.9% 44.4% CABO PTC 29.9% 34.3% 36.6% 39.0% 45.7% 46.5% 47.4% Penetration of PayTV services by technology compared to total Cabovisão 9.4% 9.1% 8.8% 8.5% 6.7% 6.4% 6.1% households Optimus (ex- 1.1% 1.1% 1.2% 1.2% 1.5% 1.6% 1.6% Sonaecom) AR Telecom 0.9% 0.8% 0.8% 0.7% 0.4% 0.3% 0.2% Centre Cable Alentejo Vodafone 0.7% 0.6% 0.6% 0.5% 0.2% 0.2% 0.1% DTH Madeira Others 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% FTTH Portugal Others Source: Anacom and Nova Equity Research Team (estimates) 0 100 200 Exhibit 22; Source:Company data Impact of TvTel, Bragatel and Pluricanal – Leiria
(Thousands) 4Q08Zon Impact of 4Q08Total and Santarém the acquisitions As we described before, in 2008, Zon acquired Bragatel and Pluricanal RGUs 2834.3 147.9 2982.2 Leiria and Santarém, regional TV and Internet providers. According to Zon, it was Subscribers 1525.1 88.5 1613.5 an important step that would allow not only market share expansion, but also TV Digital 495.8 0 495.8 synergies regarding TV content management, marketing and decrease of other
Broadband 479 40 519 administrative and general costs. 178 thousand homes passed, around 26 thousand Tv subscribers and 11 thousand Internet clients were the key indicators Voice 327.1 19.4 346.6 at that time. Besides the acquisitions of these companies, an investment of Voice- 7.2 0 7.2 Mobile 48Million €, Zon also invested in the acquisition of another regional pay
Exhibit 23; Source:Nova Equity Research estimates tv/internet provider company, TvTel. This company operated mainly in the region of Oporto, had 260 thousand homes passed in Oporto and 60 thousand homes depreciation rate 55.0% passed in Lisbon, with particular emphasis to the cable network in Lisbon which tax rate 26.5% was at that time, the vastest FTTH network in Portugal ( one of the main positive aspects with this acquisition in our opinion). 74 thousand was the number of total subscribers of this company, that allowed revenues around 21Million € in 2007
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Exhibit 24; Source: Nova Equity Research estimates Grupo Parfitel and EBITDA margin of 40%. Table 24-A illustrates the impact of the acquisitions
EBITDA (mn €) 4.94 in terms of the main operational key indicators. D & A (55%* EBITDA) 2.72 Exhibit 24-A; Source: Nova Equity Research estimates EBIT 2.22 EBIT* (1-t) 1.63 Grupo Parfitel units Gross CF 4.35 homes passed (mn) 0.178 178000 revenues (1st 6 Acquired by 48 semester 07) (mn €) Capex (approx D&A) 2.72 Tv clients (mn) 0.026 26000 EBITDA (1st 2.8 Acquisition= semester 07) (9.7*EBITDA) Δ NWC (approx 0) 0.00 Internet clients (mn) 0.011 11000 EBITDA margin 46.7% Gross Investment 2.72 However, in our analysis we will try to go in more detail and assess if these FCF (mn €) 1.63 investments (particular emphasis for TvTel, because it was a bigger and more WACC 6.5% important acquisition) were a good decision and brought value to the CF generated by Parfitel 25.14 shareholders of Zon. Even though we have very few available information, we tried to estimate the FCF of the group Parfitel (Bragatel, Pluricanal Leiria and NPV (without synergies) -22.78 Santarém) and Tvtel starting on the EBITDA that was known through the Exhibit 25; Source: Nova Equity Research estimates announcements when the acquisitions were performed. The main assumptions TvTel are illustrated on the tables on the left. We assumed the Capex would be similar EBITDA (mn€) 8.40 to the depreciation, estimated net working capital around zero and got the gross D & A (55%* EBITDA) 4.62 EBIT 3.78 investment. Finally, we obtained the FCF and used the DCF method in order to EBIT* (1-t) 2.78 evaluate the projects. In this process, we analysed some scenarions, since it was Gross CF 7.40 difficult (due to the very limited information) to get enough data to perform a very detailed and accurate valuation. So, the valuation and different scenarios Capex (approx D&A) 4.62 proposed for TvTel are based in some assumptions, made after research, such Δ NWC (approx 0) 0.00 as the cost of fibre optic deployment per home11, or the increase of +30% in Gross Investment 4.62 TvTel’s revenues, after the acquisition. This way a peremptory conclusion is not FCF (mn €) 2.78 achieved by us. The impact will depend on the different scenarios verified, that WACC 6.5% we systematize on exhibit 25. CF generated by TvTel 42.74 Exhibit 24-B;Source: Nova Equity Research estimates TvTel units NPV (without synergies) -55.26 homes passed 0.26 26000 revenues (mn 21 Deployment of fibre (Oporto) (mn) €) optic With Synergies (some scenarios) homes passed 0.06 60000 EBITDA margin 0.4 Capex/home 0.0008 Scenario 1 (Lisbon- FTTH) (mn) (mn €) clients 0.074 74000 Acquired by 98 800€/home Amount saved with the FTTH (mn €) network 48
NPV -7.3
11 According to Anacom, in the paper “The evolution of NGN”, written in 2009, the cost of fibre optic deployment goes from €651 to €1600.
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A sensitivity analysis with different values for the WACC is presented With Synergies (some scenarios) Scenario 2 on the appendixes (see table 59). Finally, one can see that the NPV can be Less competition and either positive or negative, depending on the scenarios selected. Revenues increase +30% revenues Tvtel 27.3 ZON vs MEO new EBITDA 10.9 D & A (55%* EBITDA) 6.0 A complete analysis to better understand and forecast the future must EBIT 4.9 contain a description of the service provided by ZON ( what the strengths and EBIT* (1-t) 3.6 Gross CF 9.6 weaknesses are) and also a comparison with the competitors. In this case we will Capex (approx D&A) 6.0 Δ NWC (approx 0) 0.0 study the principal competitor, PTC. Gross Investment 6.0 As we have seen, HFC is behind FTTH in terms of bandwitdth, but ZON
FCF 3.6 provides connections up to 400Mbps (through Eurodocsis 3.0), which in our WACC 0.1 opinion is adequate for the necessities of portuguese customers, nowadays, and CF generated by TvTel 55.6 NPV -42.4 for the next 3 to 5 years. In fact, according to some opinions read in specialty journals/magazines (Exame Informática, PcGuia, TvDigital), the speeds
With Synergies (some scenarios) achievable with FTTH are very high and do not bring value added for the majority
Scenario 3 of the subscribers (excluding the heavy users). However, in the future, this type Increase in EBITDA margin of technology which allows for much higher speeds (up to 1gbps) will be required due to cost reduction (due to the superior contents offered, like HDTV, 3D TV and a more demanding new EBITDA margin 0.45 use of Internet in terms of speeds either down or up stream). In this manner, we new EBITDA 9.5 D & A (55%* EBITDA) 5.2 emphasize that it will be important to compete hardly against PTC and develop a EBIT 4.3 vast fibre optic network (FTTH)12. Here, PTC is more advanced, having already EBIT* (1-t) 3.1 Gross CF 8.3 covered around 1Million households and planning to cover 600 thousand more Capex (approx D&A) 5.2 for this year of 2011 (it will mean around 50% of the households of Portugal). Δ NWC (approx 0) 0.0 Gross Investment 5.2 Moreover, PTC was distinguished with an award, “Deployment and Operation of FTTH Networks”,by the FTTH council Europe, simbolizing the best and most FCF 3.1 WACC 0.1 innovative company deploying fibre optic in Europe. CF generated by TvTel 48.1 NPV -49.9 Although PTC has these recognized advantages, ZON still has its trumps. The High Definition offer in ZON is more extensive, including more With Synergies (some scenarios) channels, than the competitors do. In the end of 2010, 20 HD channels made Scenario 1+2 part of the ZON offer, more than the double of its competitors. Besides this, ZON
NPV 5.6 was the pioneer in 3D emissions in Portugal. If we exclude the competitors’ FTTH (which is in a early stage in terms of subscribers – see market analysis above), ZON’s HFC is the most recommended technology for HD and 3D Scenario 1+3 emissions, since HFC permits more quality than IPTV or xDSL. Considering the NPV -1.9 analysis of the Video Club, ZON is definitely the best option. ZON Lusomundo
12 ZON is making efforts to develop its FTTH network, as explained in the Technology section. ( Acquisition of TvTel, and new investments for the construction of more kms of FTTH are some examples.)
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Cinemas and ZON Lusomundo Audiovisuals ( purchasing and managing movie Scenario 2+3 transmission rights) make possible a clear advantage comparing to its new EBITDA margin 0.45 competitors, and ZON offers around 5,000 movies on its Video Club. PTC only Increase in revenues 27.3 +30% revenues Tvtel offers around half of them.
new EBITDA 12.3 During our research, we found an article on Exame Informática, D & A (55%* EBITDA) 6.8 EBIT 5.5 comparing the services based on fibre of ZON and PTC (Meo). Table 26 intends EBIT* (1-t) 4.1 Gross CF 10.8 to summarize the study and some comments were added, in order to explain Capex (approx D&A) 6.8 Δ NWC (approx 0) 0.0 some points we think relevant. This is one more figure that will help us to Gross Investment 6.8 understand the customer’s mind and its possible option for ZON or PTC. FCF 4.1 WACC 0.1 CF generated by TvTel 62.5 The meo BOX is much more developed, functional and intuitive, allowing better experiences while recording (ZON box crashes frequently). Also, NPV -35.5 the software of ZON box is very slow (takes too many time to change the channel/zapping) and besides that Meo box has a PIP (Picture in Picture) Scenario 1 + 2 + 3 system, which allows a pre-visualization every time we make zapping. Regarding the channels, ZON offers a greater number of options, but Meo has the NPV 12.5 exclusivity of two important channels (Benfica TV and SIC K).
To conclude, ZON has more apelative packs in terms of prices, since the plan that provides 30Mbps costs 45€/month, while PTC the option with
Exhibit 26; Zon vs Meo Source: Exame Informática similar price (43€/month) only provides 12Mbps. nº188 The final result is very balanced. The overall winner is PTC (meo), but 13 10 points the decision depends on many personal characteristics. We highlight the most to divide important disadvantage of ZON’s HFC: “HFC is based on hundreds of between ZON and PTC subscribers sharing the same cell. So, the speed connection depends on how PTC Coluna1 ZON (meo) many subscribers are “using” the cell, leading to very low quality in “rush hours” TV Quality of image 6 4 “.One more factor that influences the perception of the client is the advertising Quality of sound 4 6 campaigns, and according to table 27, PTC is the leader. This is the strongest Recording (DVR) 2 8 reason why PTC is conquering so many market share. Video club (VOD) 4 6 BOX 2 8 DTT (Digital Terrestrial Television) Channels 6 4
The European Union decreed that in 2012 the analogue Television
Internet Bandwidth 4 6 signal will be switched off. This measure will have impact in the Pay Tv market,
Router/Hub 8 2 since the majority of the families that do not subscribe Pay Tv, will have to make Installation 8 2 an investment (around 50€ to 200€), in order to watch Television via digital Energy consumption 4 6
13 Personal tastes due to the offer of different channels; VOD with more movies vs VOD more functional and without crashing; Depends on the zone of the subscriber (especially with ZON, there are wide variations on speed)
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th 14 Exhibit 27; Source: Marktest signal. In Portugal, the switch off will occur on the 26 April , and this event can open some opportunities for the entrance of more clients in the PayTv market. Top Advertisers - Share of Voice (%) With Digital Tv, the user will benefit from better image and sound quality in the PTC 4.8 broadcasting, more interactivity (EPG- Electronic Program Guide) and more
Modelo/Continente 4.4 channels, in HD. The reason why this change provides so many improvements
Unilever 4.2 regards with the digital compression. The “space” (radio spectrum) occupied by
Pingo Doce 2 one single channel in analogic signal, corresponds to four in digital TV leading to
Zon 1.6 more free “space”, which will be used with the above mentioned new functionalities.The license of deployment of the digital network was attributed to Danone 1.4 PTC15 EDP 1
BCP 1 In our opinion, some of the households will analyse the Pay Tv market before making the investment16 necessary to have access to the Digital Tv, so
we believe that low cost plans can have some potential for these cases. This would lead to a possible decrease in ARPU, but at the same time, RGU’s would Exhibit 28; Evolution of Broadband clients; Source: ICP-Anacom increase (in a greater proportion), leading to more revenues.
Fixed broadband
Fixed Internet services are provided by means of three different technologies: ADSL; cable Modem; and FTTH/B. Through graphic 28, we see that this market is growing in a strong pace, having reached the number of 2,104,334 subscribers in the 4Q2010 (2.5% more than the last quarter and 10.9% relatively to the last year). Around 98% of the clients access it via broadband, while a decreasing minority uses dial up. We forecast a continuous decrease in dial up connections tending to zero, because the alternatives in the market, offer other type of conditions and dial up connections will become obsolete. Thus, the significant variation in the fixed internet services is due to the broadband connections. In the 4Q2010, 51.5% of these clients accessed via ADSL, while 41.1% via modem cable and finally others (includes FTTH/B) 7.4%. Both ADSL and cable modem acesses achieved double digit growth (emphasizing the big potential of this market), however the more expressive result was obtained by others with a growth of 179.1%, last year. This is due to the strong investment of the operators in the FTTH/B sector, and we are
14 The switch-off has already started in some zones, like Alenquer, in order to test the impact and to prepare the population for the DTT. 15 Another company (AirPlus TV, from Sweden) competed with PTC for the deployment of the digital network, but the chosen one was PTC. 16 Televisions with digital sintonizer DVB-T and able to decode signals in MPEG4/H.264 do not need the investment. (Televisions bought before 2010, probably do not possess this characteristic)
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Exhibit 29; Source: ICP-Anacom convinced that this technology will achieve considerable market shares in the short run. In the long run we predict a massive implementation of the fibre,
FTTH Household penetration in 2015 leading to a decrease in cable modem and ADSL accesses. Our believe is (estimates) supported by some data drom the FTTH council that estimates a rate of 25.7%
France 17.20% (household penetration), in 2015. (Graph 29) Russia 17.30% Bulgaria 17.50% In terms of market shares, according to table 32-B PTC is the leader, Netherlands 18.70% with 46.8%, followed by ZON which counts with 33%. The main point here is the Finland 20.10% Slovak Republic 23.70% fact that both PTC and ZON are gaining even more market share (PTC in a Portugal 25.70% stronger pace), while the other operators ( Cabovisão, Optimus, Vodafone, Denmark 28.40% Norway 29.50% Artelecom and Onitelecom) are losing it. This indicates a trend of even more Sweden 33% concentration of the market in the two big operators. More data indicating the Slovenia 35.80% huge potential for this market comes with the comparison of penetration rates (by % of population) between Portugal and its European peers. From table 33, one Exhibit 30; Source: ICP-Anacom; IVR stands for Relative Speed Index can see that Portugal is below the european average, leading to a perspective of
IVR - downloads (%) approximation for the next years. Of course we see this as an opportunity for ZON to expand its number of RGU’s and its revenues. In our opinion, also 100% 80% proved by a study made by ANACOM, ZON Internet service is a good option in 60% 40% 20% the market, capable of collecting more clients. Next, we show our conclusions
0%
… … … … based on “Estudo de Aferição da Qualidade do Serviço de Acesso à Internet de banda larga” by ICP – ANACOM and also ESCSI Portugal “A satisfação do
cliente no sector das comunicações”. Tables 30 and 31 provide information
Vodafone Vodafone
Cabovisão Cabovisão Cabovisão
17
Zon10Mbps Zon10Mbps
Clix Clix 24Mbps Clix 24Mbps Sapo 4MbpsSapo Sapo 4MbpsSapo about the Index of Relative Speed Connection and ZON has good
USA National performances. On the first table we see a slight advantage for SAPO (PTC) in what concerns to downloads for contents located in US servers. However, through the second table (measures the IVR along the day) ZON proves to be Exhibit 31;Source:ICP-Anacom better than PTC achieving values around 80%, while PTC 70%. One note goes to the negative performance of Clix, clearly below the average. A similar study was made but for Upload speeds. On this topic, ZON clearly beats Sapo (PTC), proving to be the best option in the market.
Moving to the customers’ opinion, the global index of satisfaction ( study conducted by Obercom) indicates that in an overall analysis, PTC is the operator with best opinion in the clients’ base. PTC achieves a classification of 7.07 (out of 10), while ZON 6.9, Sonaecom 6.86 and Cabovisão 7.06. The detailed ponctuation (divided by each variable) is presented on table Q (fazer tabela com resumo das págs 383/84 do ESCSI report).
17 IVR = )Average real speed connection/maximum speed connection announced) x 100
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Exhibit 32; Source: Obercom Turning our attention to another factor, the percentage of customers that presented a complaint during the year of 2009. This factor is illustrated on table Percentage of customers complaints 32, and ZON leads with the highest percentage of customers’ complaints18. However, the company from 2008 to 2011 has been improving (it was one of the 31.80% 29.40% 23% big priorities for the strategic plan 2008-2011) and nowadays reduced significantly this category, having been recognized by Deco Proteste, as the company with less complaints. Besides this, ZON also won the prize “Call Centre Trophy 2010”, a clear recognition of the effort made to improve the relation with Grupo PT Grupo Zon Grupo the customer. Sonaecom Broadband 4Q10 4Q11 E 4Q12 E 4Q13 E 4Q19 E 4Q20 E 4Q21 E market share Exhibit 32-A; Source: ICP-Anacom;ADSL vs Modem Grupo PT 46.8% 46.7% 46.7% 46.8% 48.3% 48.5% 48.8%
1,200,000 Grupo ZON 33.0% 33.8% 34.5% 35.0% 37.4% 37.8% 38.2% TV Cabo 1,000,000 Cabovisão 8.0% 7.7% 7.4% 7.1% 5.3% 5.0% 4.7% Grupo 6.4% 6.2% 6.0% 5.8% 4.6% 4.4% 4.2% 800,000 Sonae.com AR TELECOM 1.1% 1.0% 0.9% 0.8% 0.2% 0.1% 0.0% 600,000 Vodafone 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% ADSL subscribers 400,000 ONITELECOM 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% modem/cable 200,000 Others 0.6% 0.6% 0.5% 0.5% 0.2% 0.1% 0.0% subscribers
0 Exhibit 32 – B; Source: Anacom and Nova Equity Research team (estimates) 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 2Q10 FIXED TELEPHONE Exhibit 33; Source: Useit.com; Penetration Internet
Population( Intern Penetrati User This type of service can be provided by one of the following 2010 Est. ) et on(% Growth(20 technologies: Copper wires, used by the incumbent operator PTC; Coaxial cable; Users Populati 00-2010) (millio on) Fixed Wireless Access (FWA); FTTH; or Hertzian links. In this segment, PTC is n) the main leader with 59.5% market share, while Zon is ranked in the 2nd position Denmark 4.75 86% 144% Finland 4.48 85% 133% with around 20%, meaning 778 thousand clients. France 44.63 69% 425% Germany 65.12 79% 171% According to ANACOM, in the end of 2010, there were around Greece 4.97 46% 397% 4.4Million Fixed telephone accesses registered, meaning a penetration rate of Ireland 3.04 66% 288% Italy 30.03 52% 128% 48%, value still below the European average and with some growth potential. Netherlans 14.87 89% 281% The trend in the last years was negative due to the massive implementation of Norway 4.43 95% 101% Portugal 5.17 48% 107% the cell phones ( 148% penetration rate) which made some families to cancel the Russia 59.70 43% 1826% fixed telephone subscription. However, with the increasing penetration of Triple Spain 29.09 63% 440% Sweden 8.40 93% 108% Play packages (55.2% of Zon clients are 3Play) this service gained more UK 51.44 83% 234% subscribers. Together with the latter one, this inversion of trend (last year, the … Total 475.0 58.40% 352% fixed telephone market grew) is explained by the simple and cheap tariffs Europe 18 The report was issued in 2009, and in the last two years, Zon made a huge effort to improve this result.
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Exhibit 34; Source: Company data charged by the fixed telephone providers, free calls and other functionalities like costs control or privacy politics.
Fixed Voice Penetration in Mobile Europe,2009 (%) Source: Zon data There are five operators in the market, the big ones Vodafone, TMN (PTC group), Optimus (sonaecom) and two more recent, CTT and ZON. This is a
94% market strongly influenced by the actions of the regulator ANACOM, and until 73% 75% 77% 77% 84% 86% 2007 it was required a huge investment in order to acquire the license and respective infrastructure in order to provide mobile voice services. However, in 2007 a big step in order to increase competition was made with the possibility of using radio frequencies of the existing operators and emerged the MNVO (Mobile Virtual Network Operators) such as CTT and in 2008, Zon, establishing a 5 year contract with Vodafone. Exhibit 35; Source: ICP-Anacom; Fixed phone market shares Portugal is a country where the mobile phone services industry is very
4Q08 4Q09 4Q10 developed and there are more cell phones than people. This results in a very PT 65.4% 62.9% 61.6% high penetration rate, well above the european average, as it is shown on graph Alternative 34.6% 37.1% 38.4% 35-A. In the 4Q2010, there were 16.47 million mobile devices (including mobile Providers phones and USB wi-fi devices). The small position of Zon in the market, in our Sonae.com 16.1% 15.0% 13.7% opinion, is due to the very intense competition, recent entrance in the market and Grupo ZON 2.7% 6.5% 9.3% Vodafone 5.5% 7.0% 7.1% we believe it will be very difficult to achieve high percentages. One of the main Cabovisão 3.3% 3.1% 3.3% characteristics of this market is the choice of the operator that is influenced by ONITELECOM 3.2% 2.9% 2.7% the friends’ and family’s operator, since recently launched tariffs like AR Telecom 2.4% 2.1% 1.9% Extreme,Moche or Tag allow free calls and SMS/MMS between people that have Colt Telecom 0.9% 0.3% 0.3% the same tariff. This leads to a more difficult change in the market structure Others 0.5% 0.3% 0.3% difficulting the business to small operators which do not possess vast network of clients. Exhibit 36; Source: ICP-Anacom On the other hand, good news was announced when Anacom declared Termination rates (prices €) lower termination rates19, aspect also mentioned in the MoU (Memorandum of Dec-09 0.065 Understanding), established by the Troika, (36). This measure will be applied May-10 0.06 rd Aug-10 0.055 until the 3 quarter of 2011. This will have impact in terms of revenues (in our Nov-10 0.05 opinion, Zon will be better off) since Zon will have to pay less when its users call Feb-11 0.045 to another operator. PT was against this change and in general terms we can May-11 0.04 affirm that this measure will improve the competition and will benefit the small Aug-11 0.035 Source: Anacom operators. With this reduction, Portugal which was one of the countries with highest termination rates will return to a medium position, according to 37. This
19 Termination rate – charges that one operator has to pay to terminate a call in another operator’s network; In paper“ How mobile termination charges shape the dynamics of the telecom sector”, by Olivier Bomsel and his team
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way, Zon, with 107 thousand mobile clients in the end of 2010 is expected to Exhibit 37; Source: Eurostat slightly increase its client base (Zon mobile 8- tariff which charges 8cents/minute was recognized by Deco Proteste) and last year was a good example with an Average Mobile Termination rate - 2009 addition of around 35 thousand clients. Regarding the mobile broadband we 0.12 highlight the innovative concept of Zon@Fon which allows Zon clients to access 0.1 to more than 250 thousand wi-fi hotspots and also the offer of an USB wi-fi 0.08 device with 100Mb included in order to captivate clients and respond to similar 0.06 0.04 actions of the competitors. 0.02 Finally, some important actions will occur in 2011 in terms of mobile 0 market, such as the auction of the 4G network which will operate with LTE ( Long Term Evolution) allowing speeds of 100Mbps download and 50Mbps upload. This auction is expected to generate a cash flow of 462Million € to Portugal. Also present on the MoU, is the facilitation of the entrance of new competitors through the use of new radio frequencies. This measure means more MVNO’s can enter Exhibit 38; Source: ICA (Instituto Cinema e Audiovisual) the market and therefore threat the market growth of Zon.
Spectators 2011 New Lineo Outros Cinemas 9% 6% UCI 14% ZON 55%
Socoram a 16%
Exhibit 39; Source: ICA Exhibit 35-AService Penetration rate EU27; Units: Subscribers per 100 inhabitants; Source: Anacom Gross revenues 2011 - Cinemas
Zon Socorama UCI Cinemas and Audiovisuals New Limeo Others 8% 7% These business units are closely linked since ZON Lusomundo Cinemas manages the 217 cinema theatres spread by Portugal, while ZON 13% Lusomundo Audiovisuals purchases and manages the movie transmission rights. 55% 18% The margins obtained with these units are not so high as the ones from the core activity (Pay Tv, Broadband and Voice), but from a strategic point of view ZON Lusomundo is important in the company’s project. The existence of a strong sector in the Audiovisuals area allows advantages to other units of ZON, such as
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the large number of movies available on the VoD service (pay tv – around 5000 movies, more than the double of the main competitor), the wide number of Exhibit 40; Source: ICA premium channels offered by ZON either in HD or SD, and also the possibility for
Gross revenue 2011 - distributors Others the Lusomundo Cinemas’ unit to count with more and better movies to broadcast 3% Prisvide and therefore attract more spectators. o 9% ZON Regarding ZON Lusomundo Cinemas, during the last years, Zon has 43% mantained a constant performance , even though the country is facing a tough period due to the economic crisis. On the left, one can find some statistics about the market and Zon’s performance. Zon is the leader in both Cinemas Columb Castello ia Lopes (exhibitors) and Audiovisuals (distributors), with a variation of +887 thousand 26% 19% tickets sold compared to 2009. According to ICA (Instituto do Cinema e Audiovisual), the cinema market grew, having sold 850 thousand more tickets in 2010. This was the first time, since 2007 that the market grew in terms of Exhibit 41; Source: ICA spectators. This also means that Zon surpassed the growth of the market. For this expansion contributted some actions made by Zon, such as the constant
Spectators 2011 - Distributors innovation, namely the digitalization of the screens and the introduction of the 3D technology. Particularly the latter one, helped Zon to fight one of the biggest Castell Prisvid Others o eo 3% threats for this industry, the piracy. Internet access and illegal downloads are 9% Lopes more recurrent, nowadays, and the 3D experience is a good way to captivate 18% Zon 43% again the clients (a 3D experience at home is not yet achievable for the big majority of the customers). Besides this, the technological advance allowed Zon to charge more expensive tickets (4.4€ in 2009, 4.7€ in 2010), leading to an increase in the ARPU of this unit. Our predictions for the Lusomundo Cinemas Colum bia point to a consolidation as market leader, however we believe that the potential 27% for the whole market growth is limited, with the technologic advances in Internet and the trend of the last years confirms our reasoning.
On the other hand, the argument that justifies our confidence in a relatively stable market is that Cinema is seen as a cheap and accessible way of entertainment. This way, less money will be spent by the portuguese families in entertainment, but we believe that they will cut other more expensive options, resulting in a not so elastic demand for cinemas.
Now, analysing the Audiovisuals area, Zon is also the market leader as it is proved by the charts presented. The overall market has been increasing , (11.3% variation from 2009 to 2010 in terms of gross income and 5.4% regarding spectators), but once again, Zon outperformed it. Zon grew 17.1% in gross income and 7.8% in terms of spectators. Besides the management and
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distribution of the movie rights, this unit also counts with the distribution of DVD films distribution, as well as the production and distribution of some Premium channels. We highlight the participations in Dreamia, TvCine and a 50% stake in Sporttv. These channels (especially Sporttv), are an extremely important factor that weights in the decision of subscribing PayTv. We believe the participations in these channels, as well as the possibility of having a very good VoD service (due to the wide range of movie rights obtained) are the main advantages that this business unit brings to Zon. .
Exhibit 42; Source: Company data; Macroeconomic International Expansion – ZAP – Angola data for Angola and Mozambique The international expansion of Zon started in Angola, in the beginning of Angola Mozambique 2010, with a project named ZAP. It consisted in a joint venture (Upstar), 30% Language Portuguese Portuguese 20 Population 17 21 owned by Zon and 70% by SOCIP and it is broadcasting based on the satellite (millions) W7 which covers all the sub- saharan african countries. This service is similar to Households 3.4 4.7 (millions) the DTH operations that Zon has in Portugal and there are two options: Max GDP per 5054 478 package (50 channels, 30USD per month) and Premium package (80 channels, capita (USD) 60USD per month). One of the biggest competitive advantages for Zap is the Annual GDP 17.2% 4.7% wide offer of portuguese spoken channels , particularly Sporttv Africa which growth (09- 12F) includes the exclusive transmission of the Portuguese football championship,
Liga ZonSagres. Exhibit 43; Source: Company data; Zap’s offer Angola has one of the lowest penetration of TV devices (12% in 2008,
ZAP Channels Price (USD) corresponding to 300,000 TV households) and is known by the extreme wealth
Max 50 30 disparity. According to Screen Digest, from these 300,000 Tv households, around 200,000 subscribe payTv. This means that payTv is affordable for the Tv Premium 80 60 households, leading to a very high penetration rate of 67% that Zon is intended to explore. The service is offered by DSTV, cable and also DTH- satellite, the case of Zon. The competition in the Angolan Pay Tv market comes from TV Cabo Angola and South African Multichoice. In this first year of exploration, ZAP for the first three quarters of 2010, had losses of €5.4M. However, this value was expected and will be recovered, as soon as Zap achieves the break even.
The main disadvantage for Zon in the Angolan market is not competing in multiple play services against the principal competitors ( Multichoice and TvCabo Angola) which provide not only Tv but also Internet.
20 Sociedade de Investimentos e Participações, S.A. ( owned by Ms Isabel dos Santos)
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To conclude, we believe that the investment made in the satellite W7 for broadcasting in Angola was a good strategic decision, because it will open some Exhibit 44; Source: Nova Equity Research, Bloomberg; opportunities that Zon will explore in this growing market. Besides this, a very Cost of debt Portuguese companies good characteristic about this investment is the fact that with very low
Yield incremental costs, Zon can achieve other sub-Saharan markets, since the
1year 2yr 3yr 5yr 8yr 14yr satellite covers all the Southern African continent. This way, Mozambique (PT is Portugal 2.15% 11.1% 11.7% 11.5% 10.7% investing €6M in Beira, fibre optic to deploy in 11000 households), can be valid (rep.) Mn € options to continue the international expansion. PT 3.17% - 4.22% 6.13% 6.93% 6.7%
Amount 1300 - 750 600 750 500
EDP 3.56% - 4.92% 6.21% 6.99% 6.87 Valuation Amount 1000 - 1000 1000 750 500
Brisa - 4.85% - 6.76% - - In order to achieve the price target per share of ZON, we used the Amount - 500 - 600 - - Discounted Cash Flow method (DCF). We estimated the cash flows for the next
Exhibit 45; Source: Nova Equity Research Estimates 10 years, working always with the consolidated results of the company, since there were no avalilabe data about the business units’ results and the policy of
Cost of debt 7.30% the investors relations department is not to provide this type of information. However, due to the importance that the item revenues (particularly the ones WACC 9.3% provenient from PayTV and Broaband) assume in our model21, we tried to
pinpoint them, based on the analysis of some statistical reports of ANACOM and Cost of equity 11.9% therefore get a more accurate estimate.
The discount rate used was the WACC22, and below, we explain our CAPM Risk Free 3.04% assumptions for the topics present on the formula of WACC. Beta 1.04 Cost of debt – Our reasoning for the cost of debt estimation was the following: Base premium mature market 5% we found two types of bonds issued by Zon and would use the Yield to maturity Lambda Portugal 1.32 of a long term bond as our rate. But as the bonds issued are not considered long Lambda Angola 0.10 Country risk (Portugal) 2% term ( the maturity was only 2014) and the amount of the emissions are Country Risk (Angola) 14.% relatively low (157Million €) ( then, we considered them not very relevant Target because this low amount can lead to a noisy analysis) we had to consider other
D/E+D 40% option. Besides this, the hypothesis of relying on the rating of the company was E/E+D 60% excluded because Zon is not rated by rating agencies. Finally, we obtained this Tax rate 26.5% item through a comparison of some other companies’ yields (namely PT, EDP and Brisa) and estimated the value for Zon, knowing that due to the characteristics of the companies, Zon would get a higher rate than PT or Brisa,
21 the major part of the cash flows are concentrated on these items, and also because some other topics on our model, like direct costs and some items of the balance sheet are dependent on the value of revenues. 22 WACC=D/V*rd(1-T)+E/V*re
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for example. Therefore, we estimated the cost of debt based on the figures presented on table 44 and used the rate of 7.3% as cost of debt. Only one remark for the fact that the yields of the Portuguese republic are the highest ones on the table. We believe these values are not normal for sovereign bonds and we assumed that, for the long term, this value will be back to normal figures ( lower than the yields of the companies presented) Cost of equity – The cost of equity was obtained through the CAPM23 model including the λ approach. The assumptions for the CAPM model have the following explanation: Risk Free rate – We chose the 10year German bund and calculated an average of the last 2 years. According to Damodaran24, in a company’s valuation, the risk free rate should be in the same currency of the cash flows generated by the company. Besides this, the rate should represent no Default risk and no Reinvestment risk. We believe this criteria is achieved with the choice of the 10year German Bund. Market Risk Premium – Once again, we based our assumptions on 25 Exhibit 46; Source: Nova Equity Research Estimates Damodaran . His theory suggests that the Market Premium Risk= Base Premium for mature Equity Market + Country Premium. Terminal Value In 2022 (mn €) 2309 For the first element of the equation, we assumed a rate of 5%. Regarding the Discounted Terminal Value (mn €) 872 Country Premium26 (formula presented on the footnotes), we obtained the Sum FCF (mn €) 790 country default spread through the difference between the Portugal CDS 10year Enterprise Value (mn €) 1662 and the German CDS 10year. Finally, the σequity and σcountry bond are g 2% calculated on the Excel model. After these calculations we had to analyse the exposure of Zon to the country risk. Based on the paper “Measuring company
Market value of debt 347 exposure to country risk”, by Damodaran, we found a new variable, λ (lambda) Debt * % minorities 14 which reflects it. Similar to the concept of Beta, a λ above 1 means exposure to Market value of equity 1328 country risk above average. We defined λ based on revenues, such as a company generating few revenues in a country should be less exposed to that country and more exposed to the one that more contributes for the total value of revenues. Once again, we followed Damodaran and estimated λ as “% of number of Shares (mn) 309.067 Revenues in country for Zon/ % of revenues in that country for average Price target (€) 4.30 company”. The numerator is straightforward to determine, however in order to define the denominator, Damodaran suggests it should be (1- exports as % of
23 E( r )= Rf + β × ( Mature market equity risk premium) + λ (Country Risk Premium Portugal) + λ (Country Risk Premium Angola) 24 Paper developed by Aswath Damodaran: “Estimating Risk Free rates” 25 Paper developed by Aswath Damodaran :“Estimating Equity Risk premiums” 26 Country Risk Premium: Country Default Spread ×
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GDP), based on data of the Worldbank,. This way, we found the value of λ and applied to the formula above mentioned, leading to the values presented on table 45. We highlight the attribution of 95% weight for country risk in Portugal and 5% for Angola, due to the potential source of revenues that will come from the African country27, in the future.
Beta – For the estimation of Beta we tried two different approaches. Firstly, we regressed the returns of the last 2 years of Zon against the PSI20 and used the slope as the Beta. Our second approach consisted on the analysis of a set of comparables (PT, Sonaecom, Virgin Media, Telenet). We collected their betas (levered), respective capital structures and unlevered them. Then, we calculated the average (unlevered average beta) and finally levered this beta according to the capital structure of Zon in order to get the Beta levered for Zon.
Our base valuation scenario was performed with the Beta obtained by the first approach, since we believe this method is more reliable even though the behaviour of the last 2 years might not be the one verified in the future. In our opinion the results achieved with the second one are noisy since we did not analysed extensively the comparable companies in order to get capital structures at market values. Besides this, some of the comparables are not so similar with Zon in terms of their businesses. We relied on the data available on bloomberg (Betas levered and capital structure for each company), so the accuracy of the second method, might be threatened.
Operating Revenues
After the detailed market analysis performed on the first sections of the report, we will now analyse what the impact is in terms of valuation. First of all, the main factors in which we based our market share and revenues estimates are indicated 48.
ZON is leading the market in what concerns to Triple play (43.6% of the Triple play customers are subscribing the ZON 3play offer). Due to its 1st place in the pay tv market, the company is attracting a big part of these customers to packages of 2 or 3 services, increasing the Blended ARPU (+4.8% in 2010 to 35.4€) of the company. However, the number of net adds for the pay tv sector, in the last quarters has been slightly negative, due to the extreme competition with
27 In order to find the Country Default Spread of Angola, we tried to follow the same procedure as we did for the Portuguese Premium, however Angolan debt is not tradable. So, we found a similar country (in rating and dependence on the oil), Nigeria. Once again, the data for Nigeria was not available on Bloomberg terminals and so we assumed a Country Risk Premium for Angola of 14%.
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PTC. We estimated a negative trend regarding the pay tv market share, as we show on the table below (table 47). Our estimate indicates a balanced market, divided by these two operators and by 2018, PTC will be the market leader. Even though ZON is losing market share in Pay TV, we have to highlight that this is due to the increase in the global number of Pay TV subscribers, since this company is showing a good performance defending its customer base (around 1.6millions). This way, we do not predict a negative impact on revenues.
Exhibit 48; Important aspects to predict the Evolution of 2010 2011E 2012E 2013E 2019E 2020 E 2021 E 2022 E market behaviour market share - TV Grupo ZON TV 57.9% 53.9% 51.9% 49.9% 45.4% 44.94% 44.44% 43.94% CABO Technology PTC 29.9% 34.3% 36.6% 39.0% 45.7% 46.51% 47.37% 48.23% -Type of connection and speed Cabovisão 9.4% 9.1% 8.8% 8.5% 6.7% 6.39% 6.09% 5.79% -Reliability Optimus (ex- 1.1% 1.1% 1.2% 1.2% 1.5% 1.55% 1.60% 1.65% Sonaecom) Households covered Others 1.7% 1.6% 1.5% 1.4% 0.7% 0.6% 0.5% 0.4% Macroeconomic scenario Exhibit 47 Source: Nova Equity Research Estimates) Quality/Price of the offer The telecoms market is growing at a very strong pace (+9% pay tv subscribers in Actual market shares and trends 2010, and +11% Internet subscribers), but we have to take into account the Market potential negative macroeconomic structure. Several austerity measures have been Penetration rate vs other countries announced for the next years, so we predict a slight slowdown in the growth rate of Customers' satisfaction Pay tv subscribers (for 2011 we forecast +8% PayTV). Good news for ZON in the The DTT opportunity Broadband sector, 79600 net adds, increasing the number of customers in 13%, in Importance of the telecoms for the Portuguese people 2010. As we explained in the market analysis section, the Internet sector is expected to grow more.
Pay TV - ZON 2010 2011E 2012E 2013E 2019E 2020 E 2021 E 2022 E market( share (ZON) 57.9% 53.9% 51.9% 49.9% 45.4% 44.94% 44.44% 43.94% numbers of 1.608 1.616 1.650 1.666 1665 1672 1678 1684 subscriberso (mn) Revenuesu (mn €) 480 482 490 494 494 495 497 498 Exhibit 49 - Source: Nova Equity Research Estimates
Fixed 2010 2011 E 2012 E 2013 E 2019 E 2020 E 2021 E 2022 E Broadband market 33.0% 33.8% 34.5% 35% 37.4% 37.8% 38.2% 38.6% share(ZON) number of 0.684 0.777 0.865 0.958 1.233 1.272 1.311 1.351 subscribers (mn) Revenues 218 235 251 268 317 324 332 339 (mn €)
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Exhibit 50 - Source: Nova Equity Research Estimates
Cinemas
In our opinion, this sector is a very stable business unit. It is seen by the Portuguese people as a cheap way of entertainment, therefore it is not so penalized in the context we are living. We assumed that the price (4.7€) of the tickets will move according to the inflation rate, forecasted by the IMF. The introduction of the 3D movies was a good way of re-capturing more clients but we predict a slow growth rate for this segment, because there is no big potential for the future and other types of competition (also illegal competition like piracy) are gaining relevance (Apple TV, Smartphones,etc ).
Cinemas 2010 2011E 2012E 2013E 2019E 2020E 2021E 2022 E number of tickets 9.101 9.147 9.192 9.238 9.710 9.807 9.905 10.004 sold (mn) Revenue per ticket (€) 4.7 4.8 4.8 4.9 5.5 5.6 5.7 5.8 Revenue from 42.8 43.5 44.3 45.2 53.2 54.8 56.5 58.2 Cinema exhibition (mn €) others 12.2 12.3 12.5 12.6 13.4 13.5 13.6 13.8 total revenues 55.0 55.9 56.8 57.7 66.6 68.3 70.1 72.0 cinema
Exhibit 51 - Source: Nova Equity Research Estimates
Capex
The last 3 years (from 2008 to 2010) were defined by high Capex levels. This was due to the upgrade of the cable network (Upgrade for Eurodocsis 3.0) and cell splitting in some areas where the traffic was too high, leading to difficulties in providing the contracted speed connections. Besides that, an important strategic step was given, which consisted on the replacement of rented infrastructure from the incumbent with own equipment. This will allow important cost efficiency ( EBITDA margin is expected to grow) and more flexibility, regarding important decisions that would have to be approved by the incumbent operator, before this change. These type of investments are non-recurrent and in 2010 meant 69.8 millions € invested, so we believe in a significant decrease in Total Capex (to values around €200 Millions).Non recurrent Capex is expected to decrease to values around zero in 2011.
Another point regarding the Capex, is the investment in PayTv,Internet, voice infrastructure and also terminal equipment. The penetration rate of the ZON HD box is very high (84% of the digital clients have this box) and therefore ZON does not need to install so many units as before. However, we highlight the
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new service “IRIS” and the fact of providing a new and different box, imposing a substitution. This way, baseline Capex (in 2010 was 178.3millions €) is expected do decrease but in very moderate terms, because of the new service IRIS.
2010 2011 E 2012 E 2013 E 2019 E 2020 E 2021 E 2022 E Capex/revenues 35.6% 21.8% 21.0% 19.6% 19.8% 19.6% 19.5% 19.3%
Exhibit 52 - Source: Nova Equity Research Estimates
We can observe the capex/revenues ratio of ZON (35% in 2010) is above the average of the comparables (average capex to revenues 17%), influencing negatively the Free Cash Flow generation. However, due to the end of this Capex investment cycle (2008-2010), we forecast a reduction to values around 20% in the future, and consequently an improve in FCF values. For 2011, we believe in a reduction of 20% in total Capex.
Baseline Capex (mn €) 2010 2011 E 2012 E 2013 E 2019 E 2020 E 2021 E 2022E Pay TV,BB & 88.4 106.1 106.1 106.1 116.7 116.7 116.7 Voice 116.7 Terminal 77.3 77.3 77.3 69.6 73.1 73.8 74.6 Equipment 75.3 Other baseline 12.7 12.8 13.0 13.1 13.9 14.0 14.2 14.3 Capex Non Recurrent Capex (mn€ ) Long term 10.9 0.5 0.5 0.5 2.7 2.7 2.7 2.7
contracts Other non- 58.9 0.6 0.6 0.6 0.6 0.6 0.6 0.6 E recurrent items xTotal ( mn € ) 248.2 197.3 197.5 189.9 207.0 207.9 208.8 209.6 h Exhibtibit 53 - Source: Nova Equity Research Estimates
EBITDA margin
The EBITDA margin in ZON has been, in the last years, focus of attention by the management. As we can see on table 58 (comparables), ZON stands below the average of the comparables. Efforts have been made in order to improve its position, namely in terms of cost efficiency, but the competition in the Portuguese Telecoms market has been very intense. Comparing to PTC, ZON offers relatively cheaper packages, particularly on 3Play. Furthermore the Audiovisuals and Cinema (represent around 12% of ZON’s revenues) business units are areas that generate lower margins and this lowers even more the
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EBITDA margin in consolidated terms. Our forecast for the future is a moderate improvement (we predict +3% in the next year, due to the investments made that allow lower costs) and a rate around 0.5%from 2011 on. Other factor that helps this increase is the ability of ZON getting more muliple play subscribers and therefore increasing the blended ARPU. Once again the area that will contribute more for the positive trend is the Broadband. One more remark, we were cautiously optimistic in this improvement because Zon is clearly below the comparables in EBITDA margin and so has some potential to explore. But, Telecoms sector is expected not to allow large EBITDA margin growth in the near future, since in our opinion, it will be marked by severe austerity measures that will force some clients to update their plans for lower income ones.
2010 2011E 2012E 2013E 2019E 2020E 2021E 2022E EBITDA margin 33.1% 36.1% 36.7% 37.2% 40.7% 41.0% 41.3% 41.6% Total revenues 872 905 942 969 1047 1060 1073 1087 (mn €) EBITDA 289 327 346 361 426 434 443 452 EBIT margin 8.0% 15.4% 16.0% 16.5% 21.0% 21.5% 21.9% 22.4%
Exhibit 54 - Source: Nova Equity Research Estimates
Shareholder Remuneration
The dividend per share has been constant in the last two years, and it was established to be 0.16€. We believe this reflects a relatively high (above the average of the comparables), meaning a dividend payout ratio of 134% for 2010. In our model, we assume a 0.02€ increase to 0.18€/share, for the year of 2011 due to the prediction of upcoming good results. This expectation of good results and net income growth make us believe that values like 0.18€ are sustainable for the future.
2010 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E
div/share 0.16 0.18 0.18 0.18 0.18 0.18 0.2 0.2 (€) n shares 309.067 309.067 309.067 309.067 309.067 309.067 309.067 309.067 (mn) treasury 14.3 14.3 14.3 14.3 14.3 14.3 14.3 14.3 share (mn €) dividends 47.2 53.1 53.1 53.1 53.1 53.1 59.0 59.0 (mn €) Shares 0 0 0 0 0 0 0 0 issued Exhibit 55 - Source: Nova Equity Research Estimates
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Free Cash Flow
According to our estimates, we are optimistic regarding the FCF generation for the next years. The very significant decline in Capex levels and a slight increase in EBITDA margin (even though the tough economic environment) make possible a sharp increase from € -25Mn in 2010 and €0Mn for 2011 to values around € 100mn for the next periods. A continuing ascension is forecasted for the period 2018-2022, stabilizing in values around 160Mn €.
Zon FCF summary (mn €) 2010 2011E 2012E 2013E 2019E 2020E 2021E 2022E EBITDA 289 327 346 361 426 434 443 452 D & A 219 187 195 201 205 206 208 209 EBIT S 70 140 151 160 221 228 236 244 EBIT*(1e-t) or NOPLAT 55 103 111 118 162 168 173 179 + D & nA 219 187 195 201 205 206 208 209 = grosss CF 274 290 306 318 367 374 381 388
S Δ operating working 1 19 5 4 2 2 2 2 capitale CAPEXn 310 197 197 190 207 208 209 210 Investmentss in -17 54 16 12 6 6 6 6 intangibles Δ otheri operating assets 2 23 4 4 2 2 2 3 Δ othert liabilities -3 3 0 0 0 0 0 0 Gross iInvestment -299 -290 -223 -209 -217 -218 -219 -220 v FCF -25 0 83 109 150 156 162 168 i
Exhibit 56 - Source: Nova Equity Research Estimates Sensitivity Analysis
Δ variation relative to the values used for the standard valuation Cost of debt -2% -1% 0% 1% 2%
Price Target (€) 4.81 4.54 4.3 4.07 3.86
Cost of Equity -2% -1% 0% 1% 2%
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Price Target (€) 5.46 4.83 4.3 3.85 3.47
Country Risk (Portugal) -2% -1% 0% 1% 2% Price Target (€) 5.56 5.02 4.3 3.72 3.25
Capex -2% -1% 0% 1% 2% Price Target (€) 4.64 4.49 4.3 4.11 3.91
PayTv,Net and Phone growth -5% -3% -2% -1% 0% Price Target (€) 3.62 3.88 4.02 4.16 4.13
Zon market share growth -2% -1% 0% -1% -2% Price Target (€) 3.57 3.93 4.3 4.66 5.02
Exhibit 57 - Source: Nova Equity Research Estimates
ROIC vs WACC
Throughout the years, Zon has an acceptable performance in terms of ROIC vs WACC, in our opinion. However, in 2011 and 2012, according to our estimates, the company will not create value, since ROIC is lower than WACC.After this period, Zon presents satisfactory results, as it is shown on the graphic below.
ROIC vs WACC
0.14 ROIC, 12.96% 0.12 0.1 WACC, 9.26% 0.08
0.06 0.04
0.02
0 2009 2010 2011 E2012 E2013 E2014 E2015 E2016 E2017 E2018 E2019 E2020 E2021 E2022 E
Exhibit 57-A; Source: Nova Equity Research estimates
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Comparables
A valuation scenario is always an exercise of comparison between the company analysed and the competitors/comparables, so we selected some ratios and some companies that operate in the same industry, in order to make a relative assessment of Zon. We know that multiples can be misapplied, due to differences either in the comparable companies or in the way some items are calculated, therefore in order to provide a detailed multiples analysis, some adjustments are required. We tried to adjust our analysis and selected mainly ratios based on the Enterprise value, to avoid mistakes regarding capital structures. We believe more adjustments would have to be made in order to get a very accurate and precise comparison. Below, one cand find Zon and comparables’ figures (the ratios of the comparables are BESI’s estimates) that will help in the analysis made throughout the report.
EV/revenues EV/EBITDA EV/EBIT Net EBITDA mg debt/EBITDA 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E BSky B 2.2 2.0 10.1 8.6 13.6 11.1 0.7 0.4 22.1% 23.7%
Telenet 4.1 4.0 8.0 7.8 14.5 13.1 3.5 3.5 51.4% 51.0%
Virgin 3.1 2.9 7.9 7.3 24.0 16.0 2.8 2.4 39.5% 40.0% Media Kabel 3.5 3.1 7.7 6.7 23.8 15.6 3.8 3.2 45.2% 46.3% Deuts chland Eur ope 3.2 S3.0 8.4 7.6 19.0 13.9 2.7 2.4 39.5% 40.3% an ave e rage n Liberty 3.1 2.9 6.7 6.2 14.6 12.4 4.5 4.2 45.8% 46.4% Global s i Comcas t 2.3 2.1 6.0 5.6 10.5 9.4 1.8 1.5 38.0% 38.2% t Time i 2.1 2.0 5.9 5.3 10.5 9.1 2.5 2.1 36.6% 36.8% Warner v Cable PT i 2.4 2.5 6.2 6.5 11.5 10.6 2.3 1.9 38.7% 38.5% t Zon M 1.84 1.76 5.08 4.81 11.8 11.01 2.81 2.65 36% 37% ultim e y dia
Exhibit 58(Source: BESI, Bloomberg and Nova Equity Research for the estimates of ZON)
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Sensitivity Analysis TVTEL
NPV (mn€)
WACC Grupo Parfitel TvTel Scenario 1 Scenario 2 Scenario 3 1+2 1+3 2+3 1+2+3
0.065 -22.8 -55.3 -7.3 -42.4 -49.9 5.6 -1.9 -35.4 12.5
0.055 -18.2 -47.5 0.5 -32.3 -41.2 15.7 6.8 -24.1 23.9
0.045 -11.6 -36.3 11.7 -17.7 -28.5 30.3 19.5 -7.7 40.3
0.075 -26.1 -61.0 -13.0 -49.8 -56.3 -1.8 -8.3 -43.8 4.2
0.085 -28.7 -65.3 -17.3 -55.5 -61.2 -7.5 -13.2 -50.2 -2.2
Exhibit 59; Source: Nova Equity Research estimates
Financial ratios
Key Ratios (ZON) 2009 2010 2011 E 2012 E 2019 E 2020 E 2021 E 2022 E
EBITDA margin 32.5% 33.1% 36.1% 36.7% 40.7% 41.0% 41.3% 41.6%
EBIT margin 10.6% 8.0% 15.5% 16.0% 21.1% 21.5% 22.0% 22.4% Capex/revenue 32.4% 35.6% 21.8% 21.0% 19.8% 19.6% 19.5% 19.3% Capex/depreciation 148.0% 141.6% 105.5% 101.3% 101.1% 100.8% 100.6% 100.4%
Net debt/EBITDA 2.96 2.77 2.81 2.65 1.43 1.23 1.00 0.77
Invested capital turnover 77.5% 76.3% 72.6% 73.9% 77.8% 78.0% 78.3% 78.7%
ROIC 6.1% 4.8% 8.3% 8.7% 12.0% 12.3% 12.7% 13.0%
EPS 0.14 0.12 0.25 0.27 0.46 0.48 0.50 0.53
depreciation/EBITDA 67.3% 75.8% 57.2% 56.4% 48.1% 47.5% 46.8% 46.2% EBITDA %change 14.5% 7.8% 13.2% 5.8% 2.1% 2.1% 2.1% 2.1%
EV/Sales 2.02 1.90 1.84 1.76 1.59 1.57 1.55 1.53 EV/EBITDA 6.20 5.75 5.08 4.81 3.90 3.83 3.75 3.67 Dividend Yield 3.7% 3.7% 4.2% 4.2% 4.7% 4.7% 3.7% 3.7%
dividend payout 112.8% 134.7% 72.3% 65.8% 43.9% 41.9% 31.9% 30.4%
P/E 30.28 36.19 17.27 15.71 9.43 8.99 8.56 8.15
Reinvestment Ratio 90.6% 109.1% 100.1% 72.8% 59.1% 58.3% 57.5% 56.8%
Exhibit 60; Source: Nova Equity Research estimates
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Consolidated Income Statement (€ million)
Operating Revenues 2010 2011E 2012E 2013E 2019E 2020E 2021E 2022E
PayTV, Broadband 773 804 838 862 926 936 946 957 and Voice Cinema 55 56 57 58 67 68 70 72 Exhibition Audiovisuals 44 45 47 49 54 56 57 58
Total revenues 872 905 942 969 1047 1060 1073 1087 Direct Costs of Services Rendered 252 235 241 244 231 230 230 230
Wages and Salaries 58 59 59 60 62 62 63 63 COGS (TV,Internet,MVNO) 15 14 15 15 17 17 17 17 Marketing and Advertising 25 29 30 31 33 33 34 34
Support Services and External Supplies and 209 219 228 235 253 257 260 263 Services Other costs and (gains)- operational 12 20 20 21 23 23 23 24
Total operating expenses 570 576 593 605 618 622 626 631 Other Financial Costs (gains) 13 2 2 2 2 3 3 3
Other non-operational costs 1 1 1 1 1 1 1 1
EBITDA 289 327 346 361 426 434 443 452 Depreciation & amortization 219 187 195 201 205 206 208 209
EBIT 70 140 151 160 221 228 236 244 Financial Costs-interest expense (gains)
borrowings 23 30 30 29 20 17 14 11 Interest -6 -8 -8 -7 -5 -4 -4 -3 earned Financial Costs - interest expenses on leasing 6 8 8 8 5 5 4 3
Total Financial Costs - interest expense (gains) 23 30 30 29 20 18 14 11 EBT 47 110 121 131 201 211 221 232
Income tax 9 29 32 35 53 56 59 62 Net Income 38 81 89 96 148 155 163 171
Minority Interest 1 4 4 4 7 7 8 8
Net Income ZON 37 77 85 92 141 148 155 163
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ZON MULTIMEDIA COMPANY REPORT
THIS DOCUMENT IS NOT AN INVESTMENT RECOMMENDATION AND SHALL BE USED EXCLUSIVELY FOR ACADEMIC PURPOSES (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
Consolidated Balance Sheet (€ million)
Assets 2010 2011E 2012E 2013E 2019E 2020E 2021E 2022E Cash and cash equivalents 265 91 94 97 105 106 107 109 Accounts receivable 189 196 204 210 227 230 233 236 Inventories 59 47 49 50 54 55 56 56 Taxes receivable 3 19 19 20 22 22 22 22 Prepaid Expenses 17 15 15 15 16 16 16 16
Total current assets 531 367 382 393 423 429 434 439
Accounts receivable - others 61 83 86 89 96 97 98 99 Available-for-sale financial assets 23 23 24 24 27 28 28 29 Intangible assets 337 391 407 418 452 458 463 469 Tangible assets 646 656 659 648 648 649 651 651 Other non-current assets 53 54 55 56 63 64 66 67
Total non-current assets 1119 1207 1230 1235 1286 1296 1306 1316 Total assets 1650 1574 1612 1628 1709 1725 1740 1755
Liabilities Borrowings Short term 93 94 96 98 111 113 115 117 Accounts payable 210 196 203 207 211 212 214 215 Accrued expenses 70 78 81 84 90 91 92 94 Deferred income 4 4 4 4 5 5 5 5 Taxes payable 11 11 11 11 13 13 13 14 Provisions for other liabilities and 10 11 11 11 12 13 13 13 charges Total current liabilities 399 395 406 415 442 447 453 458
Borrowings Long term 973 913 915 890 601 529 438 339 Accounts payable 5 9 9 9 9 9 9 9 Defered income and provisions 16 16 16 16 19 19 19 20 Deferred income tax liabi lities 5 5 6 6 6 6 7 7 other non current liabilities 3 3 3 3 3 3 3 3 Total non-current liabilities 1002 946 948 924 639 567 476 378 Total liabilities 1400 1341 1355 1339 1081 1014 929 836
Shareholder's equity Share capital 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 Treasury shares (0.01) -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01 retained earnings 237 221 245 276 616 698 798 906 Equity before minority interests 240 224 248 279 619 701 801 909 Minority interests 10 10 10 10 10 10 10 10 Total equity 250 234 257 289 629 710 811 919 Total liabilities and shareholder' s 1650 1574 1612 1628 1709 1725 1740 1755 equity
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ZON MULTIMEDIA COMPANY REPORT
THIS DOCUMENT IS NOT AN INVESTMENT RECOMMENDATION AND SHALL BE USED EXCLUSIVELY FOR ACADEMIC PURPOSES (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
Consolidated Cash Flow Statement (€ million)
2010 2011 E 2012 E 2013 E 2019 E 2020 E 2021 E 2022 E
EBITDA 289 327 346 361 426 434 443 452 D & A 219 187 195 201 205 206 208 209
EBIT 70 140 151 160 221 228 236 244
EBIT*(1-t) or NOPLAT 55 103 111 118 162 168 173 179 + D & A 219 187 195 201 205 206 208 209
= gross CF 274 290 306 318 367 374 381 388
Investment in operating working 1 19 5 4 2 2 2 2 capital CAPEX 310 197 197 190 207 208 209 210
Investments in intangibles and -17 54 16 12 6 6 6 6 goodwill Change in other operating assets 2 23 4 4 2 2 2 3
Change in other liabilities -3 3 0 0 0 0 0 0 Gross Investment -299 -290 -223 -209 -217 -218 -219 -220
FCF -25 0 83 109 150 156 162 168
After tax interest income Change in Excess cash 83 -177 0 0 0 0 0 0
Decrease (increase in 0 0 0 0 1 1 1 1 nonoperating assets)
Change in other non current 6 1 1 1 1 1 1 1
liabilities
CF available to investors -102 177 83 109 150 156 162 168
After tax Interest expense 17 22 22 22 15 13 11 8
change in debt 96 -58 4 -23 -63 -70 -89 -97
Cf to debt holders 80 -80 -19 -45 -78 -83 -100 -105
Dividends 47 53 53 53 59 59 47 47
Net Shares repurchased 0 0 0 0 0 0 0 0
Share capital 0 0 0 0 0 0 0 0
Treasury shares 87 0 0 0 0 0 0 0
retained earnings -27 -16 24 31 75 82 100 108
Change in minority interests 1 0 0 0 0 0 0 0
Minority interest (Income 1 4 4 4 7 7 8 8 Statement) Net Income 38 81 89 96 148 155 163 171 CF to equity holders 22 -97 -65 -65 -72 -73 -62 -63 Cash flow available to investors 102 -177 -83 -109 -150 -156 -162 -168
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ZON MULTIMEDIA COMPANY REPORT
THIS DOCUMENT IS NOT AN INVESTMENT RECOMMENDATION AND SHALL BE USED EXCLUSIVELY FOR ACADEMIC PURPOSES (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by a Masters of Finance student, following the Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use.
The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content.
The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report.
The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report.
NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report.
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This report is not an investment recommendation as defined by Article 12.º-A of the Código do Mercado de Valores Mobiliários. The students of NOVA School of Business and Economics are not registered with Comissão do Mercado de Valores Mobiliários as financial analysts, financial intermediaries or entities or persons offering any services of financial intermediation, to which Regulamento 3.º/2010 of CMVM would be applicable.
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