Advanced Television

Kabel Deutschland: “solid top line”

September 21, 2010

By Chris Forrester

Germany‘s largest cable operator Kabel Deutschland (KDG) is looking to issue more shares. Bankers Morgan Stanley supports the move. Indeed, in a note to investors the bank says the cable giant has “robust prospects” and advises clients to stay ‘overweight’ given its forecast of a 16 per cent upside to its E31 a share target price.

“Despite the recent run, we see KDG as a superior investment proposition with 10 per cent annual EBITDA growth in the coming years coupled with ongoing deleveraging driving substantial shareholder value creation. Increasing liquidity, if Private Equity were to reduce their stake post the lock-up expiry on Wed 22nd, would offset overhang pressures, in our view,” says the bank’s note.

The bank’s report lists three reasons for its buoyant view: “Three drivers should underpin a solid top line in the coming years: new products, with a strong initial take-up of the new DVR launched Sept 6th (we do not yet give credit to KDG on this), cable TV price increases (July, Aug) both with limited customer reaction so far. In the competitive broadband market, KDG plans to keep its lead (34 per cent of gross adds, over 100 per cent of net adds in 1Q) with more aggressive promotions, and remains confident it can add 250k broadband subs this year, despite a slowing market.”

Morgan Stanley cites a meeting with management, and fresh guidance: “Management flagged the potential ahead, with cost per RGU to continue to trend down. For instance, they were down from E0.5pm to E0.41 year on year in customer care through several optimisation processes. Management is confident margins will trend to 50 per cent in the next 3-5 years. The message on capex is robust, with a structural advantage over DSL (speed, upstream) and no unexpected rise in capex to come.”

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