Analysts at investment bank Berenberg, while admitting that the John Malone-controlled suite of businesses under the Liberty Global banner represents a “complex case” to analyse, nevertheless – and it says with its eyes wide open – believes that Liberty’s prospects are solid. Berenberg is raising its advice on Liberty Global to ‘BUY’ (from ‘HOLD’) and with a share price target of $36.40 (from today’s $27-$28).
Berenberg suggests to its clients that the recent “credible” deal synergies in the UK and Switzerland should lead to Free Cash Flow (FCF) doubling from $1.1 billion last year to an estimated $2.3 billion by 2024.
“We take a decidedly conservative approach to operational momentum – particularly assuming further share losses in the existing UK footprint as BT improves competitive position through its fibre rollout, and only slow progress towards ending fixed share losses in Switzerland and Netherlands. All said, c.60 per cent of the forecast FCF expansion is from high-visibility synergy harvesting, compared to only about 10-15 per cent from organic operating momentum, and the remainder from inorganic and vendor financing effects.”
The bank admits that there’s a distinct valuation gap in Liberty Global’s position, commenting: “A valuation gap such as Liberty’s does not open up without reason. Liberty Global is a complex equity case with a complicated group structure. Operational momentum disappointed in recent times, in particular broadband customer losses in legacy (“BAU”) UK footprint, Switzerland and Netherlands, with rather soft ARPU in the UK. Finally, we note prior uncertainty over the use of proceeds from the divestment to Vodafone, together with foot-dragging over long-mulled UK footprint expansion.”
Berenberg expects improvements to happen, adding: “First and foremost, that Liberty has now committed to buy at least 10 percent of its stock annually over the next three years. We believe this is more than feasible, also in the outer years. Beyond that, management has indicated an intent to crystallise value through local listings of national operations (“string of pearls” strategy). We also mention the astute decision to upgrade the UK HFC network to full fibre that should ensure the product will see eye-to-eye with unfolding incumbent fibre in the coming battle of share defence. Finally, we expect imminent removal of uncertainty with regard to UK footprint expansion and Belgium M&A and possibly also Flanders fibre. We do not pitch these as value creation events even if they may well turn out as such – the point is the removal of strategic uncertainty.”