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Fitch: Euro telecoms FCF to remain constrained

November 1, 2022

Free cash flow (FCF) for European telecoms will remain constrained in 2022, according to credit rating agency Fitch’s European Telecoms Watch – 4Q22, with risks to short-term forecasts likely to be low.

FCF will remain constrained as capex investments for fibre deployments, 5G mobile networks, spectrum payments and IT overhauls peak during the course of this year. Fitch consider the risks to its current-year FCF forecasts low, reflecting a combination of supportive factors that will vary by market. These include cost visibility, price increases, recovery from the pandemic and improving average revenue per user (ARPU).

It suggests the impact of increasing energy costs will be limited for most telcos in Europe in 2022 because of price hedging and low overall cost contribution. Incumbent operators have reported 70 per cent-90 per cent of their total energy costs as hedged in 2022, with the figure reducing and varying more significantly in 2023 and 2024. Energy costs typically account for 4 per cent to 6 per cent of total operating costs in the sector, with electricity used to power fixed and mobile networks. The current high energy cost environment will cause operators to expand the use of long-term power purchase agreements with renewable energy sources, says Fitch.

According to Fitch, there are supportive factors that will help European operators manage inflation pressures. These include CPI-linked pricing, ‘more-for-more’ packages driving ARPU improvements, normalising roaming revenues following the pandemic and ongoing cost reductions. The exact mix will vary by market but will be harder in markets like Italy where a subscale operator is seeking to increase market share. The extent of support from these factors in 2023 will be lower, leading to lower EBITDA growth and mildly weakening EBITDA margins.

Fitch suggests that elements of the business and enterprise segments are likely to be some of the strongest areas of growth and decline for operators in Q422. Cyber security and remote/collaborative working platforms will drive growth of cloud and Internet-based products and services. Conversely, they will also accelerate declines in legacy products such as voice lines and usage. However, the impact will vary across the sector due to varying exposures to both trends, it concludes.



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