Positive market growth, strong competition and potential for ZON

Transcription

MASTERS IN FINANCE
EQUITY RESEARCH
ZON MULTIMEDIA
COMPANY REPORT
TELECOMMUNICATIONS
STUDENT: LUÍS CORREIA
06 JUNE 2011
Luisteixeiracorreia@gmail.com
Positive market growth, strong
competition and potential for ZON
Recommendation:
BUY
Price Target FY11:
4.30 €
Price (as of 11-Jul-11)
3.57 €
The fight for the best fibre network
§
Our study of the company ZON Multimedia indicates a
price target of 4.30€ (BUY), an upgrade of 20.4%, relative to the
th
price of the 3 June 2011.
Reuters: ZON.LS, Bloomberg: ZON: PL
52-week range (€)
2.77-4.12
Market Cap (€m)
1,190.023
Outstanding Shares (m)
§
main competitor, PT, due to the difference in the technologies used
(HFC vs FTTH) and due to the market structure (ZON has been
the PayTV market leader,57.9% in 2010) since the Spin off.
Source:Bloomberg
ZON vs PSI20
0.4
§
Free Cash Flow levels will improve significantly for the
next years (€0M for 2011, +€83M for 2012), because of the end
0.2
of the cycle of non-recurrent investment (Capex in long term
0
ZON
contracts, the upgrade of the cable network, and Data Centre
investments), initiated in 2008. Capex to revenues has been
2009
-0.2
around 35%, and we estimate a reduction to values around 20%
starting next year. EBITDA margin increase of 3% expected.
-0.4
§
PayTV market still growing (+9.7% FY10) and high
potential in Broadband (+11% FY10 and penetration rate of 51%,
below Euro-average).
§
Triple Play strategy has been a success (55% of the
ZON cable customers have 3play plans). It allowed a Blended
ARPU change of + 15.2% since 2007 for €35.4 in 2010.
§
309.067
ZON has a short term competitive advantage over its
International expansion to Africa (through DTH). Joint
venture in Angola, with SOCIP, a company owned by Ms. Isabel
dos Santos (shareholder of ZON, 10% of the shares) will allow the
2010
2011
PSI20
Source:Bloomberg
(Values in € million)
2009
2010
Revenues
823
872
905
EBITDA
268
289
327
Net Profit
EPS (€)
2011E
45
38
81
0.14
0.12
0.25
ROIC
6.1%
4.8%
8.3%
Dividend Payout
113%
135%
72%
FCF
23
-25
0
Dividend Yield
4%
4%
4%
EV/Sales (x)
2.02
1.9
1.87
EV/EBITDA (x)
6.2
5.75
5.08
exploration of a country with high potential and low competition.
After Angola, we believe that ZON will expand to other subSaharan African countries, due to the low incremental cost, since
Source: Company data and Nova Equity Research Team
the satellite already installed is able to broadcast to these new
countries.
THIS REPORT WAS PREPARED BY LUÍS CORREIA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT
Page 1/36
ZON MULTIMEDIA
COMPANY REPORT
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……………………………………………..12
Digital Terrestrial Television…………………………...14
Fixed Broadband market analysis……………………15
Fixed Telephone………………………………………..17
Mobile…………………………………………………..18
Cinema and Audiovisuals…………………………………….19
International Expansion - ZAP……………………………….20
Valuation…………………………………………………….…21
Comparables…………………………………………………...30
Appendixes (Financial Statements)…………………………...32
Disclosures and Disclaimers…………………………………..35
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ZON MULTIMEDIA
COMPANY REPORT
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).
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,
Multim
2Q08 1Q09 4Q09
Grupo ZON TV CABO
4Q10
PTC
th
and on the 6
November of 2007, emerges this new company. The CEO is
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 2
2,000
nd
position in the Broadband markett (33% market share) , as well as
the Fixed Phone one (18.6% market share). Nowadays, it faces great
1,000
competition by the incumbent operator, PTC (Portugal Telecom),
Telecom) which makes
1
the Telecoms market in Portugal
gal very active and innovative.
0
2Q08
1Q09
4Q09
4Q10
Exhibit 2;Source: ICP-ANACOM
on the Hybrid Fibre Cable (HFC) technology. ZON also counts with Fibre-to-the-
% revenues per business unit
Pay tv,broadband and
phone
6%
5%
These services are provided by means of
of its vast cable network, mainly based
Cinema
home (FTTH) (and with Direct to Home - DTH)), and for this contributed the
acquisition of TVTel (investment of around €98 million) in 2008,
2008 which had the
greatest FTTH network at that time. Besides
Besides TVTel, ZON also acquired
Pluri
Pluricanal
Leiria,Torres Vedras and Santarém, as well as BragaTel (investment
2
around €45 million) . 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),
technology) capable
le of providing better services. The PayTv
3
4
Exhibit 3;Source: Company data, 2010
service
ervice has the highest offer in terms of channels (either in SD or HD ) and an
Impact of Eurodocsis 3.0
Cost per Mbps (€)
ex
excellent
Video club service, possible through the contracts between ZON
Audiovisuals and some movie studios, like Universal. The exploration of the
Audiovisuals unit allows not only the access to more than 5000 movies, more
100
than the double of the main competitors’ service,
service, but also important synergies
60
35
20
regarding the premium TvChannels, like Sporttv or TvCine (participations in
Sport and Dreamia, both with 50% of the capital)..
Sporttv
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
hand ARPU is increasing, so it balances the process. We highlight this
1
Further information on the Market Analysis section
The investment made in acquisition is analysed on the section Impact of TvTel and Grupo Parfitel on Zon
3
Standard definition
4
High Definition
2
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ZON MULTIMEDIA
COMPANY REPORT
considerable increase in the ARPU, achievable with a strong commitment in
Triple Play Market Shares 2009
ZON
PT
Cabovisão
providing a good Multiple Play service. This type of service which consists in
others
of the old ones. Also, this has allowed ZON to increase the blended ARPU
8%
14%
double or triple play is a way of captivate more clients and achieve more fidelity
(nowadays in 35.4€).
35.4€). In the multiple play area, ZON is the leader, and 55.2%
55
of
45%
the cable
cabl clients are 3play customers. Lately, in 2010 ZON launched the new
33%
software IRIS, a new way of watching TV, with several new functionalities, like
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
ZON
PT
Cabovisão
others
consolidation in the leadership of the Multiple play market.
Besides these three main services, in 2009, ZON launched its mobile operator,
11% 7%
44%
38%
based on a MVNO (Mobile Virtual Network Operator). This consists on the
utilization of the Vodafone network, after an agreement between these two
operators.
The other business units, Cinema
Cinema and Audiovisuals, despite of generating lower
Blended ARPU (€) - Zon
32
30.8
33.8
35.4
margins, are strategically important. ZON Lusomundo Cinemas has 217 cinema
theatres spread by Portugal and it is seen as a cheap way of entertainment by
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
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%
Grupo Banco Espírito Santo
11.07%
Kento Holding Limited
10.00%
available in ZON box (PayTV). Finally, ZON started in 2009, the process of
internationalization in Angola, through a joint venture ZAP, (30% ZON and 70%
Banco BPI, SA
7.76%
SOCIP) due to the good relations with Ms. Isabel dos Santos, shareholder of
Telefónica, SA
5.46%
ZON. This project consists on DTH basis, where a satellite, similar to the ones
on
used in Portugal, broadcasts
broadcast to the African market.
Cofina SGPS, SA
4.91%
Grupo/Fundação José Berardo
5.63%
Joaquim de Oliveira
Ongoing Strategy Investments
Estêvão Neves SGPS, SA
Cinveste, SA
Grupo Visabeira SGPS, SA
SGC, SGPS, SA
Credit Suis e Group AG
Free float
total
4.84%
3.45%
2.94%
2.82%
2.15%
2.00%
1.83%
24.21%
100.00%
ZON’s management is
considering the expansion for other african countries in the future, since
sin it has
low incremental costs. This way, with the same satellite, ZAP can broadcast for
these new countries.
countrie
Exhibit 8: Shareholder Structure
Source: Company data
PAGE 4/36
ZON MULTIMEDIA
COMPANY REPORT
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
Nielsen's Law of Internet bandwidth
structure occurred. Kento Holding Limited, owned by Ms Isabel dos Santos
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
Exhibit 10;Source:Howstuffworks.com
Santos is important and is believed that she is favourable to a possible merger,
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
PAGE 5/36
ZON MULTIMEDIA
COMPANY REPORT
5
(figure 9 ) 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
Version
the market: Wireless (UMTS, LTE, Satellite and others); xDSL; Technologies
No of
carriers
in
downst
ream
No of
carri
ers in
Upstr
eam
Downst
ream
(Mbps)
1
1
50
4
4
200
8
4
400
EuroDOCSIS
1.x
EuroDOCSIS
3.0
Ups
trea
m
(Mb
ps)
9
twisted metallic pair (includes FTTN/C); Hybrid fibre-coaxial (HFC) and Fibre to
the end customer FTTH/B/P. We are going to focus our attention especially on
the HFC and FTTH, the technologies used by ZON, PTC and Sonaecom.
To start with, Hybrid fibre coaxial, the technology mainly used by ZON, mixes
fibre optic cables on the main network, with coaxial cable on the distribution and
108 access network. As it is illustrated on the graph below, ZON installs fibre optic
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
Less expensive
Ideal for Digital signal
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
the coaxial cables. Some more advantages are presented on table 12.
Thinner
Less signal degradation
Higher carrying
capacity
Less power required
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
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
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.
PAGE 6/36
ZON MULTIMEDIA
COMPANY REPORT
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
Exhibit 13; Types of FTTx; Source:
Howstuffworks.com
“share” the same node/cell are heavy users or not. Sometimes, in order to prevent
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
6
7
until the customer; FTTC (fibre to the curb); FTTB (fibre to the building); and
8
FTTN (fibre to the node).
6
FTTC-the optical cable is left from 200 to 400meters of the home of the client
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.
7
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ZON MULTIMEDIA
COMPANY REPORT
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
9
that time .Besides that, in 2010, ZON established a contract with Alcatel-Lucent
Exhibit 14; Source: John A. Brouse, Jr. Director of
Network Implementation Charter
Communications, Inc.
Cost per Mile of Outside Plant
Life-Cycle Cost
Analysis
HFC vs FTTH PON
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
revenues analysis has to be made. A study conducted by the International
Telecommunication Union (ITU) shows that the investment necessary in the
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
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
HFC
PON
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
network allows incremental changes in order to update the network (example of
1 2 3 4 5 6 7 8 9101112131415161718192021
Years in Operation
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
speeds offered to a set of customers are below the normal, ZON can install more
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
(constant upgrade in technologies), prices offered by the operators and finally in
the number of subscribers. There is definitely a market before the Spin-off of
PTM and another one after the Spin-off (2007). Today’s trends are being clearly
defined by intense competition between the two main operators (ZON and PTC)
9
This topic will be developed further on
PAGE 8/36
ZON MULTIMEDIA
COMPANY REPORT
and we believe that in the future, the domination of these groups will be even
higher.
Nowadays, there are different tecnhologies available in the pay tv
10
market: CATV (Cable TV) by means of the hybrid fibre coaxial platform; DTH
(Direct to home Satellite Television); Internet Protocol Television (IPTV) and
Exhibit 15; Source: ICP-Anacom
digital terrestrial television broadcasting system (DVB-T); FTTH (Fibre to the
Total subscribers of the PayTv
service
Home); 3 generation mobile networks; and the new Digital Terrestrial Television
rd
(DTT) which will have a deep impact from 2012 onwards, as we will see on the
3,000
DTT section, further on.
2,000
1,000
For a better understanding of the global pay tv market, we believe it is
0
important to make a brief explanation about the market, divided by each type of
2T08 1T09 4T09 1T10 4T10
technology. Starting by the CATV, with the help of figure 16 , one can observe
that the number of subscribers has been decreasing during the last 3 years
(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
Exhibit 16; Source:ICP-Anacom
Subscribers of the cable TV service
(thousands)
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
impact in our valuation, since ZON is the company that has the majority of the
1,500
1,450
1,400
1,350
1,300
1,250
market share and big part of revenues come from this segment.
Regarding DTH Satellite Television, the scenario is relatively different
from the previous one. Through figure 16-A, a notorious evolution is seen, having
reached the number of 670,000 customers. An interesting note for the report is
the fact of the more developed regions like Lisbon or Oporto have much lower
rates in this segment (DTH) than the less developed ones, like the regions of the
Exhibit 16-A; Source:ICP-Anacom
Subscribers of the DTH service
(thousands)
800
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.
600
400
Moving to another technology, FTTH is currently the one with the
200
biggest potential. Big investments have been made by the operators (especially
0
PTC) and even by the government with the plan to equip Portugal with a large
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.
The service is offered by PTC, Sonaecom and ZON and there are currently
around 143,000 customers. Once again, Lisbon and Oporto have the vast
majority of FTTH subscribers (87%). We predict that in the next 5 to 10 years, the
competition in this area (and also HFC) will be very high, and a big part of the
10
DTH - 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.
PAGE 9/36
ZON MULTIMEDIA
COMPANY REPORT
other technologies’ clients will change to this one. So, the operator which can
assure the best service in this segment will have a big competitive advantage, in
our opinion.
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
Subscribers of the xDSL/IP e FWA
services (thousands)
600
500
400
300
200
100
0
customers and the tendency is to keep growing. As we said, the whole market
has been evolving and a good indicator is the constant increase in the number of
subscribers. (table 15)
Besides these services there is another one, offered by ArTelecom,
which is FWA (Fixed Wireless Access), but we are not going to focus our
attention beyond this note, since it is a small segment, a small operator, and
ZON does not operate through this technology.
2Q084Q081Q094Q091Q104Q10
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
number of Pay Tv subscribers and it is a clear demonstration of the evolution of
Subscribers of the FTTH service
(thousands)
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.
200
We are cautiously optimistic about the future of ZON, since we believe
150
the market still has potential to explore.
100
50
A more detailed analysis has to be performed, in order to justify our
0
optimistic reasoning. A very important statistic is the penetration rate, provided by
1Q074Q074Q081Q094Q094Q10
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
Exhibit 19:Trend in total number of paytv
subsbribers in terms of households Source: ICPANACOM,INE; unit:subscribers per 100 inhabitants
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
(Portuguese people will be punished by the austerity measures and lose
disposable income), the trend will be that Portugal will follow the more developed
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
PAGE 10/36
ZON MULTIMEDIA
COMPANY REPORT
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
share
Grupo ZON TV
CABO
PTC
4Q10
4Q11 E
4Q12 E
4Q13 E
4Q19 E
4Q20 E
4Q21 E
57.9%
53.9%
51.9%
49.9%
45.4%
44.9%
44.4%
29.9%
34.3%
36.6%
39.0%
45.7%
46.5%
47.4%
Cabovisão
9.4%
9.1%
8.8%
8.5%
6.7%
6.4%
6.1%
PayTV Penetration rate in Europe
Optimus (exSonaecom)
AR Telecom
1.1%
1.1%
1.2%
1.2%
1.5%
1.6%
1.6%
0.9%
0.8%
0.8%
0.7%
0.4%
0.3%
0.2%
Vodafone
0.7%
0.6%
0.6%
0.5%
0.2%
0.2%
0.1%
Others
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
Source: Anacom and Nova Equity Research Team (estimates)
Impact of TvTel, Bragatel and Pluricanal – Leiria
and Santarém
As we described before, in 2008, Zon acquired Bragatel and Pluricanal
Leiria and Santarém, regional TV and Internet providers. According to Zon, it was
an important step that would allow not only market share expansion, but also
synergies regarding TV content management, marketing and decrease of other
Penetration of PayTV services by
technology compared to total
households
administrative and general costs. 178 thousand homes passed, around 26
thousand Tv subscribers and 11 thousand Internet clients were the key indicators
at that time. Besides the acquisitions of these companies, an investment of
Centre
Alentejo
Madeira
Portugal
Cable
48Million €, Zon also invested in the acquisition of another regional pay
DTH
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
FTTH
0
100
passed in Lisbon, with particular emphasis to the cable network in Lisbon which
Others
200
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
Exhibit 22; Source:Company data
(Thousands)
RGUs
2834.3
Impact of
the
acquisitions
147.9
Subscribers
1525.1
88.5
1613.5
495.8
0
495.8
479
40
519
327.1
19.4
346.6
7.2
0
7.2
TV Digital
Broadband
Voice
VoiceMobile
4Q08Zon
subscribers of this company, that allowed revenues around 21Million € in 2007
4Q08Total
and EBITDA margin of 40%. Table 22 illustrates the impact of the acquisitions in
terms of the main operational key indicators.
Exhibit 24-A; Source: Nova Equity Research estimates
2982.2
Grupo Parfitel
units
homes passed (mn)
0.178
178000
Tv clients (mn)
0.026
26000
Internet clients (mn)
0.011
11000
revenues (1st
semester 07)
EBITDA (1st
semester 07)
EBITDA margin
6
2.8
Acquired by
(mn €)
Acquisition=
(9.7*EBITDA)
46.7%
PAGE 11/36
48
ZON MULTIMEDIA
COMPANY REPORT
Exhibit 23; Source:Nova Equity Research estimates
However, in our analysis we will try to go in more detail and assess if these
depreciation rate
55.0%
investments (particular emphasis for TvTel, because it was a bigger and more
tax rate
26.5%
important acquisition) were a good decision and brought value to the
Exhibit 24; Source: Nova Equity Research estimates
shareholders of Zon. Even though we have very few available information, we
Grupo Parfitel
tried to estimate the FCF of the group Parfitel (Bragatel, Pluricanal Leiria and
EBITDA (mn €)
4.94
D & A (55%* EBITDA)
2.72
EBIT
2.22
announcements when the acquisitions were performed. The main assumptions
EBIT* (1-t)
1.63
are illustrated on the tables on the left. We assumed the Capex would be similar
Gross CF
4.35
to the depreciation, estimated net working capital around zero and got the gross
Capex (approx D&A)
2.72
∆ NWC (approx 0)
0.00
Gross Investment
2.72
FCF (mn €)
1.63
WACC
6.5%
as the cost of fibre optic deployment per home , or the increase of +30% in
CF generated by Parfitel
25.14
TvTel’s revenues, after the acquisition. This way a peremptory conclusion is not
Santarém) and Tvtel starting on the EBITDA that was known through the
investment. Finally, we obtained the FCF and used the DCF method in order to
evaluate the projects. In this process, we analysed some scenarions, since it was
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
proposed for TvTel are based in some assumptions, made after research, such
11
achieved by us. The impact will depend on the different scenarios verified, that
NPV (without synergies)
-22.78
TvTel
we systematize on exhibit 25.
TvTel
Exhibit 24-B;Source: Nova Equity Research estimates
units
EBITDA (mn€)
8.40
D & A (55%* EBITDA)
4.62
EBIT
3.78
EBIT* (1-t)
2.78
Gross CF
7.40
Capex (approx D&A)
4.62
∆ NWC (approx 0)
0.00
A sensitivity analysis with different values for the WACC is presented
Gross Investment
4.62
on the appendixes (see table 59). Finally, one can see that the NPV can be
FCF (mn €)
2.78
WACC
6.5%
CF generated by TvTel
42.74
homes passed
(Oporto) (mn)
homes passed
(Lisbon- FTTH) (mn)
clients
0.26
26000
0.06
60000
0.074
74000
revenues (mn
€)
EBITDA margin
Acquired by
(mn €)
21
0.4
98
Deployment of fibre
optic
Capex/home
0.0008
(mn €)
800€/home
either positive or negative, depending on the scenarios selected.
NPV (without synergies)
-55.26
ZON vs MEO
A complete analysis to better understand and forecast the future must
contain a description of the service provided by ZON ( what the strengths and
weaknesses are) and also a comparison with the competitors. In this case we will
With Synergies (some scenarios)
study the principal competitor, PTC.
Scenario 1
Amount saved with the FTTH
network
NPV
As we have seen, HFC is behind FTTH in terms of bandwitdth, but ZON
48
-7.3
provides connections up to 400Mbps (through Eurodocsis 3.0), which in our
opinion is adequate for the necessities of portuguese customers, nowadays, and
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.
PAGE 12/36
ZON MULTIMEDIA
COMPANY REPORT
for the next 3 to 5 years. In fact, according to some opinions read in specialty
journals/magazines
(Exame
Informática,
PcGuia,
TvDigital),
the
speeds
achievable with FTTH are very high and do not bring value added for the majority
Scenario 2
Less competition and
Revenues increase
of the subscribers (excluding the heavy users). However, in the future, this type
of technology which allows for much higher speeds (up to 1gbps) will be required
+30% revenues Tvtel
27.3
new EBITDA
10.9
D & A (55%* EBITDA)
EBIT
EBIT* (1-t)
Gross CF
Capex (approx D&A)
6.0
4.9
3.6
9.6
6.0
Δ NWC (approx 0)
0.0
Gross Investment
6.0
FCF
3.6
(due to the superior contents offered, like HDTV, 3D TV and a more demanding
use of Internet in terms of speeds either down or up stream). In this manner, we
emphasize that it will be important to compete hardly against PTC and develop a
12
vast fibre optic network (FTTH) . Here, PTC is more advanced, having already
covered around 1Million households and planning to cover 600 thousand more
for this year of 2011 (it will mean around 50% of the households of Portugal).
Moreover, PTC was distinguished with an award, “Deployment and Operation of
WACC
NPV
0.1
55.6
FTTH Networks”,by the FTTH council Europe, simbolizing the best and most
innovative company deploying fibre optic in Europe.
-42.4
Although PTC has these recognized advantages, ZON still has its
trumps. The High Definition offer in ZON is more extensive, including more
channels, than the competitors do. In the end of 2010, 20 HD channels made
Scenario 3
Increase in EBITDA margin
part of the ZON offer, more than the double of its competitors. Besides this, ZON
was the pioneer in 3D emissions in Portugal. If we exclude the competitors’
due to cost reduction
FTTH (which is in a early stage in terms of subscribers – see market analysis
new EBITDA margin
new EBITDA
D & A (55%* EBITDA)
0.45
9.5
5.2
EBIT
EBIT* (1-t)
4.3
3.1
Gross CF
Capex (approx D&A)
8.3
5.2
Δ NWC (approx 0)
Gross Investment
0.0
5.2
above), ZON’s HFC is the most recommended technology for HD and 3D
emissions, since HFC permits more quality than IPTV or xDSL. Considering the
analysis of the Video Club, ZON is definitely the best option. ZON Lusomundo
Cinemas and ZON Lusomundo Audiovisuals ( purchasing and managing movie
transmission rights) make possible a clear advantage comparing to its
competitors, and ZON offers around 5,000 movies on its Video Club. PTC only
offers around half of them.
FCF
WACC
NPV
3.1
0.1
48.1
-49.9
During our research, we found an article on Exame Informática,
comparing the services based on fibre of ZON and PTC (Meo). Table 26 intends
to summarize the study and some comments were added, in order to explain
some points we think relevant. This is one more figure that will help us to
Scenario 1+2
NPV
understand the customer’s mind and its possible option for ZON or PTC.
5.6
The meo BOX is much more developed, functional and intuitive,
allowing better experiences while recording (ZON box crashes frequently). Also,
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)
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.)
PAGE 13/36
ZON MULTIMEDIA
COMPANY REPORT
system, which allows a pre-visualization every time we make zapping. Regarding
Scenario 1+3
the channels, ZON offers a greater number of options, but Meo has the
NPV
-1.9
Scenario 2+3
new EBITDA margin
0.45
Increase in revenues
27.3
exclusivity of two important channels (Benfica TV and SIC K).
To conclude, ZON has more apelative packs in terms of prices, since
+30% revenues Tvtel
new EBITDA
D & A (55%* EBITDA)
EBIT
EBIT* (1-t)
Gross CF
Capex (approx D&A)
Δ NWC (approx 0)
Gross Investment
FCF
WACC
12.3
6.8
5.5
4.1
10.8
6.8
0.0
6.8
4.1
0.1
62.5
NPV
-35.5
the plan that provides 30Mbps costs 45€/month, while PTC the option with
similar price (43€/month) only provides 12Mbps.
The final result is very balanced. The overall winner is PTC (meo), but
13
the decision depends on many personal characteristics.
We highlight the most
important disadvantage of ZON’s HFC: “HFC is based on hundreds of
subscribers sharing the same cell. So, the speed connection depends on how
many subscribers are “using” the cell, leading to very low quality in “rush hours”
“.One more factor that influences the perception of the client is the advertising
campaigns, and according to table 27, PTC is the leader. This is the strongest
reason why PTC is conquering so many market share.
DTT (Digital Terrestrial Television)
Scenario 1 + 2 + 3
NPV
The European Union decreed that in 2012 the analogue Television
12.5
signal will be switched off. This measure will have impact in the Pay Tv market,
Exhibit 26; Zon vs Meo Source: Exame Informática
since the majority of the families that do not subscribe Pay Tv, will have to make
nº188
an investment (around 50€ to 200€), in order to watch Television via digital
10 points
to divide
between
ZON and
PTC
ZON
PTC
(meo)
open some opportunities for the entrance of more clients in the PayTv market.
Coluna1
TV
Quality of image
6
4
broadcasting, more interactivity (EPG- Electronic Program Guide) and more
Quality of sound
4
6
Recording (DVR)
2
8
Video club (VOD)
4
6
BOX
2
8
Channels
6
4
th
14
signal. In Portugal, the switch off will occur on the 26 April , and this event can
With Digital Tv, the user will benefit from better image and sound quality in the
channels, in HD. The reason why this change provides so many improvements
regards with the digital compression. The “space” (radio spectrum) occupied by
one single channel in analogic signal, corresponds to four in digital TV leading to
more free “space”, which will be used with the above mentioned new
functionalities.The license of deployment of the digital network was attributed to
Internet
Bandwidth
4
6
Router/Hub
8
2
Installation
8
2
Energy consumption
4
6
PTC
15
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)
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.
PAGE 14/36
ZON MULTIMEDIA
COMPANY REPORT
In our opinion, some of the households will analyse the Pay Tv market
before making the investment
Exhibit 27; Source: Marktest
16
necessary to have access to the Digital Tv, so
we believe that low cost plans can have some potential for these cases. This
Top Advertisers - Share of Voice (%)
would lead to a possible decrease in ARPU, but at the same time, RGU’s would
PTC
4.8
Modelo/Continente
4.4
Unilever
4.2
increase (in a greater proportion), leading to more revenues.
Fixed broadband
2
Fixed Internet services are provided by means of three different
Zon
1.6
technologies: ADSL; cable Modem; and FTTH/B. Through graphic 28, we see
Danone
1.4
that this market is growing in a strong pace, having reached the number of
Pingo Doce
EDP
1
2,104,334 subscribers
in the 4Q2010 (2.5% more than the last quarter and
BCP
1
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
Exhibit 28; Evolution of Broadband clients; Source:
ICP-Anacom
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
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,
leading to a decrease in cable modem and ADSL accesses. Our believe is
supported by some data drom the FTTH council that estimates a rate of 25.7%
(household penetration), in 2015. (Graph 29)
FTTH Household penetration in 2015
(estimates)
France
Russia
Bulgaria
Netherlands
Finland
Slovak Republic
Portugal
Denmark
Norway
Sweden
Slovenia
17.20%
17.30%
17.50%
18.70%
20.10%
23.70%
25.70%
28.40%
29.50%
33%
In terms of market shares, according to table 32-B PTC is the leader,
with 46.8%, followed by ZON which counts with 33%. The main point here is the
fact that both PTC and ZON are gaining even more market share (PTC in a
stronger pace), while the other operators ( Cabovisão, Optimus, Vodafone,
Artelecom and Onitelecom) are losing it. This indicates a trend of even more
concentration of the market in the two big operators. More data indicating the
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
35.80% can see that Portugal is below the european average, leading to a perspective of
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)
PAGE 15/36
ZON MULTIMEDIA
COMPANY REPORT
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
proved by a study made by ANACOM, ZON Internet service is a good option in
the market, capable of collecting more clients. Next, we show our conclusions
based on “Estudo de Aferição da Qualidade do Serviço de Acesso à Internet de
Exhibit 30; Source: ICP-Anacom; IVR stands for
Relative Speed Index
IVR - downloads (%)
banda larga” by ICP – ANACOM and also ESCSI Portugal “A satisfação do
cliente no sector das comunicações”. Tables 30 and 31 provide information
about the Index of Relative Speed Connection
17
and ZON has good
performances. On the first table we see a slight advantage for SAPO (PTC) in
100%
80%
60%
40%
20%
0%
what concerns to downloads for contents located in US servers. However,
Cabovisão…
Clix 24Mbps
Sapo 4Mbps
Vodafone…
Zon10Mbps
Cabovisão…
Clix 24Mbps
Sapo 4Mbps
Vodafone…
Zon10Mbps
through the second table (measures the IVR along the day) ZON proves to be
USA
National
Exhibit 32; Source: Obercom
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
Percentage of customers complaints
31.80%
29.40%
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).
23%
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
18
32, and ZON leads with the highest percentage of customers’ complaints .
Grupo PT
Grupo Zon
Grupo
Sonaecom
Exhibit 32-A; Source: ICP-Anacom;ADSL vs Modem
However, the company from 2008 to 2011 has been improving (it was one of the
big priorities for the strategic plan 2008-2011) and nowadays reduced
significantly this category, having been recognized by Deco Proteste, as the
1,200,000
company with less complaints. Besides this, ZON also won the prize “Call Centre
1,000,000
Trophy 2010”, a clear recognition of the effort made to improve the relation with
the customer.
800,000
600,000
ADSL subscribers
400,000
modem/cable
subscribers
200,000
0
4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 2Q10
17
18
Broadband
market share
Grupo PT
4Q10
4Q11 E
4Q12 E
4Q13 E
4Q19 E
4Q20 E
4Q21 E
46.8%
46.7%
46.7%
46.8%
48.3%
48.5%
48.8%
Grupo ZON
TV Cabo
Cabovisão
33.0%
33.8%
34.5%
35.0%
37.4%
37.8%
38.2%
8.0%
7.7%
7.4%
7.1%
5.3%
5.0%
4.7%
Grupo
Sonae.com
6.4%
6.2%
6.0%
5.8%
4.6%
4.4%
4.2%
IVR = )Average real speed connection/maximum speed connection announced) x 100
The report was issued in 2009, and in the last two years, Zon made a huge effort to improve this result.
PAGE 16/36
ZON MULTIMEDIA
COMPANY REPORT
AR TELECOM
1.1%
1.0%
0.9%
0.8%
0.2%
0.1%
0.0%
Vodafone
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
ONITELECOM
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
Others
0.6%
0.6%
0.5%
0.5%
0.2%
0.1%
0.0%
Exhibit 32 – B; Source: Anacom and Nova Equity Research team (estimates)
Exhibit 33; Source: Useit.com; Penetration Internet
FIXED TELEPHONE
This type of service can be provided by one of the following
Population
2010
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlans
Norway
Portugal
Russia
Spain
Sweden
UK
…
Total
Europe
Intern
et
Users
(mn)
4.75
4.48
44.63
65.12
4.97
3.04
30.03
14.87
4.43
5.17
59.70
29.09
8.40
51.44
Penetration
%
Population
86%
85%
69%
79%
46%
66%
52%
89%
95%
48%
43%
63%
93%
83%
User
Growth
20002010
144%
133%
425%
171%
397%
288%
128%
281%
101%
107%
1826%
440%
108%
234%
475.0
58.40%
352%
Exhibit 34; Source: Company data
technologies: Copper wires, used by the incumbent operator PTC; Coaxial cable;
Fixed Wireless Access (FWA); FTTH; or Hertzian links. In this segment, PTC is
the main leader with 59.5% market share, while Zon is ranked in the 2nd position
with around 20%, meaning 778 thousand clients.
According to ANACOM, in the end of 2010, there were around
4.4Million Fixed telephone accesses registered, meaning a penetration rate of
48%, value still below the European average and with some growth potential.
The trend in the last years was negative due to the massive implementation of
the cell phones ( 148% penetration rate) which made some families to cancel the
fixed telephone subscription. However, with the increasing penetration of Triple
Play packages (55.2% of Zon clients are 3Play) this service gained more
subscribers. Together with the latter one, this inversion of trend (last year, the
fixed telephone market grew) is explained by the simple and cheap tariffs
charged by the fixed telephone providers, free calls and other functionalities like
Fixed Voice Penetration in
Europe,2009 (%)
costs control or privacy politics.
Mobile
Source: Zon data
There are five operators in the market, the big ones Vodafone, TMN
94%
73% 75% 77% 77% 84% 86%
(PTC group), Optimus (sonaecom) and two more recent, CTT and ZON. This is a
market strongly influenced by the actions of the regulator ANACOM, and until
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
Exhibit 35; Source: ICP-Anacom; Fixed phone market
shares
PT
Alternative
Providers
Sonae.com
Grupo ZON
Vodafone
Cabovisão
ONITELECOM
AR Telecom
Colt Telecom
Others
4Q08
4Q09
4Q10
65.4%
34.6%
62.9%
37.1%
61.6%
38.4%
16.1%
2.7%
5.5%
3.3%
3.2%
2.4%
0.9%
0.5%
15.0%
6.5%
7.0%
3.1%
2.9%
2.1%
0.3%
0.3%
13.7%
9.3%
7.1%
3.3%
2.7%
1.9%
0.3%
0.3%
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.
Portugal is a country where the mobile phone services industry is very
developed and there are more cell phones than people. This results in a very
high penetration rate, well above the european average, as it is shown on graph
35-A. In the 4Q2010, there were 16.47 million mobile devices (including mobile
PAGE 17/36
ZON MULTIMEDIA
COMPANY REPORT
phones and USB wi-fi devices). The small position of Zon in the market, in our
opinion, is due to the very intense competition, recent entrance in the market and
we believe it will be very difficult to achieve high percentages. One of the main
characteristics of this market is the choice of the operator that is influenced by
the friends’ and family’s operator, since recently launched tariffs like
Extreme,Moche or Tag allow free calls and SMS/MMS between people that have
the same tariff. This leads to a more difficult change in the market structure
difficulting the business to small operators which do not possess vast network of
clients.
On the other hand, good news was announced when Anacom declared
19
lower termination rates , aspect also mentioned in the MoU (Memorandum of
Understanding), established by the Troika, (36). This measure will be applied
rd
until the 3 quarter of 2011. This will have impact in terms of revenues (in our
Termination rates (prices €)
Dec-09
May-10
Aug-10
0.065
0.06
0.055
Nov-10
Feb-11
May-11
Aug-11
Source: Anacom
0.05
0.045
0.04
0.035
opinion, Zon will be better off) since Zon will have to pay less when its users call
to another operator. PT was against this change and in general terms we can
affirm that this measure will improve the competition and will benefit the small
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
way, Zon, with 107 thousand mobile clients in the end of 2010 is expected to
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
Exhibit 37; Source: Eurostat
addition of around 35 thousand clients. Regarding the mobile broadband we
highlight the innovative concept of Zon@Fon which allows Zon clients to access
Average Mobile Termination rate - 2009
0.12
to more than 250 thousand wi-fi hotspots and also the offer of an USB wi-fi
device with 100Mb included in order to captivate clients and respond to similar
0.1
actions of the competitors.
0.08
0.06
Finally, some important actions will occur in 2011 in terms of mobile
0.04
market, such as the auction of the 4G network which will operate with LTE ( Long
0.02
Term Evolution) allowing speeds of 100Mbps download and 50Mbps upload.
0
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
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
PAGE 18/36
ZON MULTIMEDIA
COMPANY REPORT
the market and therefore threat the market growth of Zon.
Zon
Exhibit 35-AService
35
Penetration rate EU27;; Units: Subscribers per 100 inhabitants; Source:
Anacom
Exhibit 38; Source: ICA (Instituto Cinema e Audiovisual)
Spectators 2011
Cinemas and Audiovisuals
New
Lineo
Cinemas
6%
Outros
9%
These business units are closely linked since ZON Lusomundo
Cinemas manages the 217 cinema theatres spread by Portugal, while ZON
UCI
14%
ZON
55%
Lusomundo Audiovisuals purchases and manages the movie transmission rights.
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
Socoram
a
16%
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
Exhibit 39; Source: ICA
the large number
number of movies available on the VoD service (pay tv – around 5000
Gross revenues 2011 - Cinemas
Zon
Socorama
New Limeo
Others
7%
UCI
movies, more than the double of the main competitor), the wide number of
premium channels offered by ZON either in HD or SD, and also the possibility for
the Lusomundo Cinemas’ unit to count with
with more and better movies to broadcast
and therefore attract more spectators.
8%
uring the last years,
years Zon has
Regarding ZON Lusomundo Cinemas, during
13%
18%
55%
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
(exhibitors) and Audiovisuals (distributors), with a variation of +887 thousand
tickets sold compared to 2009. According to ICA (Instituto do
d 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
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
PAGE 19/36
ZON MULTIMEDIA
COMPANY REPORT
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
Gross revenue 2011 - distributors Others
3%
Prisvide
o
9%
threats for this industry, the piracy. Internet access and illegal downloads are
more recurrent, nowadays, and the 3D experience is a good way to captivate
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
technol
advance allowed Zon
to charge more expensive tickets (4.4€
(4.4€ in 2009, 4.7€ in 2010), leading to an
increase in the ARPU of this unit. Our predictions for the Lusomundo Cinemas
Castello
Lopes
19%
Columb
ia
26%
point to a consolidation as market leader, however we believe that the potential
pote
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 thatt justifies our confidence in a
relatively stable market is that Cinema is seen as a cheap and accessible way of
Spectators 2011 - Distributors
entertainment. This way, less money will be spent by the portuguese families in
Castell Prisvid Others
eo
o
3%
9%
Lopes
Zon
18%
43%
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
Colum
bia
27%
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
Exhibit 42; Source: Company data; Macroeconomic
data for Angola and Mozambique
Language
Population
(millions)
Households
(millions)
GDP per
capita (USD)
Annual GDP
growth (0912F)
Angola
Portuguese
17
Mozambique
Portuguese
21
3.4
4.7
5054
478
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
channels.
Sportt These channels (especially Sporttv), are an extremely important factor
Sporttv.
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
rang of movie rights obtained) are the main advantages that this
business unit brings to Zon. .
17.2%
4.7%
International Expansion – ZAP – Angola
Exhibit 43; Source: Company data; Zap’s offer
ZAP
Channels
The international expansion of Zon started in Angola,
Angola in the beginning of
Price (USD)
2010, with a project named ZAP. It consisted in a joint venture (Upstar), 30%
Max
50
30
Premium
80
60
20
owned by Zon and 70% by SOCIP
20
and it is broadcasting based on the satellite
W7 which covers all the subsub saharan
haran african countries. This
T
service is similar to
Sociedade de Investimentos e Participações, S.A. ( owned by Ms Isabel dos Santos)
PAGE 20/36
ZON MULTIMEDIA
COMPANY REPORT
the DTH operations that Zon has in Portugal and there are two options: Max
package (50 channels, 30USD per month) and Premium package (80 channels,
60USD per month). One of the biggest competitive advantages for Zap is the
wide offer of portuguese spoken channels , particularly Sporttv Africa which
includes the exclusive transmission of the Portuguese football championship,
Liga ZonSagres.
Angola has one of the lowest penetration of TV devices (12% in 2008,
corresponding to 300,000 TV households) and is known by the extreme wealth
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
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.
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
opportunities that Zon will explore in this growing market. Besides this, a very
Exhibit 44; Source: Nova Equity Research, Bloomberg;
Cost of debt Portuguese companies
good characteristic about this investment is the fact that with very low
incremental costs, Zon can achieve other sub-Saharan markets, since the
Yield
14yr satellite
covers all the Southern African continent. This way, Mozambique (PT is
1year
2yr
3yr
5yr
8yr
Portugal
(rep.)
Mn €
2.15%
11.1%
11.7%
11.5%
10.7%
PT
3.17%
-
4.22%
6.13%
6.93%
6.7%
1300
-
750
600
750
500
3.56%
-
4.92%
6.21%
6.99%
6.87
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
Amount
EDP
Amount
investing €6M in Beira, fibre optic to deploy in 11000 households), can be valid
options to continue the international expansion.
Exhibit 45; Source: Nova Equity Research Estimates
Valuation
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%
PAGE 21/36
ZON MULTIMEDIA
COMPANY REPORT
21
provenient from PayTV and Broaband) assume in our model , we tried to
pinpoint them, based on the analysis of some statistical reports of ANACOM and
therefore get a more accurate estimate.
22
The discount rate used was the WACC , and below, we explain our
assumptions for the topics present on the formula of WACC.
•
Cost of debt – Our reasoning for the cost of debt estimation was the following:
we found two types of bonds issued by Zon and would use the Yield to maturity
of a long term bond as our rate. But as the bonds issued are not considered long
term ( the maturity was only 2014) and
the amount of the emissions are
relatively low (157Million €) ( then, we considered them not very relevant
Cost of equity
because this low amount can lead to a noisy analysis) we had to consider other
11.9%
option. Besides this, the hypothesis of relying on the rating of the company was
excluded because Zon is not rated by rating agencies. Finally, we obtained this
CAPM
Risk Free
3.04%
item through a comparison of some other companies’ yields (namely PT, EDP
1.04
and Brisa) and estimated the value for Zon, knowing that due to the
5%
characteristics of the companies, Zon would get a higher rate than PT or Brisa,
Beta
Base premium mature market
Lambda Portugal
1.32
Lambda Angola
0.10
Country risk (Portugal)
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
2%
Country Risk (Angola)
remark for the fact that the yields of the Portuguese republic are the highest ones
14.%
on the table. We believe these values are not normal for sovereign bonds and we
Target
D/E+D
40%
assumed that, for the long term, this value will be back to normal figures ( lower
E/E+D
60%
than the yields of the companies presented)
Tax rate
26.5%
•
Sum FCF (mn €)
Enterprise Value (mn €)
g
23
model
including the λ approach. The assumptions for the CAPM model have the
Exhibit 46; Source: Nova Equity Research Estimates
Terminal Value In 2022 (mn €)
Discounted Terminal Value (mn
€)
Cost of equity – The cost of equity was obtained through the CAPM
2309
•
872
790
1662
2%
following explanation:
Risk Free rate – We chose the 10year German bund and calculated an average
24
of the last 2 years. According to Damodaran , 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.
Market value of debt
Debt * % minorities
Market value of equity
number of Shares (mn)
Price target (€)
347 We believe this criteria is achieved with the choice of the 10year German Bund.
14
1328
309.067
4.30
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
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”
PAGE 22/36
ZON MULTIMEDIA
COMPANY REPORT
•
Market Risk Premium – Once again, we based our assumptions on
25
Damodaran . His theory suggests that the Market Premium Risk= Base
Premium for mature Equity Market + Country Premium.
For the first element of the equation, we assumed a rate of 5%. Regarding the
Country Premium
26
(formula presented on the footnotes), we obtained the
country default spread through the difference between the Portugal CDS 10year
and the German CDS 10year. Finally, the σequity and σcountry bond are
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
exposure to country risk”, by Damodaran, we found a new variable, λ (lambda)
which reflects it. Similar to the concept of Beta, a λ above 1 means exposure to
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
Exhibit 48; Important aspects to predict the
market behaviour
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
Revenues in country for Zon/ % of revenues in that country for average
Technology
-Type of connection and speed
company”. The numerator is straightforward to determine, however in order to
define the denominator, Damodaran suggests it should be (1- exports as % of
-Reliability
Households covered
Macroeconomic scenario
Quality/Price of the offer
Actual market shares and trends
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
27
Market potential
African country , in the future.
Penetration rate vs other countries
Beta – For the estimation of Beta we tried two different approaches. Firstly, we
Customers' satisfaction
regressed the returns of the last 2 years of Zon against the PSI20 and used the
The DTT opportunity
slope as the Beta. Our second approach consisted on the analysis of a set of
Importance of the telecoms for the Portuguese
people
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
25
26
Paper developed by Aswath Damodaran :“Estimating Equity Risk premiums”
Country Risk Premium: Country Default Spread ×
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%.
PAGE 23/36
ZON MULTIMEDIA
COMPANY REPORT
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
st
play customers are subscribing the ZON 3play offer). Due to its 1 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
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.
2010
2011E
2012E
2013E
2019E
2020 E
2021 E
2022 E
57.9%
53.9%
51.9%
49.9%
45.4%
44.94%
44.44%
43.94%
29.9%
34.3%
36.6%
39.0%
45.7%
46.51%
47.37%
48.23%
Cabovisão
9.4%
9.1%
8.8%
8.5%
6.7%
6.39%
6.09%
5.79%
Optimus (exSonaecom)
Others
1.1%
1.1%
1.2%
1.2%
1.5%
1.55%
1.60%
1.65%
1.7%
1.6%
1.5%
1.4%
0.7%
0.6%
0.5%
0.4%
Evolution of
market share - TV
Grupo ZON TV
CABO
PTC
Exhibit 47 Source: Nova Equity Research Estimates)
The telecoms market is growing at a very strong pace (+9% pay tv subscribers in
2010, and +11% Internet subscribers), but we have to take into account the
negative macroeconomic structure. Several austerity measures have been
announced for the next years, so we predict a slight slowdown in the growth rate of
PAGE 24/36
ZON MULTIMEDIA
COMPANY REPORT
Pay tv subscribers (for 2011 we forecast +8% PayTV). Good news for ZON in the
Broadband sector, 79600 net adds, increasing the number of customers in 13%, in
2010. As we explained in the market analysis section, the Internet sector is
expected to grow more.
2010
2011E
2012E
2013E
2019E
2020 E
2021 E
2022 E
( share (ZON)
market
57.9%
53.9%
51.9%
49.9%
45.4%
44.94%
44.44%
43.94%
s
number
of
o
subscribers
(mn)
Revenues
(mn
€)
u
1.608
1.616
1.650
1.666
1665
1672
1678
1684
480
482
490
494
494
495
497
498
Pay TV - ZON
Exhibit 49 - Source: Nova Equity Research Estimates
Fixed
Broadband
market
share(ZON)
number of
subscribers
(mn)
Revenues
(mn €)
2010
2011 E
2012 E
2013 E
2019 E
2020 E
2021 E
2022 E
33.0%
33.8%
34.5%
35%
37.4%
37.8%
38.2%
38.6%
0.684
0.777
0.865
0.958
1.233
1.272
1.311
1.351
218
235
251
268
317
324
332
339
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
sold (mn)
Revenue per ticket (€)
9.101
9.147
9.192
9.238
9.710
9.807
9.905
10.004
Revenue from
Cinema exhibition
(mn €)
others
total revenues
cinema
4.7
4.8
4.8
4.9
5.5
5.6
5.7
5.8
42.8
43.5
44.3
45.2
53.2
54.8
56.5
58.2
12.2
12.3
12.5
12.6
13.4
13.5
13.6
13.8
55.0
55.9
56.8
57.7
66.6
68.3
70.1
72.0
Capex
PAGE 25/36
ZON MULTIMEDIA
COMPANY REPORT
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
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.
Capex/revenues
2010
2011 E
2012 E
2013 E
2019 E
2020 E
2021 E
2022 E
35.6%
21.8%
21.0%
19.6%
19.8%
19.6%
19.5%
19.3%
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.
PAGE 26/36
ZON MULTIMEDIA
COMPANY REPORT
Baseline Capex
(mn € )
Pay TV,BB &
Voice
Terminal
Equipment
Other baseline
Capex
Non Recurrent
Capex (mn€ )
Long term
contracts
Other nonrecurrent items
Total ( mn € )
2010
88.4
2011 E
106.1
2012 E
106.1
2013 E
106.1
2019 E
116.7
2020 E
116.7
2021 E
116.7
2022E
77.3
77.3
77.3
69.6
73.1
73.8
74.6
12.7
12.8
13.0
13.1
13.9
14.0
14.2
75.3
14.3
10.9
0.5
0.5
0.5
2.7
2.7
2.7
2.7
58.9
0.6
0.6
0.6
0.6
0.6
0.6
0.6
248.2
197.3
197.5
189.9
207.0
207.9
208.8
116.7
209.6
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
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
(mn €)
EBITDA
872
905
942
969
1047
1060
1073
1087
289
327
346
361
426
434
443
452
8.0%
15.4%
16.0%
16.5%
21.0%
21.5%
21.9%
22.4%
EBIT margin
PAGE 27/36
ZON MULTIMEDIA
COMPANY REPORT
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
div/share
(€)
n shares
(mn)
treasury
share
(mn €)
dividends
(mn €)
Shares
issued
2011 E
2012 E
2013 E
2014 E
2015 E
2016 E
2017 E
0.16
0.18
0.18
0.18
0.18
0.18
0.2
0.2
309.067
309.067
309.067
309.067
309.067
309.067
309.067
309.067
14.3
14.3
14.3
14.3
14.3
14.3
14.3
14.3
47.2
53.1
53.1
53.1
53.1
53.1
59.0
59.0
0
0
0
0
0
0
0
0
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
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
PAGE 28/36
ZON MULTIMEDIA
COMPANY REPORT
Δ operating working
capital
CAPEX
1
19
5
4
2
2
2
2
310
197
197
190
207
208
209
210
-17
54
16
12
6
6
6
6
2
23
4
4
2
2
2
3
Δ other liabilities
-3
3
0
0
0
0
0
0
Gross Investment
-299
-290
-223
-209
-217
-218
-219
-220
-25
0
83
109
150
156
162
168
Investments in
intangibles
S
Δ other operating assets
e
n
s
FCF
S
e
Sensitivity Analysis
∆ 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%
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
ROIC vs WACC
PAGE 29/36
ZON MULTIMEDIA
COMPANY REPORT
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 E 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E 2021 E 2022 E
Exhibit 57-A; Source: Nova Equity Research estimates
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.
PAGE 30/36
ZON MULTIMEDIA
COMPANY REPORT
EV/revenues
EV/EBITDA
EV/EBIT
Net
debt/EBITDA
EBITDA mg
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 Media
3.1
2.9
7.9
7.3
24.0
16.0
2.8
2.4
39.5%
40.0%
Kabel Deuts chland
3.5
3.1
7.7
6.7
23.8
15.6
3.8
3.2
45.2%
46.3%
Eur ope an ave rage
3.2
3.0
8.4
7.6
19.0
13.9
2.7
2.4
39.5%
40.3%
Liberty Global
3.1
2.9
6.7
6.2
14.6
12.4
4.5
4.2
45.8%
46.4%
Comcas t
2.3
2.1
6.0
5.6
10.5
9.4
1.8
1.5
38.0%
38.2%
Time Warner Cable
2.1
2.0
5.9
5.3
10.5
9.1
2.5
2.1
36.6%
36.8%
PT
2.4
2.5
6.2
6.5
11.5
10.6
2.3
Zon M ultim e dia
1.84
1.76
5.08
4.81
11.8
11.01
2.81
1.9
38.7%
2.65
36%
38.5%
37%
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
PAGE 31/36
ZON MULTIMEDIA
COMPANY REPORT
Financial ratios
Key Ratios (ZON)
2009
2010
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%
148.0%
141.6%
105.5%
101.3%
101.1%
100.8%
100.6%
100.4%
2.96
2.77
2.81
2.65
1.43
1.23
1.00
0.77
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%
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%
Capex/depreciation
Net debt/EBITDA
Invested capital turnover
dividend payout
2011 E
2012 E
2019 E
2020 E
2021 E
2022 E
PAGE 32/36
ZON MULTIMEDIA
COMPANY REPORT
Consolidated Income Statement (€ million)
Operating Revenues
PayTV, Broadband
and Voice
Cinema
Exhibition
Audiovisuals
2010
2011E
2012E
2013E
2019E
2020E
2021E
2022E
773
804
838
862
926
936
946
957
55
56
57
58
67
68
70
72
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
Services
Other costs and (gains)- operational
209
219
228
235
253
257
260
263
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
70
140
151
160
221
228
236
244
23
30
30
29
20
17
14
11
-6
-8
-8
-7
-5
-4
-4
-3
6
8
8
8
5
5
4
3
EBIT
Financial Costs-interest expense (gains)
borrowings
Interest
earned
Financial Costs - interest expenses on leasing
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
PAGE 33/36
ZON MULTIMEDIA
COMPANY REPORT
Consolidated Balance Sheet (€ million)
Assets
2010
2011E
2012E
2013E
2019E
2020E
Cash and cash equivalents
265
91
94
97
105
106
107
109
Accounts receivable
189
196
204
210
227
230
233
236
59
47
49
50
54
55
56
56
Inventories
2021E
2022E
Taxes receivable
3
19
19
20
22
22
22
22
Prepaid Expenses
17
15
15
15
16
16
16
16
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
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
Total current assets
Other non-current assets
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
charges
Total current liabilities
10
11
11
11
12
13
13
13
399
395
406
415
442
447
453
458
Borrowings Long term
973
913
915
890
601
529
438
339
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
Accounts payable
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
(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
10
10
10
10
10
10
10
10
Treasury shares
Minority interests
Total equity
Total liabilities and shareholder' s
equity
250
234
257
289
629
710
811
919
1650
1574
1612
1628
1709
1725
1740
1755
PAGE 34/36
ZON MULTIMEDIA
COMPANY REPORT
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
1
19
5
4
2
2
2
2
310
197
197
190
207
208
209
210
-17
54
16
12
6
6
6
6
2
23
4
4
2
2
2
3
-3
3
0
0
0
0
0
0
-299
-290
-223
-209
-217
-218
-219
-220
-25
0
83
109
150
156
162
168
83
-177
0
0
0
0
0
0
0
0
0
0
1
1
1
1
6
1
1
1
1
1
1
1
-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
87
0
0
0
0
0
0
0
-27
-16
24
31
75
82
100
108
Change in minority interests
1
0
0
0
0
0
0
0
Minority interest (Income
Statement)
Net Income
1
4
4
4
7
7
8
8
38
81
89
96
148
155
163
171
CF to equity holders
22
-97
-65
-65
-72
-73
-62
-63
102
-177
-83
-109
-150
-156
-162
-168
Investment in operating working
capital
CAPEX
Investments in intangibles and
goodwill
Change in other operating assets
Change in other liabilities
Gross Investment
FCF
After tax interest income
Change in Excess cash
Decrease (increase in
nonoperating assets)
Change in other non current
liabilities
CF available to investors
Treasury shares
retained earnings
Cash flow available to investors
PAGE 35/36
ZON MULTIMEDIA
COMPANY REPORT
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 Luís Correia, a student of the NOVA School of Business and Economics,
following the Masters in Finance 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. This report was supervised by professor Rosário André (registered
with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation
methodology and the financial model. 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.
The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores
Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market
counterparties, private or intermediate customers.
This report may not be reproduced, distributed or published without the explicit previous consent of its author,
unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to
suspend this report reproduction or distribution without further notice.
PAGE 36/36

Positive market growth, strong competition and potential for ZON

Transcription

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