Swisscom (OTCPK:SCMWY) is a Swiss telecom operator that also has a sizeable presence in Italy through FastWeb, one of several major telecom brands that provide cable services in Italy.first One point we would like to point out is that compared to other companies in the European telecom industry such as Proximus (OTCPK: BGAOF), fortunately for Swisscom, the capex burden is rather low, as much of the major deployment of new connectivity infrastructure has already been completed. Still, it’s not a particularly cheap company, so it really doesn’t make sense given the fundamental economics and dynamics of telcos, namely price competition. pass.
Second Quarter Breakdown
Let’s start with the results, starting with the capital expenditure situation, which we believe is the most important and primary consideration when analyzing European telecom operators because fiber Rolling out is expensive.
In terms of capex trends, Swisscom is doing pretty well. So far, the laying of optical fibers has been truly completed, and the goal of FTTH has been fully realized. They’ve also entered the 5G deployment phase, so the extraordinary capex required to be a vital utility provider to the public is largely over. However, the business remains very capital-intensive in terms of fixed assets, with a fairly weak free cash flow yield. While the NWC effect will reverse in FY20, FCFY is still well below the 5% level. Even if capex levels don’t grow much, it’s not a great start in terms of cash generation or valuation.
The prevailing ARPU pressure in terms of EBITDA and profitability is largely due to the idiosyncratic shift in focus to lower value brands, but this ultimately means that price competition prevalent in the industry will re-emerge, which remains an issue. With the advent of FastWeb, Italian broadband price competition remains fierce and market entrants are increasing, and in general the competition watchdog will continue to ensure that incumbents are not favored, even those operating fiber optic infrastructure, Otherwise it would be a way to deter new entrants, even from outside the telecom space, such as Sky and Enel (OTCPK:ENLAY). The company’s group EBITDA is still growing, but largely due to lower litigation provisions this year than last year. In fact, almost 4% of the growth relative to the 5% increase in overall EBITDA came from these provision effects. These are contained within the “Exceptions” element in the image below.
The company’s EBITDA strength remains strong and results are good, as fixed cost inflation (especially wages) is a relevant issue across the industry. However, the salary increase took effect in April, so the first-half impact is only half. Operating pressure will be higher. Still, it’s been quite satisfying to be able to stay ahead so far.
the bottom line
At the end of the day, Swissco is a telecommunications company. Business development is difficult, but costs keep increasing due to inflation. In general, costs in terms of marketing and promotions are also increasing because the industry structure is also not that good. These are commoditized services, and the government has tight control over these businesses, which are always regulated by national competition and telecom-specific agencies. In fact, that’s where the terms of the lawsuit come in — a lawsuit with COMCO over some of the details of how they’re deploying their fiber infrastructure and some of their potential to control the industry.
On an annualized basis, the price-to-earnings ratio is around 18-19 times, which is neither conservative nor optimistic given fixed cost inflation, cost savings programs in effect, and overall pricing pressure to achieve run rate savings. Given the current base rate and the relatively poor quality of the telecom economy and industry structure, the P/E ratio is unremarkable. pass.
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