2023-04-20 10:30:00 ET
Summary
- Swisscom is the largest telecom player in Switzerland and a challenger on the Italian market.
- Switzerland is a very saturated market and I'm not expecting Swisscom to expand the margins or to gain market share.
- The potential growth will have to come from Italy.
- Trading at about 20 times earnings, I don't think Swisscom is cheap at this moment.
Introduction
Swisscom (SWZCF) (SCMWY) is the largest telecom company in Switzerland and is currently expanding beyond its borders. In 2022, 78% of the company's revenue was generated in Switzerland with the remainder generated in Italy where Swisscom's subsidiary Fastweb is a leading challenger on the market.
The current share count of Swisscom is 51.8M, which means that, using the current share price of approximately 600 CHF per share, the market cap is approximately 31B CHF. The most liquid listing of the company is in Switzerland where the stock is trading with SCMN as ticker symbol . The average daily volume is almost 100,000 shares.
A strong free cash flow result despite high capital expenditures
As Swisscom's main market, Switzerland, is quite saturated the company continuously refers to fierce and "cutthroat" competition. Swisscom's answer is to focus on convergence offers where all of the products are offered in one "package deal." In Italy, Swisscom's Fastweb brand is one of the largest players on the broadband market with a 16% market share in the residential customer segment and an impressive 34% in the B2B segment. Fastweb also is active in the mobile communications market in Italy, and despite growing its customer base by 25% to in excess of 3 million customers, its market share remains relatively limited to approximately 4%.
The total revenue of Swisscom during 2022 was 11.1B CHF which is pretty stable compared to the 2021 results. The OIBDA (Operating Income Before Depreciation and Amortization, so basically the EBITDA) was 4.4B CHF, a decrease of just over 1.5% compared to 2021. This is partially caused by a lower revenue and a surprisingly small increase in the operating expenses.
The EBIT decreased by just over 1% and the sole reason why Swisscom's pre-tax income decreased by almost 10% was a much lower financial income which decreased from 269M CHF in 2021 to 76M CHF in 2022. The strong finance income result in 2021 was caused by a non-recurring item as Swisscom sold an equity-accounted investee for a gain of 219M CHF. This obviously didn't reoccur in 2022 and that's why we should consider the 2021 results to be exceptionally strong and the 2022 results to be "normalized."
The net income was 1.6B CHF and this resulted in an EPS of just under 31 CHF per share.
And while the company's cash flows are strong as well, let's not forget Swisscom, like so many other telecom companies, continuously has to invest in its products to make sure its customers have access to the best and most up-to-date technology available.
The reported operating cash flow generated during 2022 was 3.88B CHF and after deducting the 240M CHF in lease payments, the adjusted operating cash flow generated in 2022 was 3.65B CHF.
A decent result but as the total capex came in at 2.3B CHF, the underlying free cash flow result was just 1.35B CHF or just over 26 CHF per share. That's lower than the reported net income, mainly (and solely) because the combination of capex and lease payments (2.53B CHF) is substantially higher than the 2.36B CHF in depreciation and amortization expenses.
Fortunately Swisscom still has a rock solid balance sheet. As of the end of 2022, the company had 121M CHF in cash (excluding other financial assets) while it had just 547M CHF in current financial debt and about 5.46B CHF in longer-term debt due for a total net debt of 5.9B CHF. Considering Swisscom generated an adjusted EBITDA of 4.15B CHF (this number already includes the lease-related depreciation), the debt ratio of approximately 1.4 times the EBITDA is very reasonable.
And as you can see above, the vast majority of the debt consists of fixed-rate bonds. While Swisscom will for sure also have to deal with higher interest rates (the current interest rate on the 5-year Swiss government bond is 1.07% ), it looks like the increase in the cost of debt will happen very gradual as Swisscom will have to refinance just a few hundred million Swiss Francs per year for the next decade.
Investment thesis
Swisscom is a very well-run telecom company, and while I like its challenger status in Italy, unfortunately it's operating in a very mature and saturated core market where the competition is fierce. That's also why I'm not really willing to pay 20 times earnings or an EV/EBITDA multiple of 9 for the shares. The European telecom market is a difficult market with a lot of competition which puts pressure on margins and the ability to hike prices.
I'm on the sidelines but I also realize Swisscom will likely never be really cheap. I also definitely missed my opportunity in Q3 2022 when the share price bottomed out below 450 CHF/share. In hindsight, that would have been a very nice price to pick up stock but for now I'll just keep an eye on the share price performance and the financial performance of the company.
For further details see:
Swisscom Appears To Be Fully And Fairly Valued