Introduction
We review our Altice USA (NYSE:ATUS) investment case after shares fell 14% from their December peak, giving them a 7%+ Free Cash Flow ("FCF") Yield. Since we upgraded our rating to Buy last November, ATUS shares have risen 10%, far ahead of AT&T (T) and Verizon (VZ), and slightly ahead of the S&P 500:
| ATUS Share Price vs. Comparables and S&P 500 (Since 12-Nov-20)
Source: Yahoo Finance (04-Mar-21). |
Buy Case Recap
We have been bullish on the U.S. Cable sector, having maintained Buy ratings on Charter (CHTR) and Comcast (CMCSA) since January 2020.
We were initially Neutral on ATUS, but upgraded our rating to Buy following Q3 2020 results, after key improvements including:
- An upgrade of the ATUS network, with 1 Gbps broadband having become available in 92% of its footprint
- A stabilization of Video profits, with price rises offsetting subscriber losses
While ATUS' EBITDA growth during 2020 undoubtedly benefited from people staying at home during COVID-19, we expect it to remain at low-single-digits in future years. With a fixed CapEx, new debt raised in line with EBITDA growth and buybacks, this will lead to a mid-teens growth in FCF/Share:
| Illustrative ATUS FCF/Share Growth from EBITDA Growth
Source: Librarian Capital estimates. |
However, we also expected ATUS' FCF to take a material step down in 2021, as it starts paying material cash taxes and spends more on CapEx.
Altogether, we expected FCF/Share to grow from $1.66 in 2019 to $2.66 in 2020, and to then close to double to $3.16 by 2023.
While ATUS' growth decelerated sequentially in Q4 2020, results were in fact better than our forecasts and support our investment case.
Customer Net Adds
On reported figures, ATUS had customer net losses of 17k during Q4, including 15k residential customers. In residential broadband, it lost 4k customers, in contrast to Charter (gaining 216k) and Comcast (gaining 515k):
| ATUS Customer Numbers (Q4 2020)
NB. “SE” = “Service Electric”, acquired in Q3 with 34k total new customers. Source: ATUS results release (Q4 2020). |
Management argued that reported figures should be adjusted for one-offs, particularly 22k customers reported as lost after becoming more than 90 days overdue under a New Jersey state order that prohibited disconnections during COVID-19 and who have since been brought current, partly through balance forgiveness. The adjusted numbers showed net adds of 3k in residential and 14k in residential broadband alone:
| ATUS Customer Net Adds – Management View (Q4 2020)
Source: ATUS results presentation (Q4 2020). |
A small net add in residential broadband is consistent with ATUS' historic performance (excluding H1 2020, boosted by COVID-19 stay-at-home):
| ATUS Residential Customer Net Adds by Product (Since 2018)
NB. Excludes net adds from Service Electric acquisition in Q3 2020. Suddenlink OSS/BSS migration disrupted net adds in Sep-Nov 2019. Source: ATUS company filings. |
With 1 Gbps broadband now available in 92% of ATUS' network (including 100% of its Optimum footprint), we believe there is a good chance that net adds will be better in the future.
The percentage of customers with 1 Gbp broadband rose again to 7.8% at Q4 2020, from 5.7% in Q3 and 1.9% in Q4 2019; conversely, those with speed of 200 Mbps or less have dropped from 60% of the total to 55% during Q4.
Profit & Loss
ATUS's Q4 2020 results were solid, with year-on-year growth of 2.5% in revenues and 6.1% in EBITDA:
| ATUS Profit & Loss (2020 Q4 & FY)
|
Growth would be higher excluding the impact of storms and Regional Sports Networks credits (due to sports being cancelled during COVID-19), at 3.6% year-on-year for revenues and 6.6% for EBITDA.
ATUS' P&L continued to be characterised by growth in Broadband and declines in (low-margin) Video and Telephony, including:
- Broadband revenues up 14.0% year-on-year in Q4, driven by the number of customer rising 3.4% and higher Average Revenue Per User ("ARPU"); typically, ARPU increases are about one third each from accounting (revenue reallocation from former bundled customers), price and upsell
- Business Services revenues were up 1.8%, below the 4-5% range in prior years, due to COVID's impact on businesses
- News & Advertising revenues grew 29.8% for Q4, taking full-year growth to 9.1%, after falling 0.1% year-on-year during Q1-3; Q4 was helped by $60-70m of political ad spend related to U.S. elections. Excluding political ads, News & Advertising revenues were down 3% in 2020
- Mobile revenues showed a small $2m growth year-on-year in Q4, having been at $18-20m each quarter since Q4 2019, after a 2019 launch
ATUS's Mobile business has been growing only slowly due to 40% of its retail stores being closed by COVID-19, previous network quality issues (ATUS has since switched to T-Mobile (TMUS) as its MVNO provider), and also to a reluctance to sustain large losses. ATUS expects the Mobile business to breakeven on a monthly EBITDA basis by the end of 2021.
The share count has fallen 14.4% year-on-year by Q4, after $4.8bn were spent on buybacks in 2020, including a $2.5bn tender in December.
We continue to believe ATUS' EBITDA will grow at low-single-digits. After growing 7% sequentially in Q2 2020 with the boost from COVID-19, it has been growing sequentially at about 2%; note that the difference between Video revenues and programming costs has remained stable, despite large Video subscriber losses shown above.
| ATUS EBITDA vs. Video Revenues & Costs (Last 10 Quarters)
Source: ATUS company filings. |
Group FCF
FCF/Share grew by 85% year-on-year in 2020, with total FCF growing 63% and the average share count falling 12%, even as EBITDA grew only 3.5%. However, 40% of the growth in FCF was due to a $285m reduction in CapEx, as projects were delayed during COVID-19; Net Cashflows from Operating Activities grew "only" 16.7% year-on-year:
| ATUS Free Cash Flow (2019-20)
Source: ATUS results release (Q4 2020). |
2021 Outlook
For 2021, in Broadband, ATUS expects net adds to be “at least in line or better” compared with 2019, with growth weighted towards H2:
“For 2021, we think the appropriate benchmark for broadband customer growth is 2019 and expect to be at least in line or better with this level as we continue to return to more normalized levels. Once we get past any residual noise from the storms and New Jersey order in the first half, we expect more of a tailwind to customer growth in the second half of the year, especially as we see more of a benefit from our accelerated pace of edge-out build-outs”
Dexter Goei, ATUS CEO (Q4 2020 earnings call)
ATUS gained 72k broadband customers in 2019, a growth rate of 1.7%. Management's confidence came partly from the number of new homes passed, likely to be 150k in 2021, compared to 100-125k each year historically. At the time of Q4 results (February 10), ATUS has not observed any abnormalities in net adds vs. the historic pattern.
Video subscriber losses are expected to be similar to 2020, i.e. about 7%.
Business Services revenue growth is expected to again be below the 4-5% “usual” range, due to fewer customer sign-ups during COVID-19.
News & Advertising revenues is expected to be flat year-on-year, despite lapping $60-70m of election-related political ad spend in 2020, as the economy recovers.
The full 2021 outlook guides to “growth” in both revenues and EBITDA:
| ATUS 2021 Outlook
Source: ATUS results presentation (Q4 2020). |
CapEx is expected to be $0.2-0.3bn higher in 2021. Cash taxes are also expected to be higher, at “about $400m” vs. $80m in 2020. On the other hand, cash interest costs are expected to be lower, at “around $1.2bn" compared to $1.41bn in 2020, after favourable refinancings.
For overall FCF, management expect EBITDA growth and lower cash interest to “partially offset” the impact of higher CapEx and cash taxes.
Net Debt / EBITDA is expected to be less than 5.3x, the level at 2020 year-end, and to return to the 4.5-5.0x target range “over time”. The above-target leverage was the result of management having decided “to take advantage of ... a significantly undervalued share price” to execute buybacks in 2020. They now “expect to naturally delever through EBITDA growth”.
ATUS has been making small acquisitions, for example agreeing to acquire Morris Broadband in North Carolina for $310m in March. Apart from such acquisitions, FCF is likely to be spent on buybacks, and the $1.5bn guided for 2021 is equivalent to 8.3% of the current market capitalization.
Valuation
FCF reached a record high in 2020, at $1.91bn by management's definition and $1.79bn by ours (subtracting share-based compensation):
| ATUS Earnings, Cashflows & Valuation (2017-20)
Source: ATUS company filings. |
We further adjust the FCF figure for normalized levels of interest expense, cash taxes and CapEx, as well as for the sale of 49.99% of Lightpath, and arrive at a normalized FCF of $1.34bn. With shares at $33.09, this gives ATUS shares a FCF Yield of 7.4%:
| ATUS 2020 Free Cash Flow (Normalised)
Source: ATUS company filings. |
Charter, ATUS’ only pureplay peer, trades at a FCF Yield of 4.8% (5.6% excluding Mobile cash burn), but has higher growth and less debt.
Illustrative Return Forecasts
ATUS' 2020 FCF of $1.79bn was approx. 20% higher than our November forecast ($1.50bn); we had significantly underestimated Q4 2020 FCF.
We now expect 2021 FCF to be $1.48bn (was $1.10bn), based on:
- Growth of 6.2% (was 6.5%) before CapEx and cash tax increases, corresponding to a 2.5% growth in EBITDA
- Net reduction of $450m from higher CapEx, cash taxes and Lightpath stake sale, offset by lower cash interest (see above)
In addition, a higher share price means buybacks will be less effective in shrinking the share count, reducing FCF/Share growth.
We extend our forecasts by a year to 2024, and now assume:
- From 2022, FCF to grow at 5.5% annually (was 6.5%), the result of EBITDA growing 3% annually (unchanged)
- 2021 share count to be 477.0m (was 479.7m), based on the 2020 year-end figure and $1.5bn of buybacks
- 2022 share count to fall by 5.5% (was 9%), as buybacks remain limited to enable natural deleveraging to the target share
- Thereafter share count to fall by 8.5% annually (was 9%)
- Exit valuation of a 7.0% FCF Yield (unchanged)
Our new 2023 FCF/Share of $3.92 is 24% higher than our previous forecast ($3.16), mainly due to the larger 2021 FCF.
With shares at $33.09, we expect an exit price of $65 at 2024 and a total return of 95% (19.1% annualized):
| Illustrative ATUS Return Forecasts
Source: Librarian Capital estimates. |
Conclusion
ATUS Q4 2020 saw growth of 2.5% in revenues and 6.1% in EBITDA, helped by customer net adds in H1 as more people stay at home during COVID-19.
Q4 customer number and EBITDA were broadly stable sequentially, and we continue to believe ATUS' EBITDA will grow at low single-digits.
2021 outlook is for broadband net adds to be at least as good as 2019, revenue and EBITDA both to grow, and for $1.5bn of buybacks.
With fixed CapEx, new debt in line with EBITDA growth and the share count falling, Free Cash Flow / Share can grow at mid-teens.
With shares at $33.09, we expect an exit price of $65 at 2024 and a total return of 95% (19.1% annualized).
We reiterate our Buy rating on ATUS.
Note: A track record of my past recommendations can be found here.
