Cellcaom and Partner are waitting for the new minister of Communication

Equity value remains elusive

While we do not expect debt service capacity to be stress-tested above EBITDA levels of  NIS700m for Cellcom and NIS600m for Partner, sustainable EBITDA and equity value remain elusive and will largely depend on the approach of the new government.Possible upside could come from a more pragmatic approach towards consolidation or higher network investments imposed upon the new MNOs. On the other hand, more of the same could sustain underlying trends towards loss-making territories. We expect more clarity after a new Minister of Communication is appointed some time in May.

In the meantime; more fixed, less capex With limited control over the regulatory end-game in mobile, we expect Cellcom and Partner to scale down capex considerably and focus on new fixed-line services. We expect Cellcom to launch 3-play at <NIS200/mth in the coming month with Golan following suit later in the year. Partner seems less inclined to dive into TV under current models and will likely focus on broadband for now as well as advancing its JV with HOT Mobile. We would closely monitor the effect of the new bundles on the pricing environment, subs stickiness, and overall competitive intensity.Updating our models following 4Q We lower our 2015 EBITDA estimate for Partner by 10% to NIS782m on a weakerthan-expected 4Q. Based on BoI CPI forecast for -0.1% in 2015 (-1.6% in 1Q15), we believe Partner may shift into a marginal net loss in certain quarters but suggest focusing on EBITDA and FCF. Our 2015 EBITDA estimate for Cellcom is reduced marginally by 2% to NIS872m but our net income estimate is lowered by 16% due to NIS30m one-off charge relating to the collective employment agreement. Our estimates reflect a decline of NIS7 in clean ARPU (4Q/4Q) and net subs loss of 75k.

Remain on sidelines pending regulatory clarity Changes to our model Cellcom's 4Q14 were slightly ahead of our estimate and reflected lower erosion in ARPU and EBITDA than Partner. That said, we would take any quarterly alpha with a

grain of salt given the underlying mobile trends. We adjust our 2015 net income (and EPS) estimate lower by 16% to NIS93m mainly due to the NIS30m one-off provision announced for 1Q15 relating to the collective employment agreement. Our 2015

EBITDA estimate for Cellcom is lowered by 2% to NIS872m, reflecting a decline of cNIS7 in clean ARPU (4Q/4Q) and net subs loss of 75k. Looking beyond 2015, we model flattish KPIs although point to limited visibility. We expect Cellcom TV to weigh

on earnings in 2015 due to upfront content cost but believe this venture should be measured over time against its strategic benefits rather than financial.

A binary play on regulation

While we see limited risk to interest coverage above EBITDA levels of NIS700m for Cellcom, sustainable EBITDA and equity value remain elusive and will largely depend on the regulatory environment, in our view. Possible upside could come from a more pragmatic approach towards consolidation and network agreements, while more of the same could sustain underlying trends towards loss-making territories. We believe the wholesale market in fixed and TV entry may improve subscriber stickiness and generateincremental profits but will remain secondary to mobile trends.3 things to watch for in the meantime 1. 3-play. We expect Cellcom to launch 3-play in the coming month at <NIS200/mth,trying to capitalize on its TV as a differentiating factor against other wholesalers. Wewould closely follow the impact of this package as well as potential response fromBezeq and mainly HOT. 2. MoC objection to the Golan agreement. Arguably this may level the playing field and ease pricing pressures, but in practice we believe the next minister will set the tone. 3. Capex. With opex savings becoming difficult to extract,Cellcom is likely to scale down its capex and spread out LTE roll-out over a longer period. This may also send a signal to the MoC regarding downside ramifications of deteriorating mobile fundamentals.

Remain on sidelines pending regulatory clarity Changes to our model We lower our 2015E EBITDA by 10% to NIS782m following weaker-than-expected 4Q14. This leads us to lower our 2015E net income (and EPS) by 64% to NIS32m (lownet income levels lead to higher standard deviation). We do not rule out a marginal net loss in certain quarters but suggest focusing on EBITDA and underlying trends. Our estimates reflect a decline of cNIS7 in clean ARPU (4Q/4Q) and net subs loss of 75k.

Looking beyond 2015, we assume flattish KPIs but point to poor visibility. We expect Partner to continue to scale down its capex in 2015 having rolled out most of its 4G network, but expect increasing working capital due to higher handset activity.

Employee agreement reportedly reached on HOT Mobile JV According to Globes, Partner has reached an agreement with its employees regarding the networking sharing JV model with Hot Mobile. According to the article, Partner will terminate the position of 35 employees and migrate another 80 to the JV. We believe this agreement may advance the preparation for the JV and will be followed by a collective agreement with the remaining employees. Assuming 2017 kick-off (may be

earlier) we expect the following effects: 1. Removal of hosting revenues from which we estimate at cNIS100m/yr. 2. A similar reduction in opex/capex in year-1 with additional savings in outer years. 3. A one-off payment from HOT Mobile in year-1 which we estimate at ~NIS250m.

Still a binary play on regulation

Notwithstanding the network sharing with HOT and wholesale market in fixed, we believe these are secondary to the underlying mobile trends and regulation. We therefore continue to view Partner as a binary play and await more clarity from the next

minister. Possible upside could come from a more pragmatic approach towards consolidation and network agreements, while more of the same could sustain underlying trends towards loss-making territories

We view Israeli mobile as a binary play on regulation. On one hand, EBITDA erosion could continue, as the market remains overly crowded and mobile potentially becomes secondary to broader fixed-line considerations. On the other hand, we see plenty of upside should current dynamics and market structure prove unsustainable and a possible shift to net-loss improves backdrop for M&A. Given the structural issues in hand, we would like to gain more clarity on M&A prospects and maintain a Neutral stance. We expect better clarity over market direction in 2H15, as the new Minister of Communication is confronted with a complex mobile reality and potentially unpopular decisions.

Cellcom Israel Ltd Investment case

We view Israeli mobile as a binary play on regulation. On one hand, EBITDA erosion could continue, as the market remains overly crowded and mobile potentially becomes secondary to broader fixed-line considerations. On the other and, we see plenty of upside should current dynamics and market structure prove unsustainable and a possible shift to net-loss improves backdrop for M&A. Given the structural issues in hand, we would like to gain more clarity on M&A prospects and maintain a Neutral stance. We expect better clarity over market direction in 2H15, as the new Minister of Communication is confronted with a complex mobile reality and potentially unpopular decisions.

Statement of Risk

The key downside risks in the mobile market are higher-than-expected loss of market share to the new entrants and a higher-than-expected erosion in ARPU due to price competition. Another risk is declining market share and ARPU in ISP once

Bezeq begins to offer bundles. The main upside risks are potential M&A, change in pricing strategy by Golan Telecom and better-than-expected traction in fixed-lineand TV markets.

הנתונים, המידע, הדעות והתחזיות המתפרסמות באתר זה מסופקים כשרות לגולשים. אין לראות בהם המלצה או תחליף לשיקול דעתו העצמאי של הקורא, או הצעה או שיווק השקעות או ייעוץ השקעות ב: קרנות נאמנות, תעודות סל, קופות גמל, קרנות פנסיה, קרנות השתלמות או כל נייר ערך אחר או נדל"ן– בין באופן 

כללי ובין בהתחשב בנתונים ובצרכים המיוחדים של כל קורא – לרכישה ו/או ביצוע השקעות ו/או פעולות או עסקאות כלשהן. במידע עלולות ליפול טעויות ועשויים לחול בו שינויי שוק ושינויים אחרים. כמו כן עלולות להתגלות סטיות בין התחזיות המובאות בסקירה זו לתוצאות בפועל. לכותב עשוי להיות עניין אישי 

במאמר זה, לרבות החזקה ו/או ביצוע עסקה עבור עצמו ו/או עבור אחרים בניירות ערך ו/או במוצרים פיננסיים אחרים הנזכרים במסמך זה. הכותב עשוי להימצא בניגוד עניינים. פאנדר אינה מתחייבת להודיע לקוראים בדרך כלשהי על שינויים כאמור, מראש או בדיעבד. פאנדר לא תהיה אחראית בכל צורה שהיא לנזק או הפסד 

שיגרמו משימוש במאמר/ראיון זה, אם יגרמו, ואינה מתחייבת כי שימוש במידע זה עשוי ליצור רווחים בידי המשתמש.