UBS Updating Bezeq עדכון לבזק‎

Bezeq

Updating our model

Accounting for the Yad-2 transaction and early retirement provision

As a recap, Bezeq has announced a binding agreement to sell Yad-2 to Axel Springer Digital for NIS788m and expects to recognize profit before tax of NIS560m. Assuming corporate tax of 26.5%, the transaction implies NIS412m or NIS0.15/share. The company has also announced NIS116.5m provision for early retirement of 101 employees to be recognized in 2Q14. We raise our 2014 net income estimate by 17% to NIS1.938bn and EBITDA by 10% to NIS4.438bn to reflect the two events and lower mobile ARPU assumptions.

1Q14 preview (29 May)

We expect Bezeq's 1Q14 results to reflect a more intense competition from HOT and a challenging quarter in mobile. Nevertheless, we expect Bezeq to show a solid quarter in fixed-line with continued increase in broadband lines albeit at a slower pace. Hot's 1Q results point to continued moderation in broadband and TV subs loss (-5k and -3k QoQ) as well as an increase in telephony lines (+4k). In mobile, Cellcom and Partner both reported a reduction of NIS4 in ARPU and we expect Pelephone's bottom-line performance to depend on cost management and handsets momentum. We model 1Q14 EBITDA of NIS1.0bn and net income of NIS397m.

Read-across from MoC policy on mobile network sharing

According to the MoC policy documents released on 15 May, passive sharing of sites and towers is encouraged wherever possible and active sharing is likely to be cleared only between a new entrant and an incumbent. We therefore expect Pelephone's passive agreement with Cellcom to be cleared, unlocking opex savings of around NIS150/yr within 3-5 years. We believe it is more likely that Pelephone will roll out an independent 4G network at an estimated cost of NIS250-300m (ex. frequency).

Valuation: Raising 12-month PT to NIS6.6 (ex. dividend), maintain Buy

We raise our DCF-derived PT to NIS6.6 from NIS6.3, reflecting mainly the Yad-2 transaction. Our PT is ex. dividend and implies a total return of c16%.

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