KPN Earnings Preview

Rating: Baa3[P]/BBB/BBB

• Q2 results tomorrow before the open. Company-provided consensus looking for total revenue +3.6% o/w service revenue +3.9% (roughly nine-tenths of total) o/w consumer service revenue +6.6% (roughly one-half of total) and business service revenue +3.3% (roughly one-third of total). EBITDAal is seen +4.4%, CapEx -1.7%, oFCF +10.8%, FCF +11.6% and a dividend of 5.8c/share.
• Q1 results were solid with headlines slightly ahead of consensus with revenue +3.3%, EBITDAal +3.6% YoY. The group slightly increased EBITDAal and FCF guidance on the YouFone acquisition which they did again in June when it brough tower infrastructure back onto its BS with a 0.1x increase in leverage on completion though it will remain within the <2.5x target. Consensus implies FY guidance will be met.
• KPN revealed new MT guidance in November; as we currently stand consensus implies faith in compliance with the targets – 2027 service revenue CAGR of 2.7% (vs. ~3% target), EBITDAal CAGR 3.2% (vs. ~3% target), 2025 CapEx of EUR 1bn (vs. EUR <1bn target) and FCF 7.4% CAGR (vs. ~7% target).
  
  
• We like the credit over the LT on the consistency of management’s policy in recent years and the stability and rationality of the Dutch market compared to elsewhere in Europe.
• With a positive outlook in place at Moody’s since May, KPN sits close to the upside threshold, and should the issuer deleverage further (even incrementally) then we would expect an upgrade.
• However, while KPN’s incremental M&A deals (Youfone, Glaspoort, towers) make sense and support the credit profile, they may see the issuer denied the upgrade over the near term. However with steady CapEx improvements on the horizon we think this looks like more a question of when and not if.
• For the above reasons we think the longer-end of the KPN curve screens sense at levels and steepness like Telefonica’s (Baa3/BBB-/BBB); we think Telefonica is on the brink of a FCF inflection though think the curve (particularly the long-end) screens tight against the ‘safer’ KPN given the steep deleveraging path for it to maintain/grow ratings headroom.