Author Topic: CTL - CenturyLink  (Read 117068 times)

Packer16

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Re: CTL - CenturyLink
« Reply #70 on: July 05, 2017, 06:27:39 PM »
Thanks for the reply.  I see two risks here.  First turning a telco with a 2.5% revenue decline rate to growth is a difficult task.  Alot of firms have tried to do this (CTL, FTR and WIN) amongst others & have failed.  IMO the key is to have an grow a customer base & this requires cap-ex and marketing.  LVLT's customer base is fine.  It is CTL's that I am concerned about.  As you say 55% of the customers are good while 45% are at risk.  If the at risk base continues to shrink at current levels, then the whole thing could default with the debt level they have.  If we look at the debt, it will be rated B after the transaction (the debt is trading 6.7% which also implies a B rating with B trading at 5.7%) implying a 35% default in 10 years based upon historical defaults.  What makes matters worse is the declining cash flows lead to a collapsing margin of safety like we have seen at FTR and WIN. 

As to the dividend coverage, CTL will provide $1.9 to $2.0bn of FCF today based upon 1Q2017 annualized FCF but in 12 months it will be $400m less.  Level 3 will provide $700m that has stalled in Q1 2017 in terms of growth.  So you have $2.6 to $2.7 billion pre-synergy today and $2.3 to $2.4b in 12 months pre-synergy.  The dividend will require $2.3b to maintain the current level.  Therefore, you are reliant on synergies and the NOL for the dividend coverage. 

How do you see the different cultures of growth at Level 3 and mature at CTL will play out?  They definately have 2 different shareholder bases & IMO they have stated which way they are planning on going with the dividend.  They are in defense/mature mode.

Then what is the upside?  Let's say revenues increase by 2 to 3% so you can get a FCF multiple of 15x from the Graham formula so you get $35 billion in equity value or about $35 per share.  This is generous because it assumes that you will not have to pay additional cap-ex to get the growth which I think you will.  But this has to be adjusted for the 35% chance of a $0 if the company defaults so you get an expected value of $23 about where it trades today.  If we look at EBITDA mulitples we get about the same with an EBITDA multiple of the combined entity of 6.9x and an upside of lets say 8x EBITDA (similar to cable cos).  This implies an upside of $33 per share assuming no default risk.  IMO the upside/downside is not favorable unless these guys can do what no other telco has done for the past 20 years.

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Valuehalla

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Re: CTL - CenturyLink
« Reply #71 on: July 05, 2017, 07:24:33 PM »
Packer, I can not confirm your cashflow figures.

LVLT will provide 1,1 to 1,16 B and CTL will provide 1,55 to 1, 75 B per year, than you have to add effects from NOL and synergies. Often it is not recognized that CTL did share buybacks additionally to the dividend in the past. Further there is a bulk of cash inside LVLT of app estimated 2,2 B at the moment.

I dont take a default into consideration at all. Beside economical reasons, I think LVLT is to much connected to the US government & military & intelligence services.... dont worry ;D

US$ 35 for CTL is a good price target for now, already mentioned in my first post concerning this aquisition on 1st Feb 2017. If revenue is increasing, should be much more than 35 US$.

According to the management, the increase in CTL revenue is expected from 3Q 2017 on. So this mean already now!

(If you anticipate 35B marketcap for the new formed entity, the price per CTL share would be 32,52 US$, not 35 US$)
« Last Edit: July 05, 2017, 08:16:48 PM by Valuehalla »
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Packer16

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Re: CTL - CenturyLink
« Reply #72 on: July 05, 2017, 07:45:34 PM »
My cash flow figures are from annualizing the Q1 2017 FCF results from each firm's 1Q 2017 presentation.  Are your figures from another presentation?

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Valuehalla

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Re: CTL - CenturyLink
« Reply #73 on: July 05, 2017, 07:51:46 PM »
LVLT FCF is expected to be 1,1 to 1,16 B in 2017, not 700 m:

See page 12
http://s1.q4cdn.com/840339377/files/doc_downloads/1Q17Earnings/1Q17-External-Presentation_LVLT_2017-05-03_FINAL.pdf

All my posts are further based on the management statements during conference calls. Pls check the minutes or the audios.

Find enclosed a pdf for CTL revenue, operative CF and FCF. Yello fields are estimated from me, based on statements of management.
« Last Edit: July 05, 2017, 08:06:11 PM by Valuehalla »
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longinvestor

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Re: CTL - CenturyLink
« Reply #74 on: July 05, 2017, 08:10:28 PM »
My cash flow figures are from annualizing the Q1 2017 FCF results from each firm's 1Q 2017 presentation.  Are your figures from another presentation?

Packer

Can't speak to CTL's numbers, but LVLT cash flow is hockey sticked to the second half of the year. Historically so. That said, Q1 2017 stalled a bit but Storey tends to be conservative and has come good on full year projections for >5 years. They have reiterated  the FY 2017 numbers Valuehalla posted here. Storey's words carry weight with me. Those who gave up on LVLT pre-Storey may not be familiar with the more recent LVLT. Deliver promises. Case in point, Storey never promises growth numbers because that's not their A- game. Not yet anyway. Cost is.

I tend to agree with you that CTL is a wild card to the downside here. Storey has his hands full.
« Last Edit: July 05, 2017, 08:19:05 PM by longinvestor »

SI

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Re: CTL - CenturyLink
« Reply #75 on: July 05, 2017, 08:28:38 PM »
Packer, Cowen published his proforma model today. He is not buy rated on CTL/L3 and is using $2.16 in 2018 FCF/share and $3.40 in 2019 as tax and synergies start helping in 2019 and $3.73 in '20 and '21 $3.83 on 90bps, 130 and 150bps of rev growth and 37%, 38%, 39% and 41%(where he has margins leveling out) so as you can see this is all about the margins.

I have the under actually on those revenues but the over on margins.

Valuehalla

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Valuehalla

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Re: CTL - CenturyLink
« Reply #77 on: July 11, 2017, 01:58:54 AM »
http://www.cnbc.com/2017/07/11/singapores-temasek-portfolio-rose-to-198-point-6-billion--up-13-percent-for-fiscal-year.html

Temasek is holding 65 Mio shares of LVLT (= 18% of LVLT), = app. 3,8 B US$, so 2 % of the Temasek portfolio.

Anticipated no changes, they will hold 8,8 % of the combined entity (CTL+LVLT) in the future.
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JayGatsby

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Re: CTL - CenturyLink
« Reply #78 on: July 12, 2017, 12:25:30 PM »
https://www.bloomberg.com/news/articles/2017-07-12/centurylink-sued-by-minnesota-over-billing-practices

Every company has billing issues, the difference is how they're addressed. I think any analysis of Centurylink without ascribing some level of increased legal/compliance costs or decreased pricing power is risky. That was the lesson learned from Ocwen for me.. their underlying business continued as expected (actually better in some ways), but they couldn't escape a historically loose culture and state AGs destroyed the valuation with compliance/legal costs. Politics gets involved as well. I suppose the opposite argument could be made for Altria... those that invested at the peak of their legal issues have done quite well.


Valuehalla

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