425: Sunrise Primed for Growth and Cash Returns Post Liberty Global Spin-Off

Sunrise management presents its operating strategy and financial outlook to investors, highlighting growth opportunities and attractive dividend returns following the spin-off from Liberty Global.

Summary

• Sunrise held its Capital Markets Day on September 9, 2024, outlining its strategy as a standalone, soon-to-be-listed business.
• Key messages included the attractiveness of the Swiss telecoms market, Sunrise's unique positioning to capture growth, and the potential for robust free cash flows and attractive dividend returns.
• The company starts from a strong position with CHF3 billion in revenues, a 44% EBITDAaL margin (CHF1 billion), and approximately CHF400 million in free cash flow.
• Sunrise is the number one challenger in Switzerland, holding the number two market position across mobile (26% market share), broadband (28% market share), and TV (31% market share).
• The company benefits from a favorable macroeconomic environment in Switzerland, characterized by high GDP per capita (CHF85,000), stable GDP growth (1.8%), and low inflation (1.6% expected for the current year).
• Sunrise is focusing on three growth engines: the Sunrise main consumer brand, the yallo flanker brand, and the B2B segment.
• The company plans to deliver more than CHF410 million of free cash flow in the midterm and intends to pay out up to 70% of its free cash flow as dividends.
• Sunrise expects to pay CHF240 million in dividends in 2025 for the year 2024.
• Dividends are expected to be free of Swiss withholding tax for at least the next five years.
• The spin-off is expected to occur in the fourth quarter of 2024, subject to Liberty Global shareholder approval.

Sentiment

Score: 8

Explanation: The document presents a positive outlook for Sunrise, highlighting its strong market position, growth opportunities, and commitment to shareholder returns. While acknowledging some challenges, the overall tone is optimistic and confident.

Positives

• Strong market position as the number one challenger in Switzerland.
• Favorable macroeconomic environment in Switzerland.
• High-quality, world-class networks on both fixed and mobile sides.
• Compelling cash flow generation and a clearly defined growth plan.
• Attractive and progressive shareholder returns expected.
• Unique hybrid network strategy offering gigabit speeds across Switzerland.
• Successful integration of Sunrise and UPC, with most of the heavy lifting behind them.
• Strong board of directors with extensive experience in the telecom and media sectors.
• Commitment to sustainability and governance, with clear ESG targets.
• Dividends are expected to be free of Swiss withholding tax for at least the next five years.

Negatives

• Migration of UPC customers to the Sunrise brand has created headwinds in the past, resulting in fixed ARPU decline.
• The company will lose some tax efficiency going forward.
• The company has high leverage at 5.9 times Adjusted EBITDAaL.
• The company faces competition from Swisscom and Salt in the Swiss telecoms market.
• The company is becoming a full taxpayer by 2028 with an effective tax rate of approximately 17%.

Risks

• Competition in the Swiss telecoms market could impact market share and profitability.
• Potential for increased promotional intensity in the market.
• Reliance on wholesale agreements for fiber access could impact margins.
• Regulatory changes could impact the business.
• Failure to achieve ESG targets could impact the company's reputation and financial performance.
• The company is becoming a full taxpayer by 2028 with an effective tax rate of approximately 17%.

Future Outlook

Sunrise is guiding for stable to low single-digit revenue growth in the midterm, with a focus on driving free cash flow growth and attractive shareholder returns.

Management Comments

• Andre Krause: 'Today we are not only bigger, but we are also better.'
• Mike Fries: 'Sunrise is now the leading national challenger and a true convergence champion in one of Europe's best telecom markets.'
• Christoph Richartz: 'Churn goes down.'
• Stefan Fuchs: 'yallo has generated double digit growth on all core financial KPIs.'
• Thorsten Haeser: 'There's a tangible opportunity for us to grow B2B.'
• Elmar Grasser: 'Our hybrid strategy offers the best gigabit coverage in Switzerland better than on any competitor.'
• Anna Maria Blengino: 'We have successfully completed the integration of the two previous IT landscapes.'

Industry Context

The announcement positions Sunrise as a key player in the Swiss telecoms market, highlighting its competitive advantages and growth opportunities in a three-player market. The spin-off aims to unlock value by allowing investors to directly participate in the future growth of the Sunrise business.

Comparison to Industry Standards

• Sunrise's mobile network is ranked number six in Europe according to Umlaut Hudas tests, only two percentage points away from number one.
• Sunrise has won the connect award on an outstanding network as the only operator in Europe eight times in a row.
• Sunrise's ARPU levels on the mobile side are twice as high as in the rest of Europe.
• 10% of broadband customers in Switzerland are choosing services delivering more than one gigabit of speed, compared to 2.5% in the rest of Europe.

Related Party Transactions

• The company has agreements in place with Liberty Global for various services, including transitionary management services, TSAs, and FSAs.

Stakeholder Impact

• Shareholders will have the opportunity to directly participate in the future growth of the Sunrise business.
• Employees will benefit from a stable and growing company with a commitment to sustainability and governance.
• Customers will benefit from high-quality networks, innovative products, and excellent customer service.
• Suppliers will benefit from a strong and reliable partner.
• Creditors will benefit from a deleveraging plan and a commitment to maintaining a strong financial position.

Next Steps

• Liberty Global shareholders will vote on the spin-off transaction.
• Sunrise will continue to execute its growth plan, focusing on its three growth engines.
• The company will continue to invest in its network and IT infrastructure.
• Sunrise will continue to pursue its ESG targets.
• The company will monitor the competitive landscape and adjust its strategy as needed.

Key Dates