5G Completion And Converged Bundles Will Support Stronger Long Term Telecom Prospects

Catalysts

About Sunrise Communications

Sunrise Communications is a Swiss telecom operator providing nationwide mobile, broadband, TV and B2B connectivity and digital services.

What are the underlying business or industry changes driving this perspective?

• Completion of the 5G stand alone and 3G switch off programs reduces network capacity CapEx needs, allowing more of incremental cash generation to flow into free cash flow and earnings growth.
• Growing demand from enterprises and small retailers for integrated connectivity, security and cashless payment solutions should support B2B revenue expansion and a higher margin mix over time.
• Rising household appetite for converged mobile, broadband and content bundles and Sunrise's 59 percent FMC penetration create room for further upselling on its main and flanker brands, supporting top line growth and stabilizing blended ARPU.
• Greater customer sensitivity to value in the lower price segments and Sunrise's now fully covered multi brand portfolio, including CHmobile, improve its ability to capture budget demand without materially diluting premium pricing, supporting mobile service revenue and limiting churn related margin pressure.
• Cost and CapEx efficiency initiatives, including AI driven process improvements and tighter marketing and organizational spend, are expected to offset slower fixed line stabilization and underpin medium term EBITDA margin expansion and growing free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Sunrise Communications's revenue will remain fairly flat over the next 3 years.
• Analysts are not forecasting that Sunrise Communications will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Sunrise Communications's profit margin will increase from -6.9% to the average CH Telecom industry of 9.5% in 3 years.
• If Sunrise Communications's profit margin were to converge on the industry average, you could expect earnings to reach CHF 289.6 million (and earnings per share of CHF 3.87) by about December 2028, up from CHF -205.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CHF445.6 million in earnings, and the most bearish expecting CHF-621.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from -14.5x today. This future PE is lower than the current PE for the CH Telecom industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.09%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent decline and slower than expected stabilization in the fixed line business, driven by weaker inflows, elevated churn and post promotional repricing, could keep fixed subscription revenue on a downward trajectory and weigh on total group revenue and earnings growth.
• Intensifying competition across all mobile segments, including aggressive Black Friday discounting and a crowded budget segment with new and existing low cost brands, may force Sunrise Communications to sacrifice pricing power and margins, pressuring mobile service revenue and net margins.
• Limited monetization of the completed 5G stand alone network, with only slow B2B demand for new 5G SA and security solutions so far, risks underutilizing recent network investments and constraining the expected uplift in EBITDA and long term returns on invested capital.
• Execution challenges in capturing growth from new products, such as home security, content discovery tools and bundled cashless payment solutions for small retailers, could mean these initiatives fail to offset structural pressure in legacy services, limiting diversification of revenue and future earnings expansion.
• Reliance on ongoing OpEx and CapEx efficiencies, including AI driven savings and lower network investment, to counterbalance top line headwinds may face diminishing returns over time, which would slow free cash flow growth and constrain the company’s ability to support rising dividends and de leverage while growing earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CHF48.68 for Sunrise Communications based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF65.0, and the most bearish reporting a price target of just CHF36.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CHF3.1 billion, earnings will come to CHF289.6 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of CHF41.36, the analyst price target of CHF48.68 is 15.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.