Drillisch shares slump as earnings guidance trimmed, 5G costs loom

[August 15, 2019]   By Douglas Busvine

FRANKFURT (Reuters) - Shares in telecoms firm 1&1 Drillisch and its parent United Internet slumped to six-year lows on Thursday after they trimmed profit guidance due to initial 5G network costs and higher line connection charges.

A logo of the upcoming mobile standard 5G is pictured in Hanover, Germany March 31, 2019. REUTERS/Fabian Bimmer/File Photo

Drillisch shares fell 12% while United Internet's slid by 9% even though United announced a share buyback, responding to steep falls over the past year as concerns grew over the cost of building its own network.

CEO Ralph Dommermuth splurged 1.07 billion euros ($1.2 billion) at Germany's auction of 5G frequencies in June, bringing the self-made billionaire a step closer to his dream of founding a fourth German mobile network.

Market leader Deutsche Telekom and rival Vodafone have already announced the rollout of limited 5G services in some German cities, but Europe's largest economy is lagging early adopters like the United States, Japan and Korea.

Drillisch has tapped banks for extra credit and minimized dividend payments to fund commitments to build out a network that can reach half of German households, as required by the regulator.

Despite the heavy spend on 5G frequencies, Dommermuth said Drillisch would only need to partly draw on a 2.8 billion euro credit facility it arranged with a European banking consortium to pay its dues to the regulator.

"There's no need to correct our financial plans," Dommermuth told reporters on a call after the companies reported first-half results. Contract talks with network vendors and infrastructure partners were ongoing, he added.

Sales and core profits at Drillisch were marginally higher than a year earlier as it added 380,000 new customer contracts in the period, bringing the total to 13.9 million. These missed market expectations, giving investors a negative surprise, said Commerzbank analyst Heike Pauls.

The pre-paid telecoms specialist now sees earnings before interest, taxation, depreciation and amortisation (EBITDA) growing by 8% this year compared to an earlier forecast of 10%.

INSTALMENT PLAN

Drillisch is due next month to pay 735 million euros for the 3.6 Gigahertz (GHz) spectrum it bought, to which it will gain access in 2021. A further payment of 335 million euros for 2 GHz spectrum is due in June 2024. This becomes available in 2026.

At United Internet, first-half EBITDA rose 11.6%, helped by a favorable change in lease accounting rules. On an underlying basis, EBITDA rose by 3.6%. The company trimmed its EBITDA guidance for the full year by a percentage point to 11%.

United Internet, in which Dommermuth owns a 40% stake and which in turn owns 75.1% of Drillisch, also announced a share buyback worth 192 million euros.

Jefferies analyst Ulrich Rathe described results as "messy, but on track where it matters". He added that the buyback represented "a stark statement by management on the current share-price dislocation".

Shares in Drillisch have fallen by 50% over the last year on concerns that it will not ultimately recoup its network investments. United Internet's share price has fallen by 43% over the same period.

(Reporting by Douglas Busvine; Editing by Kirsten Donovan and Jane Merriman)

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