Today, I've had another phone call with the Head of Investor Relations at 1&1 Oliver Keil. I've gotten to know a very experienced and focused man that seemed to know the company and the current situation of it very precisely. This has probably been the most professional Head of IR that I've talked to so far. He spoke his words clearly and emotionless. No room for bullshit or exaggeration. Unfortunately, the (legal) requirements behind his role challenged me to get the insights I wished for in my mail. Please read my mail to 1&1 and then check the answers I have summarized under the questions that I highlighted. For each question, you can find my comments beneath Mr Keil's answer.
Dear Sir or Madam,
I don't quite get 1&1 AG out of my head because of their really great current stock market valuation.
For this reason, I studied the Annual Report 2020 to learn more about business segments, risks and corporate plans.
I came across the following issues that I would like to discuss with you:
Now that the company is delivering stable double-digit operating (2021: 12%, 2020: 10%) and future high free cash flow percentage margins (2021: 6%, 2020: 10%), the question arises for me how you plan to maximize shareholder value. The 2020 annual report says on page 56, "The company is authorized until January 11, 2023 to acquire treasury shares in the company up to a total of 10 percent [...]." Based on the development of the number of shares, it is not apparent to me that there were actually extensive share buyback programs in the near past, although these seem suitable for the weak price development in order to spark more euphoria for the share again. Furthermore, due to the high investment requirements of the coming years, the dividend will be kept low.
What steps can shareholders expect over the next 3 years to what extent free cash flow is used to maximize shareholder returns? Will the approved 10% share buyback rate actually be used for share buybacks until 2023?
Mr. K: It is very unlikely that we use it. You normally buy back stocks if you do not know how to use your cash or in case you are undervalued. This is not the case with us, we want exactly what our plan is. Since we follow our big plan to build our own mobile networks, we do have plans how to use our cash for sustainable investments.
Comment to Mr. K's reply:
Very sad story although I fully understand the company. To not get into any debt, the company tries to you all its operating cashflow for the sake of its investments.
The external conditions are very challenging in many respects. Nevertheless, this company can hardly take advantage of the increasing focus on working from home. On the profit side, too, hardly any increases are to be expected due to the high operating expenses associated with the construction of the mobile communications network. With which sales growth plans and strategies does 1&1 currently want to ensure more growth? Since the takeover of United Internet, the company has been transformed from a growth tycoon into a telecommunications group with growth rates à la Deutsche Telekom.
Mr. K: I cannot give you any answer on that question as it is related to our plans to position this company as a mobile network operator as well. We're not Rakuten from Japan. They released their exact plans where they would like to expand. This was the worst thing they could do as their competition immediately knew where to invest in order to seize the chances that Rakuten saw in certain regions or product lines. As long as we haven't published any figures on Capital Market Days, I'm sorry, I will not be able to answer any questions in this direction.
Comment to Mr. K's reply:
This is indeed another sad story. On my subsequent question if investors could see this Capital Markets Day coming within 1 or 2 years, he added that there will not be any forecasts or guidance as long as the contractual arrangements are not signed (and they will probably be signed by 2023 earliest. In recent talks, Deutsche Telekom should have said that they need access to the mobile network although not being owned by them. Neither the prices nor the exact arrangements can yet be forecasted. I was very surprised but also very happy to experience such a conservative corporate policy on such urgent and important issues.
Does the company plan to continue its excellent financial policy with a focus on almost full equity financing or is this just a short-term phenomenon? Is there a specific planning key figure here as to how high the equity share should be in the future?
Mr. K: (laughs) Well, if it was possible, we would of course strive for 110% equity ratios. This is not possible. But as you can see in our reports, we have also been trying to finance any expense with our capital earned from revenues. You can be sure this should continue to be our plan, also for the future.
Comment on Mr. K's reply:
These words speak for themselves. Very conservative and professional answer and management. I highly appreciated this attitude throughout our complete interview. On one question he added that Mr. Dommermuth (CEO of United Internet and majority stockholder of 1&1 AG with around 76% company ownership) is not interested in any short-term goals and KPIs. He would know that many (especially) institutional investors are obliged to deliver returns within 3 years for insurances or family investors. But for investors as such, this is the wrong company. With 1&1, there is only long-term focus. After this interview, I can't see any reason why I would disagree with this view of Mr. K.
Investments in the new 5G business segment are massive. For me as an investor, these could become attractive from 2030 onwards. What sales, earnings and cash flow effects can an investor expect from these investments in a kind of before/after comparison? Here is a fictitious example of which KPIs I could imagine for such planning:
KPI 2020-2030 from 2030
- Sales growth 2% 5-7%
- Return on sales 8% 12%
- OCF margin 10% 15%
- FCF Margin 8% 10%
Mr. K: As I said, I cannot give you any guidance for this scenario as long as they are not officially published during Capital Market Days. But you can immediately get to know the figures right then if you subscribe to our IR newsletter. As we do not offer any guidance or forecasts we experience a valuation discount. And as long as we don't offer any, investors won't appreciate that. What investors need is transparency. We can't offer any on our forecasts currently. For our application to become a mobile network operator we had to hand in business plans which we naturally did. But we cannot and do not want to disclose them.
Comment on Mr. K's reply:
Nothing to add here. He made it clear from the beginning that he will legally not have the chance to answer my questions. He would try to give me some hints - which he did.
So, what's my conclusion?
It's tough what to conclude here. The company is in an excellent position to perform strongly within the next 20 years. The only problem is that it cannot offer any reliable guidance. Due to its conservative IR policy it also doesn't answer any statements to questions which they cannot answer based on facts due to the contractual negotiations which will have to finish beforehand. With its high equity ratio, its strong cash flow ratios and its market position as a discounter, I see this company in a good position to be a formidable value investment. Although not every contract and every external negative factor in its plans to take part as a mobile network operator is yet finalized, we are optimistic that the German state will take effort to welcome another mobile network operator for higher competition and less market concentration in Germany.