6. FORECASTING AND PRO FORMA STATEMENTS
6.2 Most likely scenario
This scenario TDC’s financial performance is certainly very dependent on the on the conditions of the surrounding macro environment. Seeing as the company is facing ma‐
turing markets, and competition is becoming increasingly intense, however; TDC will have to struggle just to maintain the current position, even provided that the economies of Scandinavian countries will recover as estimated by experts. Put more precise, given the current circumstances, chances are, that TDC will lose size in spite of the industry gaining size. Using GDP projections as a direct driver, i.e. in mathematic terms, is there‐
fore found to have little value with regard to domestic operations.
In the following subsections grounds for forecasting estimates on each value driver is presented.
6.2.1 I ‐ Revenue TDC Consumer
The revenue of TDC Consumer is estimated to continue its negative trend till 2017 – with 2012 decline as the low point of ‐4%, followed by a steady diminishing trend of 0,5 percent points till 2016, after which the trend shifts to 1 percent point. Then from the zero growth in 2018, it is estimated to climb up by 0,5 percent points the following two years. Growth in the terminal period is estimated to be zero.
The reason for the “curved” trend is, that the situation right now implies intensified competition within mobile and broadband, and still declines in fixed line telephony, however, on a bit longer perspective, losses from fixed line will be fading out, competi‐
tion within mobile perhaps stabilize somewhat. Additionally, TV and new opportunities are expected to add in terms of revenue in the future. Nevertheless, a perhaps somewhat conservative terminal growth is applied, simply reflecting, that in the long run, TDC can
not rely on further growth in this market, as market shares within mobile are artificially high in my opinion. Provided that growth in the market, and TDC loosing share will off‐
set each other, zero growth seems most likely. Also, the Q2 financial report supports the revenue decline, as decrease of 3,4% compared to Q2 2010 is presented, which is 0,1%
lower than my estimate for the year 2011, and hence fits perfectly with the fact that revenue growth from 2009 to 2010 was 3,3%.105
TDC Business
The overall pattern of the forecasted revenue for TDC Business is very similar to that of TDC Consumer described above. Despite decrease in 2010 larger than that of TDC Con‐
sumer, revenue of TDC Business is expected to recover without a low point in 2012.
More specifically, the decrease in revenue is estimated to be equal to that of TDC Con‐
sumer in 2011, after which it will decline by 0,5 percent points till 2014, a rate that changes to 1 percent point the following two years. Then, after zero growth in 2016, positive growth of 0,5%are estimated for the period from 2017‐2019. In the last year explicit forecast year growth is zero, and the same goes for the terminal period.
The arguments, naturally, bares many resemblances to TDC Consumer as well. Fixed line telephony is dropping, but not to the same extend as for TDC Consumer, which explains the faster paced recovery. However, future growth opportunities are not found as ap‐
parent, hence explaining why growth does not reach above 0,5%, and again is estimated as 0% in the terminal period. Again, the estimate for 2011 finds strong support in the Q2 2011 report, in which a decrease of 3,3%, i.e. 0,2 percent points lower than my estimate.
TDC Nordic
TDC Nordic presented very good results in 2010, namely a growth of 16,3%. However, the root cause was favorable exchange rate changes. Nevertheless, organic growth was still observed; and would there not be? In these markets TDC is not in a dominating po‐
sition, and provided a) that the economies of these countries are gaining strength and b) that TDC will be able to continue to take its share of the markets in which operating, the revenue generated in TDC Nordic is most likely to follow the positive trends of those economies.
105 TDC A/S. TDC Second Quarter Report 2011, p 6.
Estimates of GDP growth for Finland, Norway, and Sweden by the International Mone‐
tary Fund are used along with the revenue split among these units to compound a weighted average growth for the total revenue of TDC Nordic. Seeing as TDC Nordic en‐
compasses another division, namely TDC hosting, which across all three countries in addition to Denmark, it is somewhat misleading. However, since the revenue fraction stemming from here is very small, it is by no means serious. The estimates by IMF only exist for the years 2011 to 2016. For the remaining period, including the terminal pe‐
riod, the rule of thumb is used, and growth is forecasted to be 2%.
YouSee
YouSee has in deed been the positive story over the last couple of years, presenting very high growth rates. There is still substantial doubt regarding potential future regulation of YouSee’s cable network. In addition, with TDC Consumer products such as TDC TV and HomeTrio, cannibalization is expected to occur in the long run.
The growth rate of YouSee’s revenue estimated to be 7% in 2011 after which it will di‐
minish by 1 percent point annually till hitting 2% in 2016. For the remaining explicit period, it is estimated to be 2%. Growth in the terminal period is estimated to zero. The drop in growth from 2010 to the forecast of 2011 could seem too dramatic, yet this is not the case; in fact, the Q2 report presents growth of only 6,9% as compared to Q2 2010, actually making it a bit optimistic.
Operations & Wholesale
Despite showing a pattern of diminishing revenue loss from 2007 to 2010, the outlook is not assumed positive. In the long run, the argument is, that MVNO competition is dimin‐
ishing and large competitors increasingly depend on their own infrastructures. The Q2 report supports this view with presented growth decrease of 1,7 and 8,9 respectively for the units now known as Wholesale and Operations & Headquarters. Wholesale repre‐
sents a very dominating fraction, and hence, growth for 2011 is estimated to be ‐1,7%, followed by ‐1,5% in the remaining periods including the terminal period.
Total revenue
The overall revenue growth rate is calculated as a weighted average. I have chosen that estimates for growth in ‘other including eliminations’ is zero, as I do not know better.
TDC Consumer and TDC Business being the largest contributors, the pattern of the total growth rate is much similar to the pattern of those.
6.2.2 II ‐ Transmission Costs and Costs of Goods Sold
These costs have developed favorably in relation to revenue over the period from 2007 to 2010. This trend not is expected to continue, however – quite on the contrary. In the Q2 report, these costs increase by 4,9% as compared to Q2 2010, which is substantially more than the revenue. Hence, from presenting a fraction of 25,8% of the revenue in 2010, the item is forecasted to represent a fraction of 26% throughout the entire fore‐
casting period including the terminal period.
TC and COGS are very much dependent on the product mix. Having insufficient knowl‐
edge hereof however, prevents me from making actual predictions based on the strate‐
gic analysis. The chosen level is perhaps a bit optimistic, but it is difficult to assess.
6.2.3 III ‐ Other External Expenses
Other external expenses have developed in a favorable direction over the past years, because the company is resizing its activities. Value here is believed to not be completely exhausted. Hence, it is estimated to constitute a fraction of 16,5% throughout the entire period including the terminal period. This view is also supported by the Q2 report.
6.2.4 IV ‐ Wages, Salaries and Pension Costs
The story on wages salaries and pension costs is basically the same as that of the previ‐
ous. I.e. headcount reduction is not fully completed. Hence, it is estimated to drop from representing a fraction of the revenue of 16,5% to decline by 0,1 percent point till reach‐
ing a level of 16%, and that level is then fixed throughout the remaining period. Again this view I also supported by the Q2 report.
6.2.5 V ‐ Other Income and Expenses
Not having sufficient knowledge of a better approximate, other income and expenses are forecasted represent a fixed fraction of revenue corresponding to its level in 2010, namely 0,7%.
6.2.6 VI ‐ Restructuring Costs
Restructuring costs have been quite high in past few years. I believe, restructuring costs will reoccur every year, albeit in a smaller scale in 2 years from now. I.e. restructuring costs are estimated to be 4% in 2011 and 2012, after which it will drop and remain at 3% throughout the entire period including the terminal period.
6.2.7 VII ‐ Depreciations
Depreciations are forecasted as a percentage of intangible and tangible assets. This is, in my opinion one of the most difficult items to forecast. The level was particularly high in 2010; I do not believe it will be that high in the future, seeing as the asset base has di‐
minished substantially. Hence it is estimated to be 9% throughout the entire period in‐
cluding the terminal period. Looking at the outcome in the pro forma statement, it seems reasonable.
6.2.8 VIII ‐ Interest Rate
The interest rate has fluctuated in the historical period, with 5,3%, 5,8%, and 5,1% in the period from 2008 to 2010. The interest is estimated to be 6% throughout the period, which is somewhat conservative considering the current state.
6.2.9 IX ‐ Tax Rate
It was my original intention, to use the marginal tax rate of 25%, i.e. the Danish marginal tax on corporations. This would, however underestimate the taxes payable, and hence, would lead to a distorted conclusion, as tax rates in the countries in which TDC Nordic is represented is slightly higher. To adjust for this effect, I have chosen to apply a tax rate of 26%. This is by no means an exact adjustment, but I believe it is reasonable.
6.2.10 X ‐ Intangible and Tangible assets
Intangible and tangible assets are expected to remain at a level where it represents a fraction of the revenue slightly higher than that of 2010. The fraction has been diminish‐
ing over the past years, and it seems reasonable to believe, that it will remain around the current level. Hence it is estimated to be 195% of revenue.
6.2.11 XI ‐ Net Working Capital
Net working capital is estimated to be 25% throughout the entire period including the terminal period. This is perhaps somewhat pessimistic seeing the overall steady state assumptions regarding assets and the level in 2010 of 23%. This is to be on the safe side, as the previous years 2008 and 2009 were characterized by a fraction of 27% and 29%
respectively.
6.2.12 XII ‐ Net interest bearing debt
The case of net interest bearing debt is the same as with intangible and tangible assets, except the fact that it is calculated as a fraction of invested capital rather than revenue. It
has fluctuated up and down between 53% and 56% approximately of revenue. The level of 52,9% is estimated to stick, yet with a roundup of 0,1 to 53%, because it looks better.