Barclays downgrades Freenet to “equal weight”, citing limited upside

Investing.com -- Freenet (ETR:FNTGn) has been downgraded to “equal weight” from “overweight” by Barclays (LON:BARC) in a note dated Thursday, citing limited upside potential following strong post-fourth quarter 2024 share price performance. 

While the company’s 2025 guidance remains solid, the stock’s valuation now reflects much of the expected growth, leading to the adjustment in rating.

Commercial trends for 2025 appear stable, particularly in the IPTV sector, which continues to gain traction. 

The mobile segment is also expected to benefit from improved wholesale agreements secured in 2024. Barclays forecasts a 6% increase in adjusted EBITDA for 2025. 

The telecom company’s outlook for 2028 suggests steady EBITDA growth at a compound annual rate of 4% between 2023 and 2028, aligning with Barclays’ projections. 

Free cash flow is expected to grow at a 5% CAGR over the same period, though rising tax obligations will constrain overall expansion.

Following the fourth-quarter results, Barclays has updated its estimates for the company. Revenue forecasts for 2025 and 2026 have been adjusted slightly upward to €2.56 billion and €2.65 billion, respectively. 

The 2025 adjusted EBITDA projection has been lowered by 1% to €528 million, while the 2026 forecast has been increased by 0.6% to €561 million. 

These figures place Barclays’ estimates at the midpoint of Freenet’s 2025 adjusted EBITDA guidance range of €520 million to €540 million. In terms of free cash flow, Barclays has revised its 2025 and 2026 expectations downward by 0.9% and 1.7%, respectively, bringing them to €309 million and €303 million.

The fourth-quarter results indicated continued strength in key performance indicators, particularly in Waipu TV and contract mobile subscriber numbers.

However, EBITDA fell short of expectations due to challenging comparisons and an increase in bad debt. 

One of the more notable announcements was Freenet’s plan for a €100 million share buyback in 2025. 

With year-end 2024 leverage at 0.9x and dividends of more than €200 million well-supported by free cash flow, Barclays considers this move a positive given the absence of immediate value-generating investment alternatives.

Barclays has marginally raised its price target for Freenet from €37.00 to €37.50 per share, translating to an 8% upside. 

This compares unfavorably to sector peers, which have an expected upside of around 20%. Given the increasingly competitive market in Germany, Barclays sees little room for upward revisions to estimates. 

While potential market consolidation could provide an opportunity, Barclays favors Deutsche Telekom (OTC:DTEGY) (rated “overweight”) as the preferred stock for such exposure.

Freenet currently trades at 9.5 times estimated 2025 EV/EBITDA and 10.4 times EV/OpFCF, with an expected effective free cash flow yield of 6.4%. These figures position it below peer valuations of 7.6x EV/EBITDA and 13.8x EV/OpFCF.