Zegona Share Price Target Upgraded at Barclays

Barclays has recently revised its outlook on the telecommunications investment company Zegona Communications (LON: ZEG), significantly increasing its price target from £3.50 to £6.00, while maintaining an Overweight rating on the stock.

This bullish stance heralds positive momentum for Zegona, which could be attributed to strategic agreements aimed at integrating its Coax assets into Fibre NetCo's operations—a move anticipated to yield substantial free cash flow.

Zegona's share price has added 4.6% through early trading, with the YTD increase now standing at an impressive 85%. This brings the stock into all time high territory, with new highs set in recent months.

Zegona's recent agreements with MasOrange and TEF are projected to generate a free cash flow ranging between €1.8 billion and €2.3 billion. Despite the prospect of these agreements raising Zegona's operational expenditures by approximately €200 million annually, cost reduction strategies are expected to mitigate the impact significantly, bringing additional expenses closer to €100 million per annum. The company is poised to benefit from a substantial reduction in ongoing cable costs as a result of these strategic partnerships.

Furthermore, Zegona is forecasted to realize savings of approximately €30 million yearly through a new deal with TEF. This is in addition to cost savings linked to restructuring of headcount—estimated to yield about €70 million per year, offsetting against one-time costs of €100 million. These measures underline Zegona's focus on cost efficiency and profitability.

Barclays also projects that Zegona's capital expenditures in 2025 will equate to roughly 17% of its sales, which signifies a reduced network capital expenditure. On a Vodafone reporting basis, this percentage is expected to be closer to 10%. Such decreased capital expenditures would enable Zegona to allocate resources more efficiently and potentially enhance shareholder value.

These moves underscore a larger trend in the telecom industry, as noted during Sunrise's recent capital markets day, of transitioning from cable to fiber wholesale operations. With an emphasis on managing operating expenses and capital expenditures, companies like Zegona are restructuring to thrive in a competitive market.

Zegona Communications is embarking on a strategic journey with the potential to substantially raise its free cash flow and streamline operations. With Barclays' upgrade, investor confidence in Zegona is likely to grow, fuelled by the company's tactical agreements and commitment to cost-efficiency. As the telecom industry continues to evolve, Zegona’s efforts to optimize its operations and capital expenditure could set a new precedent for success within the sector.