Virgin Media Profits to Improve

Virgin Media, Inc. (VMED - Analyst Report) is, in our view, in the midst of a turnaround, poised to generate vigorous free cash flow growth beginning in second half 2008. A new management team has re-branded the services, formerly notorious for poor customer service, and is rolling out digital services to stabilize average revenue per unit (ARPU), reducing churn and slowing its market share drain from the recent onslaught of new entrants into VMED’s markets.

We expect tax shields, declining cap ex requirements, together with reduced interest expense from the inevitable financial de-leveraging, to generate strong growth in free cash flow beginning in the second half of 2008. At less than 6x 2008 estimated EBITDA, the stock is currently trading at a steep discount to chief competitor British Sky Broadcasting Group a.k.a. BSkyB (BSY - Snapshot Report) and its other cable peers, a discount that we think will narrow over the year as profitability improves.

Virgin Media reported first quarter 2008 financial results. EBITDA was better than expected at £324 versus our estimate of $318.For first quarter 2008, EBITDA increased 6.1% year-over-year and 1% sequentially to £ 324.2 million. Cable drove the year-over-year increase, partially offset by declines in mobile and content. The company is reviewing strategies to improve mobile results, including potential rate increases. EBITDA margin expanded 250 basis points to 32.4% in first quarter 2008 from 29.9% in first quarter 2007. Free cash flow was £80 million, or $0.50 per share.

The company is taking price increases, effective June 1, 2008, on some of its telephony, TV and bundle pricing, which should boost ARPU in second half 2008. At the end of first quarter 2008, debt-to-total capital was 62%. Book value per share was $16.29. The company is exerting good cost controls. We accord a Buy rating to VMED shares with a six-month price target of $15.50.

Sumit Singh contributed to this report.

Read the full analyst report on VMED.

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