Citi keeps AT&T on positive catalyst list as spin-off record date arrives
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An updated model from Citi ahead of the AT&T/WarnerMedia spin-off has the bank maintaining its Buy rating on AT&T (NYSE:T), expecting room for multiple expansion amid prospects of growing revenue and EBITDA.
The new model cuts back on an announced net debt reduction of $43 billion by $5.6 billion, for working capital adjustments.
It also has analyst Michael Rollins presenting a pro forma model that reinforces that AT&T "needs to step up its execution on expense management to improve normalized RemainCo EBITDA during the second half of this year and into 2023.
Rollins is keeping AT&T on Citi's positive catalyst watch list, with upcoming moves including the completion of the Warner Bros. Discovery (WBD) deal with Discovery (DISCA
+0.4%), solid strategic volume performance, and better pro forma EBITDA in the second half of 2022.
Citi's still below guidance for 2023 EBITDA and free cash flow, it says, but a pro forma FV/EBITDA multiple in the low-6x range points the way to multiple expansion.
With the record date for the spin-off coming tomorrow, Rollins also updates the valuation methodology. In a target price of $28/share (implying 17% upside), he's estimating AT&T RemainCo contribution value of $22, and a pro forma contribution from Warner Bros. Discovery of $6 per AT&T share.
Two-way trading of AT&T stock is expected to begin today, with two markets on NYSE: a "regular way" market and an "ex-distribution" market (under a temporary T.WI symbol), as well as a market for WBD common stock on a when-issued basis.