Monthly report September 2021

KPN is the market leader in telecommunications in the Netherlands. Over the past decade the number of players in the telecommunications market has been consolidated. As a result, there is an oligopoly in the Dutch telecommunications market. The market is now largely in the hands of three telecom companies. KPN and Vodafone Ziggo are the only ones with nationwide fixed and mobile networks. T-Mobile has a mobile telecommunications network and uses KPN's fixed network to offer its Internet services. The chances of a new telecom player entering the market with a nationwide fixed and mobile network are very slim. A new entrant would have to invest many billions of euros in licenses and networks. Moreover, it will take many years to build a network and to win enough customers. We expect competition to become less because of the oligopoly in the telecommunications market.

We expect revenue and profit growth to return at KPN in the coming years. Rates for Internet subscriptions are rising due to rate increases and because more and more people are switching to fiber. Mobile subscription rates are stabilizing. Due to cost savings, profits are rising faster than revenue. KPN has an ambitious plan to accelerate the rollout of the fiber optic network. This will increase the number of households connected to fiber from KPN from 30% at present to 80% in 2026. Investments will remain high until 2025. But after 2025, investments will fall substantially. This will further increase the already very strong cash flow.

KPN uses its solid, predictable cash flow to pay an attractive dividend, which at its current share price is 5.0%. KPN has indicated that the dividend payment will continue to increase in the coming years. If space remains on the balance sheet, KPN will use it to repurchase shares. This year, through a share repurchase program, KPN is returning another 200 million euros to shareholders. Together with the dividend, this means that KPN will pay out almost 7% to its shareholders this year.

We find it interesting that the telecom sector has been out of favor in the stock market for more than 10 years. Investors in the stock market seem to ignore the underlying improvements in market conditions and declining competition. At the same time, we notice that insiders have been actively on the acquisition trail in recent years. Telecom companies, major shareholders and private equity investors are willing to pay much higher valuations for telecom companies than on the stock market. In the Netherlands, T-Mobile was recently acquired by two reputable investment funds. Based on the valuation the investment funds paid for T-Mobile, a KPN share would be worth 3.20 euros. This is almost 20% higher than KPN's current share price. We think KPN deserves a much higher valuation than T-Mobile Netherlands. KPN is the market leader and has a nationwide fixed network. T-Mobile is the number three player and uses KPN's network for its Internet services.

The AEF added shares of KPN to its portfolio at the end of 2020. Since the initial purchase, a return of over 15% including dividends has been achieved. This leaves KPN's share return slightly behind that of European stock markets. Due to the defensive nature of KPN's activities, we believe the share's risk is limited. We believe that KPN shares have an attractive risk-return profile. As such, it fits well with the investment profile of the Antaurus Europe Fund. For the next few years, we expect KPN's share to average a higher return than the European stock market, while the risk is much lower.