The French consumer fixed market is beginning to show signs of price rationality, with accelerating fibre investments supportive for ARPUs. Mobile trends were unsurprisingly weighed down in 1Q by heightened competitive intensity, but nevertheless delivered a +30bp q/q improvement in the MSR trend. Following the EU competition’s decision to block the UK O2/Hutch merger, we view the French telecom market in an increasingly positive (relative) light, given fading prospects of four to three mobile consolidation across Europe. France should benefit from fixed price repair, mobile bottoming out and a French competition authority that may yet take a supportive view on future M&A. We are OW ORA/ILD, EW NUM-SFR/EN.
French pricing – further signs of rationality. French fixed pricing is increasing, per our Orange – Prospects for price inflation research; Bouygues increased frontbook pricing €1-4/mth, NUM-SFR prices will increase €2-3/mth from mid-year, and ORA's newly announced 4k Livebox comes with €2-5/mth increases. With fixed capex set to rise, per Iliad - Capex in a co-financing world, continued fixed price rationality appears likely.
ORA (OW) – Prospects for price inflation: As ORA continues to take share with FTTH, competitors are raising prices to balance capex spending. Higher prices should offer a powerful value driver; we estimate each c.€1/mth ARPU increase is worth c.1% on group adj. EBITDA, per Bridge to higher profitability. Mobile conversely remains competitive, but ORA's mobile service revenues are tracking towards stabilization with 1Q16s -1% y/y a c.1pp sequential improvement. Trading on 5.7x 2016E EV/EBITDA, 12x OpFCF and 5.3% EFCF, we are OW with our €20 PT implying 32% upside potential.
NUM-SFR (EW): 1Q results were below expectations, but management commentary on the call was supportive of a material 2H16 inflection given: (1) tax unwinds; (2) further cost savings; (3) fixed and mobile price increases. We trim forecasts, leaving NUM-SFR trading on 7.7x 2016 E EV/EBITDA, 20x OpFCF and 3.4% EFCF. We are EW with our €33 PT (from €35 prior) implying 19% upside potential.
ILD (OW) – Broadband inflection: 1Q results delivered a further acceleration to +3.7% y/y in broadband service revenues, benefiting from ‘vente privee’ unwind and continued strong adds momentum. With capex a key cashflow driver for ILD, our published bottom up capex forecasts capture: (1) the ongoing mobile build-out, and; (2) accelerating fibre deployments. Our forecasts imply capex/sales falls steadily from c.27% in 2016E, and <€1.3bn peak capex in 2017E, per Iliad - Capex in a co-financing world. We are OW ILD, viewing the 8x 2016E EV/EBITDA multiple as attractive for a c.10% EBITDA CAGR stock. Our €230/shr PT implies 19% upside potential.
EN (EW): Bouygues 1Q results delivered positive telecom trends and rays of light in construction. Trading on 4.6x 2016 E EV/EBITDA, 11x OpFCF and 1.1% EFCF. We are EW with our €33 PT (from €36 prior) implying 11% upside potential.