* Reinstating at Buy: €20 PO, 30% total return upside
We see France as an attractive market; and Orange is well positioned to capture reemerging pricing power and monetise its premium quality/brand. We think a €19-22 range is realistic as Orange closes the valuation gap with the sector, with shares trading at 11.2x ‘15E EV/OpFCF and 7.1% FCFE, vs the sector at 13.8x and 5.9%, respectively. A rerating towards our €20 price objective would take the stock close to sector multiples at 13.1x EV/OPFCF and 5.6% FCF yield. We think stabilising earnings and domestic consolidation are key catalysts for the valuation gap to close, with the Dec 15 spectrum auction a potential trigger for consolidation.
* Domestic asset: underappreciated quality leader
In our proprietary survey of 1,000 mobile customers in France, Orange emerges as a quality leader both in mobile and fixed; and appears best positioned to capture data / high speed growth. We also see reduced churn risk due to higher convergent take up. We expect the pricing environment to normalise further post the Iliad-led repricing in 2012-14, especially in broadband as NUM cleans up SFR offers and high speed starts to be monetised.
* Time to move on
We believe historical reasons for a lower valuation vs peers are largely behind, with a recovering pricing environment, consolidation potential, and a healthier balance sheet. In our view, Orange is well placed to benefit from incremental rotation into the Telecoms sector, with 1) improving revenue/FCF/earnings growth, 2) a healthy balance sheet position at 2.0x net/debt EBITDA, and 3) a dividend yielding 3.8% with potential to grow (50% FCF payout). Among EU majors, we favour BT, DT and ORA ahead of VOD and TEF, while in France we prefer Iliad and ORA over NUM.