>>> Iliad
Reiterate Buy, mid-term valuation in in line at 12.4x EV/OpFCF and 5.4% FCFE
despite a superior growth. Iliad’s message remains bullish on a number of fronts:
1) pace of net additions in broadband with solid share of additions in Q1, 2)
traction in mobile with leading share of additions every quarter since launch in
2012, and better customer mix, and 3) progress on mobile network roll-out that
drives better quality but also better economics. Guidance is for >10% EBITDA
growth for the full year 2015, however Iliad expects top line growth coupled with
benefits of the migration of traffic to its own network to have positive benefits on
margins as early as H1. We forecast with 10.4% YoY EBITDA growth in H1. We
expect Iliad's roaming bill to Orange to remain stable YoY (higher coverage with
950 sites in Q1, offset by higher subs base and usage), however we see roaming
costs declining c 100mln in H2, which we expect to translate into 22% EBITDA
growth in H2.
Thomas Reynaud, Deputy CEO and CFO
* Good commercial momentum… Iliad’s management insisted on the current
good commercial momentum driven by service and product innovations (4k
box, roaming etc.). Mobile base mix is improving with higher share of €20
offers vs €2 while mobile market share of net adds have consistently
remained above 65% over the last 13 quarters.
* … to translates into EBITA growth: Mobile contribution expected to turn
positive as of H1 due to sustained top line growth and higher traffic offloaded
to own network. Progress on mobile network roll-out drives better quality but
also better economics. Guidance is for >10% EBITDA growth for the full year
2015, however Iliad expects top line growth coupled with benefits of the
migration of traffic to its own network to have positive benefits on margins as
early as H1.
* M&A “a nice to have but not a must have”: Iliad has currently no plans for
M&A but remains open to opportunities. Iliad is looking at maverick in market
where pricing arbitrage is possible and where Opex and Capex are
undermanaged. Iliad think it has specific and efficient vision on cost
management (online sales, simplicity of offering) which can be exported.
Management team has 60% of Iliad so M&A needs to be value creative.
* Low leverage/Use of cash: Iliad flagged three potential uses of cash to
address an unlevered balance sheet, at 0.8x YE14 net debt to EBITDA.
1.Higher capex: Iliad could decide to accelerate investments if it can deliver
faster FCF growth. In particular, we believe that investing faster in mobile
roll-out to reduce roaming payments to Orange makes sense as it is FCF
accretive in the medium term but improves quality perception.
2. Foreign M&A (see above)
3. Cash returns: In the absence of attractive external growth opportunities
(we understand c 2 years), Iliad could look into returning cash to
shareholders.
* Distribution strategy: Iliad distribution strategy is primarily online-driven.
Iliad use “flash” promotional sale from time to time using the “vente-privee”
website.
>>> Orange
M&A remains a key focus post comments from the press linking Orange to
Telecom Italia. Management has emphasized the importance of Africa as a
region where it was planning to increase its exposure. Investors remain focussed
on domestic M&A but Orange believes the likelihood of a deal in the short term
has reduced.
Thierry Bonhomme, Senior EVP and head Orange Business Services,
represented the company
* M&A: Focus on geographies where are present, ie Africa or Europe. Not
working on Telecom Italia. Africa: the creation of a single holding for all
African assets will allow Orange to be more agile and flexible to participate in
consolidation in Africa which remains very fragmented with over 240
operators. Ora wants to increase exposure to Africa, will open Mobinil to
other investors, want to increase its stake in Meditel. Consolidation in
France: ORA very confident with commercial targets, cost saving targets.
Situation far better than a few years ago. Some stress in competitors but
don't expect consolidation short term.
* Cost cuttings: 1) commitment of Orange delivering 2018 better revenues
and EBITDA better by 2018. 3bn cost savings: all the geography at working
on savings to reduce gross savings. 25000 departures is a major part of the
cost saving as it also implies real estate savings, work equipment etc. expect
operational costs saving with fibre migration. Do not want to commit on
EBITDA if there is other unexpected cost but should be accretive to EBITDA.
* Corporate business in France: dynamics in business. Different segments:
Soho, SMEs, Enterprise, MNCs. Market share in France are v strong and
more or less stable. Very strong organisation and sales coverage. Taking
share requires a strong commitment. In reorganisation of competitors, limited
consideration for enterprise specific needs, Orange seeing many customers
coming over as they value 24/7 service, account management, dedicated
network.
* Spectrum auction: satisfied to see apparent position by regulator not to give
reserve block. Key is reserve price, induces behavior of players during the
auction. ORA considers spectrum is a key asset because of traffic explosion,
doubling every year. 1000x increase expected in the coming ten years to be
covered by 1) 10x from refarming, 2) 10x by next technologies including 5G,
and 3) 10x by increased sites.
* M2M: want to leverage on their asset and IOT and mobile banking are area
where they have taken commitment. Many opportunities to develop skills
from this. Mobile banking: money transfer (Orange money in Africa), cash
(Orange cash with NFC,), banking company (being a broker of banking
services). Very promising as perceived as legitimate provider within this
banking service business.