* Short-term risks to the nice ‘market polarisation’ scenario
Consensus is that, in fixed-line, Orange and Numericable will take the superfast segment and leave the ADSL low-end to Bouygues; whilst in mobile Iliad will remain a low-end underdog, leaving incumbents in peace in the 4G segments. In our view, this rosy scenario will be disrupted in the coming quarters: 1) Iliad will not stay idle – we expect new commercial initiatives, both in mobile and fixed-line, to grab SFR’s ADSL customers and to cap Bouygues’ inroads; 2) in mobile, the 4G quality gap in favour of Orange and Bouygues will go as Iliad and SFR beef up networks.
* Consolidation remains the end game – Hardly a surprise for anyone
The end-game remains Numericable-SFR acquiring Bouygues Telecom. Renewed competitive pressure would actually increase the chances that Martin Bouygues welcomes an offer by Patrick Drahi. We see synergies of EUR9bn and Bouygues Telecom going for EUR7.5bn.
* Numericable-SFR downgraded to (=) from (+) – Target price upped to EUR45 vs. EUR35
Everybody loves Numericable-SFR and so do we. We have hiked our forecasts (revenues and margin) and our Bouygues synergies number - to arguably bullish levels - but fail to see upside. The good news on rapid delivery of SFR synergies is out, but the risk of Iliad striking back is not.
* Iliad (+) retaking the initiative – Target price upped to EUR220 vs. EUR210
Iliad remains the fastest growing stock in the sector. We have hiked our 2015e EBITDA estimate thanks to faster progress in the mobile network rollout. Consolidation is a key catalyst ahead.
* Bouygues (+): 2015 a pivotal year for Bouygues Telecom – TP upped to EUR34 vs. EUR33
Not for the faint-hearted given the earnings risk on French construction, but upside remains assuming that pragmatism prevails on a Telecom sale - and we believe it will.
* Orange (=): a well know story – TP upped to EUR14 vs. EUR12
Solid earnings for sure, but wholesale headwinds will increase and the valuation is full.