As France returns to growth: CL-Buy ATC, ORA; Neutral ILD, BOUY
French telecom market inflects to growth
In 3Q16, overall French market revenues grew +0.2%, turning positive
following multi-year declines as pricing promotional intensity reduced. In
this note, we highlight stabilising mobile and fixed ARPUs and accelerating
fibre demand. France is still a four-player market, but with two players
generating limited cash flow, we believe the backdrop is supportive for nearterm
price rationality and modest growth. We model market revenues of
+1.1% 2016-18 CAGR. We also believe French consolidation remains possible
and could offer €10-20 bn value accretion.
How to invest in France: CL-Buy Altice and Orange
Efforts by SFR, Altice’s France asset, to improve customer perception
following several years of underinvestment may take time to deliver
sustainable top-line growth. But market growth is supportive, and despite
modelling flat SFR top-line in perpetuity, cost-cutting drives 5.9% EBITDA
2016-20E CAGR. Altice US has a high structural growth outlook and drives
Altice Group revenue/EBITDA CAGR +1.8%/+5.9% 2016-20E, making its 14%
2018E FCF yield compelling. Net debt/EBITDA is 5.4x 2016E but no major
refinancing is needed before 2022. Orange’s 3Q16 showed sustained group
growth and French trends inflecting to growth as it leverages superior
investment and positioning. With +4.4% EBITDA 2016-20E CAGR for 12.3%
2018E FCF yield, Buy.
Reinstate Iliad at Neutral: French growth but Italian uncertainties
Iliad continues to leverage its cost base advantage in France, driving EBITDA
+8.6% 2016-20E CAGR. It has an opportunity to create material value in Italy,
but we see too many uncertainties today to incorporate this into valuation.
Our SOTP-based 12-month target price is €210, implying 18% upside (vs
sector average 27%). At our target price, Iliad would trade on 6.2x 2018E
EBITDA, in line vs the sector, reflecting its modestly superior long-term
growth, offset by its higher-for-longer capex and Italian uncertainty.
Bouygues up to Neutral
We continue to believe that Bouygues Telecom is structurally challenged
as a predominantly mobile operator that is struggling to gain traction in
fixed. But a more rational French telco market is boosting its near-term
growth and a more optimistic outlook in construction means we raise our
group EBITDA estimates +0.7%/+2.1% in 2017/18 and our SOTP-based 12m
target price to €35.5 (from €29), implying 12% upside vs. sector +27%.