Back to growth for the first time in six years; reiterate CL-Buy
We believe Orange's return to growth is sustainable and with the stock
currently trading at a 13% 2017E FCF yield, valuation is attractive. 3Q15
results highlighted Oranges' increasingly premium position in a benign and
modestly inflationary market, allowing the company to increase prices,
improve customer mix and grow ARPU. With ongoing underlying domestic
cost-cutting and African/Spanish organic growth acceleration, this produced
the first quarter of revenue and EBITDA growth in 6 years. We argue Orange
has a multi-year self-help opportunity, compounding modest top-line
growth to drive a +5.3% 4-year EBITDA CAGR. We reiterate our CL Buy.
Catalyst
1) Earnings momentum – our 2016/17 group EBITDA forecasts are
+4.7%/+8.0% ahead of company-compiled consensus driven by our more
constructive view on top-line growth and cost cutting in France. We also
believe consensus reflects no benefit from the recent reinvestment into
Africa, the improved market growth outlook following recent consolidation
in Spain. 2) French spectrum auction – this unlikely to be a negative
catalyst in our view. The reserve price for each of the six 5MHz blocks is
already high at €416 mn and the structure of the auction process makes it
hard for operators to “bid up” the price. We also note that Bouygues and
NMC-SFR said they have limited need for more spectrum.
Valuation
Our raised underlying numbers and longer-term growth outlook drive our
12m ROIC-based target price to €21 (from €20). At our target price Orange
would trade at a 9% 2017E FCF yield vs. sector average of 7.2%.
Key risks
1) Numericable re-focusing on top-line sustainability. This is unlikely to
come in the form of price cuts, but it could bring increased cost competition
that could raise competitive intensity more broadly. 2) Slower-than
expected cost-cutting at Orange.