Growth, capital discipline and M&A optionality - CL Buy
* Source of opportunity
Orange offers a compellingly priced organic growth opportunity, in our
view, with a potential boost from consolidation. At 4Q15 results, it sustained
growth for the second consecutive quarter following six years of decline.
French top-line trends are improving and will inflect to growth during 2016,
in our view. With ongoing cost-cutting, we model Group sales/EBITDA
+1.5%/+4.1% 2016-20E CAGR. French consolidation discussions continue,
and could potentially boost Group EBITDA growth by 1-2 pp pa. Today’s call
reassured on capital discipline risk; Orange ruled out pan-European
consolidation for "many years", focusing on small-scale in-footprint deals.
* Catalyst
1) French consolidation - management updated that Bouygues Telecom
deal discussions are ongoing with "good momentum". We see a strong
valuation accretion opportunity from the deal, which would consolidate the
fixed and mobile markets. We estimate €8-10 bn NPV benefits from lower
market churn driving sustained margin expansion and EBITDA growth. 2)
Number upgrades - we forecast EBITDA +3% in 2016 (adjusted for Jazztel),
and our 2016/17 EBITDA forecasts are +2.2%/+3.6% vs. company consensus.
Key driver is France, where Orange has built a premium position in a benign
competitive market, with ARPU growth still compounded by cost-cutting.
Capex is €150 mn higher in 2016 than consensus expected. But this is spent
mainly on French fibre, which is already driving improving returns. Orange
will use low-cost new technologies in rural areas (45% of population).
* Valuation
Orange trades on a 9.8% 2017E FCF yield offering a compelling valuation
even before French consolidation, in our view. Our ROIC-based 12m PT
rises to €22.2 (from €20.9) with our target multiple increasing to reflect a
more constructive view on consolidation benefits.
* Key risks
French deal talks collapse, competition in all markets.