Key Takeaway
We preview results for BYG/NUM-SFR/ORA, also publishing updated models.
3Q15 was another heavily promotional quarter with NUM-SFR visibly more
active in mobile. But this fight-back may not have gained much traction,
judging from BYG/ORA confidence. Being on the wrong end of polarised
operating trends in French Mobile is not sustainable for Free or NUM-SFR. We
discuss why and how Nov's spectrum auction could be a catalyst for change.
3Q15 was another heavily promotional quarter for French Telecoms with NUMSFR
visibly more active in mobile. Repairing commercial momentum is a priority for NUMSFR,
which saw its postpaid base shrink 7% in 1H15 yet aims to stabilise revenue in 2016.
Free's decision to raise the 4G data limit on its €19.99 plan to 50GB in Sept may have had
limited effect on 3Q15 volumes. But in conceding the opportunity to price subs up to higher
data tiers, Free is signalling that a bigger opportunity lies in grabbing market share as 4G
capabilities improve. There is plenty to aim for with only 22% of French subs migrated to 4G
so far and 61% out-of-contract. Confident signals from BYG/ORA suggest trends remained
polarised in their favour during 3Q15. But the mobile oligopoly looks unstable, in our view.
NUM-SFR (Hold, PT €45) reports on 28 Oct. At the 2Q15 results, mgmt. claimed to
have 'launched the commercial machine'. This has been reflected in relentless promotions
throughout 3Q, with a heavy focus on mobile. Having discounted certain SFR-branded plans
in July, the focus switched to RED for the 'back-to-school' period. RED's high-profile 3GB/
unlimited SMS/unlimited minutes plan (normally €19.99/month) was halved in price. By
mid-Sept, attention had switched back to SFR where iPhone prices were trimmed. That
reversed again in early Oct, when RED discounts returned with a permanent doubling of
data allowances on (previously) 3GB and 5GB plans. Disconnection volumes deteriorated
between 1Q and 2Q, both in postpaid mobile and FBB. We suspect that customer trends
will have remained weak in 3Q15. NUM-SFR is likely to assert again that its exit run-rate was
better than the quarter as a whole. We believe that NUM-SFR's ability to bid aggressively in
next month's spectrum auction may now be constrained by the combination of the €2.5bn
special dividend announced last week and tighter credit market conditions.
Bouygues (Buy, PT €45) reports on 13 Nov. Mgmt's confident tone at the 6 Oct investor
day suggests to us that BYG has felt little impact from NUM-SFR's commercial 're-launch' so
far. We observe that BYG ran aggressive mobile promotions in the 'back-to-school' but did
not feel obliged to extend these to the end of 3Q. However, we think BYG should remain
watchful, particularly in FBB where its 78k net adds in 2Q15 combined with those of Free
(46k) were the mirror image of the 119k net losses that NUM-SFR reported. If/when NUMSFR
can stem its FBB churn, BYG's own fixed revenue growth would be threatened since this
currently relies on heavy intake volumes to compensate for pricing below the back-book
ARPU. Nonetheless 2015 should be the low-point for group FCF, which could expand to
€708m pre-spectrum in 2016 (vs. €70m 2015e) restoring dividend coverage.
ORA (Buy, PT €18), which reports on 22 Oct, is for now gliding above the worst of the
trench warfare, benefiting from a widespread perception for 4G network quality (a notion
more sharply perceived among consumers in France than in most other European countries)
and the retail win-back opportunity presented by its ability to plough resources into FTTH
deployments in ‘very dense’ areas where retail FBB market share is as low as 20-25%.