Key Takeaway
This note outlines our first batch of expectations for 3Q14 reporting season. We
expect results to provide a positive catalyst in particular to Orange and KPN.
We also mention tailwinds for BT and Telenor and headwinds at TalkTalk, SES
and Telekom Austria.
* Positive trading calls. Orange should benefit from renewed hope of French
consolidation now that ILD has terminated its attempts to acquire TMUS. We expect
increasing optimism of market repair in Spain to be another supportive theme as Orange
promotes a positive outlook for its Spanish operation to justify part-funding the JAZ
acquisition with equity. And rising awareness that Orange's five-year plan, due to be
announced in February, should contain a cost-reduction target may instil confidence that
strong recent cost-cutting momentum will not prove short-lived. We believe KPN will
be able to show ever more tangible signs of progress towards the guided stabilisation
of financial trends by year-end, which is not fully appreciated by consensus, in our view.
Key areas to watch in this regard include postpaid momentum in consumer mobile, the
progression of broadband share, and efficiency measures mitigating top-line pressures in
the business segment. The outlook for relative stability is not discounted in the current
valuation (5.4x 2014e EV/EBITDA, vs 5.9x for the sector), in our view. BT should draw
attention to a strong 2H outlook as several headwinds subside. Management can calm
fears on EPL/mobile by reassuring that ambitions here remain tied to enhancing loyalty/
profitability of its retail BB base. Following the guidance upgrade in 2Q, Telenor should
report a solid 3Q – supported in particular by the domestic operations, and notwithstanding
continued competitive pressures in Thailand and also some regulatory headwinds in
Pakistan. Valuation presents an opportunity, in our view: On a mark-to-market basis, the
core EV (excluding VIP, and start-up operations in India and Myanmar) now trades on 6.7x
2014e EV/EBITDA, a modest premium to the sector on 5.9x for Telenor’s growth profile.
* Negative trading calls. We expect TalkTalk to report 1H marketing costs still at the
elevated levels of 1H last year despite slower TV adds. This may cast doubt on exactly how
bullish margin expansion targets might be achieved. Telekom Austria will no longer have
the technical support of the America Movil offer, so any deviation from inflated expectations
leaves the equity exposed to the downside (and the increased speculation of new Austrian
MVNOs is a growing overhang). While our base is that SES will reiterate FY14 guidance
(albeit with expectations now thoroughly anchored at the bottom of the 6%-7% range),
we worry that management will be unable to convince on the 4Q14 trading momentum
needed to bridge the gap to revenue guidance.