Orange Revenue improving, Spain the weak spot (again)

BOfAML | Orange’s Q3 results were broadly in line with expectations with revenues 0.5% ahead, (+0.8% in Q3 vs +0.4% in Q2) and EBITDAaL +0.2%, in line with consensus expectations. The mix was somewhat weak however with France and Spain delivering slightly below expectations, with the beat driven by Poland, Africa and Middle East, and Enterprise on a somewhat lumpy significant cloud contract contribution.

KPIs were solid however with an improvement in Spain, paving the way for improving trends into 2020. In France, revenues deteriorated to -0.4% (+0.2% ex VAT) vs flat in Q2 (+0.4% ex VAT); the company’s ambition for flat to growing revenues in 2019 implies a turnaround into Q4 (implied Q4 c+2% to reach stable revenues). Guidance for 2019 (excl. network sharing in Spain) confirmed, with ‘slight’ EBITDAaL growth and ‘slight’ decrease from 2018 eCapex peak, resulting in OpCF ‘growth’. Call at 8:30am CET / 7:30am UK, expect focus on France pricing, competition in Spain and potential for further network sharing.

We expect limited granularity however ahead of the Investor Day scheduled December 4th where ORA should deliver an update on its infrastructure strategy among others. We maintain our Buy rating on commercial momentum in France, strong delivery in A&ME and further cost cutting opportunities enabled by digitalisation.

France a touch light, while Spain continues to hurt

Group revenues: Revenues grew 0.8% (Q2 +0.5%) to €10,577mln, 0.5% above consensus. France was 0.6% below css with 0.4% contraction yoy (flat in Q2), reflecting the loss of the VAT benefit recorded in Q3 2018. Ex VAT, France grew 0.2% vs. +0.4% in Q2. Spain top line contracted 2.5% yoy (1.2% below css), with soft mobile contract adds (+12k vs +38k in Q2) and -6k broadband adds. A&ME was +3.2% vs css, while Enterprise was +1.9%. We believe consensus has not yet fully baked in M&A in Enterprise, which was +0.5% vs BofAML estimates.

Group EBITDA: Q3 group EBITDAaL grew 0.2% to €3,615mln, in line, while telecom EBITDA (ex Bank) was up 0.4%, also in line. For the full year, we expect EBITDAaL growth of 1.0% to €12.8bn, which compares with 2.7% growth of adj. EBITDA in 2018.

Group capex: Q3 eCapex was 0.3% above consensus at €1,724mln. This contributed to an OpFCF decline of 0.5% to €1,891mln, 0.4% below consensus.

KPIs: Solid in France, Spain TV improving

France: Mobile – Contract subs (ex M2M) saw +90k net adds (BofAMLe +69k), vs +61k in Q2 and +12k in Q1. Sosh added +44k subs (+16k in Q2), implying Orange branded adds were +46k (+45k in Q2). Fixed – FTTH take up continued strong, with +178k net adds, vs +160k in Q2 and +168k in Q1. Broadband overall saw +65k net adds (+41k in Q2). Spain: -6k broadband losses (-27k in Q2) and +47k TV adds (-41k in Q2 and +46k in Q3 18), reflecting Champions League seasonality. Mobile decelerated with +12k mobile contract ex MtoM adds, from +38k in Q2 and -59k in Q1.

Price Objective Basis & Risk

Orange (FNCTF / ORAN)

Our EUR18.0 ($20.06/ADR) price objective is based on a Sum-of-the-Parts analysis, in which Orange French and Spanish businesses are valued on a DCF- basis (7.0% WACC, 1% term growth). Orange’s Polish assets being listed are valued on a Mark to market basis and we use a DCF with WACC 7.0% and 1% terminal growth for Orange Belgium.

The SOTP is adjusted for minorities, associates, provisions for retirement, spectrum, the NPV of cash tax savings and €5.8bn of hybrid bonds accounted by Orange as Equity, per IFRS rules.

The downside risks to our PO are: 1) continuation of mobile and fixed pricing pressure 2) failure to execute on cost cutting and 3) expensive (and dilutive) M&A.

Upside risks to our PO are asset sales, market consolidation (mainly in France or Spain), more accommodative regulatory environment.