PROX: Measured Outlook Will Weigh On Upside Potential Despite Fair Value

Key Takeaways

• Expansion of the fiber network and strategic partnerships are expected to boost revenue and enhance earnings growth.
  
• Cost-efficiency measures, asset sales, and digitization are anticipated to improve net margins and support cash flow during investment phases.
  
• Rising competition and cost pressures threaten Proximus's market share and margins, with risks from high CapEx, debts, and dependence on efficiency gains.

Catalysts

Provides digital services and communication solutions in Belgium and internationally.

• Proximus is expanding its fiber network, which has shown significant growth and is expected to attract more customers, boosting future revenue.
  
• The implementation of cost-efficiency programs and anticipated additional savings will likely improve net margins as Proximus mitigates cost pressures.
  
• Proximus Global is poised for strong growth, with expectations of a 20% increase in EBITDA due to strategic partnerships and synergies, enhancing earnings.
  
• The ongoing sale of non-core assets is projected to generate substantial cash flow, supporting free cash flow during periods of high investment in fiber deployment.
  
• Proximus is capitalizing on retirements to drive efficiency improvements through automation and digitization, potentially increasing net margins.

Proximus Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Proximus's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will shrink from 6.4% today to 5.5% in 3 years time.
• Analysts expect earnings to reach €342.2 million (and earnings per share of €1.06) by about April 2029, down from €398.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €419.2 million in earnings, and the most bearish expecting €267.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.1x on those 2029 earnings, up from 5.4x today. This future PE is greater than the current PE for the GB Telecom industry at 5.4x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.44%, as per the Simply Wall St company report.

Risks

• The anticipated competitive environment, particularly with the entry of new market players like Digi, presents a challenge to maintaining Proximus's market share and revenue growth. According to the CEO, while they've observed a slowdown in customer mobile ports to Digi, ongoing competition could pressure revenues if customer acquisition costs rise or churn increases further.
  
• Proximus's CapEx investment, although consistent with guidance, is at a peak level, and there are expected future modifications in fiber deployment, potentially impacting free cash flow if efficiencies aren't realized as planned.
  
• Inflationary pressures and anticipated cost pressures from customer-related expenses and transformation costs could squeeze net margins unless offset by aggressive cost-efficiency programs.
  
• The leveraging ratio of around 3x, while considered manageable, presents a risk to earnings and the ability to maintain dividend payments if debt levels rise due to unexpected increases in interest rates or underperformance in key segments.
  
• Proximus's reliance on meeting efficiency improvements through retirements and digitization presents execution risk. Should these not materialize as projected, operating expenses could remain elevated, impacting net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €8.11 for Proximus based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €10.9, and the most bearish reporting a price target of just €6.4.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €6.2 billion, earnings will come to €342.2 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 9.4%.
• Given the current share price of €6.62, the analyst price target of €8.11 is 18.3% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.