Future Cost Savings And A €100 Million Cybersecurity Deal May Benefit Earnings, But Competition From Digi Poses Risks

Key Takeaways

• Strategic cost-efficiency and automation efforts are expected to improve net margins and earnings, despite cost pressures.
  
• Securing significant B2B contracts and pursuing asset management initiatives will drive revenue growth and support cash flow.
  
• Increased competition, inflation, high CapEx, and regulatory uncertainties may pressure Proximus’s market share, customer satisfaction, cash flow, and future earnings growth.

Catalysts

Provides digital services and communication solutions in Belgium and internationally.

• Proximus is executing a strategic cost-efficiency program projected to save an additional €70 million in 2025, helping mitigate anticipated cost pressures. This will likely positively impact net margins.
  
• The company is poised to benefit from an increase in retirements and enhanced efficiency through digitization and automation, allowing for leaner operations and further cost savings, beneficial for net margins and earnings.
  
• Proximus Global is expected to achieve strong EBITDA growth of around 20% in 2025, driven by synergy commitments and growth in higher-margin revenue. This will enhance overall group earnings.
  
• Proximus has a strategy to strengthen its position in B2B telco and IT, securing significant contracts like a €100 million cybersecurity deal, which will drive revenue growth.
  
• Ongoing asset management initiatives aim to generate over €500 million by 2027, supporting free cash flow and easing financial pressures during the high-investment phase of fiber build-out.

Proximus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Proximus's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.8% today to 5.5% in 3 years time.
• Analysts expect earnings to reach €377.4 million (and earnings per share of €1.17) by about March 2028, down from €447.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €507.6 million in earnings, and the most bearish expecting €174 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 4.3x today. This future PE is greater than the current PE for the GB Telecom industry at 4.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Proximus Future Earnings Per Share Growth

Risks

• Increased competition, particularly from Digi, could impact Proximus’s ability to maintain its market share, potentially affecting revenue stability and growth.
  
• Inflation-related price increases may impact customer satisfaction and retention, influencing revenue and net margins adversely.
  
• The strategy's reliance on extensive fiber expansion entails high CapEx, which, if not matched by sufficient uptake, can pressure free cash flow and reduce net margins.
  
• The potential challenge of cost inflation in wages and operational expenses could offset revenue gains and pressure net earnings.
  
• Dependence on regulatory approvals for fiber collaboration agreements adds uncertainty, potentially delaying expected synergies and efficiency improvements, impacting future earnings growth.

Valuation

• The analysts have a consensus price target of €7.447 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 €11.2, and the most bearish reporting a price target of just €4.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.8 billion, earnings will come to €377.4 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of €6.01, the analyst price target of €7.45 is 19.3% higher. Despite analysts expecting the underlying buisness 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.