Fiber Rollout And Legacy Service Declines Will Constrain Telecom Earnings Ahead

Catalysts

About Proximus

Proximus is a Belgian telecommunications operator providing fixed and mobile connectivity, internet, TV and ICT services to residential and business customers, as well as global communications solutions.

What are the underlying business or industry changes driving this perspective?

• Although domestic fiber and 5G coverage are expanding and driving higher value convergent offers, intense mobile and fixed competition, including aggressive low cost entrants, risks capping pricing power and limiting service revenue growth and ARPC expansion over the medium term. This may constrain top line growth.
• Although the company is realizing structural CapEx efficiencies through Fiberklaar integration, higher refurbishment and self installation, the need to complete nationwide gigabit and fiber build outs in both Flanders and Wallonia could re accelerate investment needs later in the cycle. This may pressure free cash flow and slow deleveraging.
• Although Proximus is well positioned in B2B connectivity and aims to capture growth in hybrid cloud, cybersecurity and AI at the edge, execution complexity and strong hyperscaler and IT integrator competition could delay monetization of these new services. This may limit their positive impact on revenue mix and margins.
• Although the reset of Proximus Global ambitions and ongoing cost synergies are expected to stabilize profitability, the structural shift away from legacy P2P voice, messaging and SMS CPaaS toward omnichannel and digital identity may take longer than anticipated. This may keep Global EBITDA at the lower end of the guided range and weigh on group earnings.
• Although the disposal of noncore assets supports the EUR 600 million asset sale program and strengthens the balance sheet, the loss of related cash flows combined with lower football content spend and a reset dividend policy could limit future earnings growth and reduce flexibility for further shareholder returns.

Assumptions

This narrative explores a more pessimistic perspective on Proximus compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Proximus's revenue will decrease by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.4% today to 4.4% in 3 years time.
• The bearish analysts expect earnings to reach €264.1 million (and earnings per share of €0.79) by about December 2028, down from €473.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €413.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 4.8x today. This future PE is greater than the current PE for the GB Telecom industry at 4.8x.
• The bearish analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structural decline in legacy Global services such as P2P voice, A2P SMS and SMS CPaaS, including onetime password traffic, may outpace the ramp-up of newer lines like cloud, omnichannel and digital identity. This could lead to sustained pressure on Proximus Global EBITDA and ultimately on group earnings.
• If competitive intensity in Belgium, including aggressive low price offers from Digi and active promotions from rival B brands, forces Proximus to keep using multi-brand discounting and apply more-for-more pricing cautiously, domestic ARPC growth could slow and service revenue momentum could weaken. This would put strain on revenue and net margins.
• The ambitious fiber and gigabit network rollout, including the proposed collaboration in Flanders and negotiations in Wallonia, could require higher than anticipated long-term investment once detailed plans are set. This may reverse recent CapEx efficiencies and weigh on free cash flow and deleveraging.
• Execution risks around Global integration, delayed go-to-market synergies and leadership churn may prolong the period before the planned 2027 inflection. As a result, Global EBITDA could remain closer to the lower end of the EUR 100 million to EUR 130 million range and drag on consolidated profitability.

Valuation

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

• The assumed bearish price target for Proximus is €6.6, which represents up to two standard deviations below the consensus price target of €8.41. This valuation is based on what can be assumed as the expectations of Proximus's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €11.8, and the most bearish reporting a price target of just €6.6.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €6.1 billion, earnings will come to €264.1 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of €7.05, the analyst price target of €6.6 is 6.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.