Fiber Leadership And Middle East And Africa Expansion Will Reshape Long Term Earnings Profile

Catalysts

About Orange

Orange is a multinational telecom operator providing mobile, fixed broadband, convergent services and business connectivity across France, Europe, the Middle East and Africa.

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

• Continued build out and commercial traction in fiber in core markets, including leadership in France with over 10 million fiber customers and 1.1 million net adds over 12 months, supports a larger high quality access base that can feed future revenue and earnings.
• Ongoing double digit growth in the Middle East and Africa segment for 10 consecutive quarters, with management confidence around double digit EBITDAaL growth in 2025, points to a structurally more profitable group mix that can lift margins and cash generation.
• Recovery in Europe, where revenues are back to growth at 4.7% with services up 1.4% and convergence revenue close to 6%, suggests that convergent offers and IT and integration services can become a more meaningful contributor to group revenue and EBITDAaL.
• Group wide efficiency efforts, including procurement, use of AI and cost optimization, along with an eCapEx approach that keeps CapEx at about 15% of sales, create room for EBITDAaL expansion and improved organic cash flow even in relatively flat markets.
• Growing contribution from adjacencies such as cybersecurity, sovereignty related services, equipment sales and other non connectivity offerings, already around 8% of retail services ex PSTN in France, provides additional revenue streams that can support margins and earnings resilience.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Orange compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Orange's revenue will grow by 9.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.8% today to 11.0% in 3 years time.
• The bullish analysts expect earnings to reach €5.8 billion (and earnings per share of €2.16) by about July 2029, up from €327.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €2.5 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2029 earnings, down from 129.0x today. This future PE is lower than the current PE for the US Telecom industry at 129.0x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structural decline in French wholesale revenues, already described as anticipated and linked to factors such as copper decommissioning, could deepen more than expected. This would weigh on group revenue and limit the contribution of France to overall earnings and cash flow.
• The French telecom market is described as flattish in value with sustained competition at the low end. Mobile and fixed broadband ARPU are under pressure from mix effects, which could cap future pricing power and limit any improvement in net margins and earnings.
• The potential acquisition of a large part of Altice France at a total offer of €17b, with Orange accounting for 27%, introduces leverage and integration risks. If synergies are slower or smaller than management assumes or regulatory remedies are heavy, this could strain the balance sheet and dilute future earnings and organic cash flow.
• Orange Business is facing a difficult IT market and a weak French macro backdrop, and management already signals that the ambition for EBITDA in 2025 is challenging. A prolonged slump in legacy connectivity and slower than expected ramp up in areas like cloud and data centers could hold back group EBITDAaL and net margins.
• The group’s medium term plans lean heavily on continued double digit growth and EBITDAaL expansion in the Middle East and Africa and on low single digit EBITDAaL growth in Europe. Any long lasting slowdown in these regions, whether from competition, regulation or weaker IT spending, would put pressure on group revenue growth, EBITDAaL and earnings momentum.

Valuation

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

• The assumed bullish price target for Orange is €21.8, which represents up to two standard deviations above the consensus price target of €19.04. This valuation is based on what can be assumed as the expectations of Orange's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €21.8, and the most bearish reporting a price target of just €15.5.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €52.4 billion, earnings will come to €5.8 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of €15.87, the analyst price target of €21.8 is 27.2% higher.
• 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.