Fiber Leadership And Market Consolidation Will Shape A Stable Yet Constrained Future

Catalysts

About Orange

Orange is a multinational telecommunications operator providing fixed, mobile, broadband, IT services and cybersecurity solutions across Europe, the Middle East and Africa.

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

• While fiber leadership in France and the creation of PremiumFiber in Spain position Orange well for growing data consumption, integration risks around Altice France and execution complexity in multiple infrastructure JVs could dilute synergy capture and weigh on revenue growth versus expectations.
• Although Middle East and Africa continue to deliver double digit revenue and EBITDAaL gains from rising mobile data and higher 4G penetration, increasing geopolitical and regulatory volatility in several markets could pressure pricing and FX translation, limiting future group earnings growth.
• Despite early investments in AI driven efficiency and procurement programs that are supporting current EBITDAaL margin expansion, rising network security, resilience and AI infrastructure needs may push structural operating costs higher, constraining further margin improvement.
• While cybersecurity, cloud and sovereignty focused IT services are attractive growth vectors inside Orange Business, the weak European IT spending environment and ongoing portfolio transition from legacy connectivity increase the risk that these activities underperform and drag on group net margins.
• Although planned French market consolidation could enhance mobile scale and long term investment capacity, uncertain and lengthy antitrust processes combined with potential overpayment for SFR assets may elevate leverage for longer, limiting flexibility for shareholder returns and slowing earnings per share growth.

Assumptions

This narrative explores a more pessimistic perspective on Orange 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 Orange's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.3% today to 8.0% in 3 years time.
• The bearish analysts expect earnings to reach €3.3 billion (and earnings per share of €1.23) by about December 2028, up from €911.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €5.0 billion.
• 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 13.1x on those 2028 earnings, down from 40.5x today. This future PE is lower than the current PE for the US Telecom industry at 40.4x.
• The bearish 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 7.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The proposed French market consolidation around Altice France, if ultimately approved with favorable remedies and strong synergy capture, could materially enhance Orange's competitive position and pricing power in its core market, supporting faster than expected revenue growth and higher earnings.
• Double digit revenue and EBITDAaL growth in the Middle East and Africa for ten consecutive quarters, coupled with management's confidence in sustaining double digit EBITDAaL growth in 2025, suggests that long term structural demand for mobile data and 4G expansion could drive group revenue and earnings above a flat share price scenario.
• Ongoing fiber leadership in France, record net adds across Europe and the creation of PremiumFiber in Spain with 12 million premises and 5 million customers could lock in high quality, high lifetime value customer bases, lifting convergence ARPU and supporting structurally higher net margins and earnings over time.
• Company wide efficiency programs, including procurement optimization, AI driven operational improvements, disciplined eCapEx and early retirement and copper decommissioning initiatives, may structurally lower the cost base more than anticipated, raising EBITDAaL margins and free cash flow and putting upward pressure on the valuation multiple.

Valuation

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

• The assumed bearish price target for Orange is €13.0, which represents up to two standard deviations below the consensus price target of €15.69. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €20.0, and the most bearish reporting a price target of just €13.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €40.7 billion, earnings will come to €3.3 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of €13.88, the analyst price target of €13.0 is 6.7% 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.