Fiber Monetization And 5G Adoption Will Support Stronger Long Term Telecom Fundamentals

Catalysts

About Bezeq The Israel Telecommunication

Bezeq The Israel Telecommunication is the incumbent Israeli telecom operator, providing nationwide fixed line, fiber broadband, mobile, TV and ICT services to residential and business customers.

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

• Completion of the nationwide fiber build to 2.9 million homes and the shift from network rollout to monetization should support rising fiber take up, higher broadband ARPU and a structural decline in CapEx from 2026, which in turn may expand free cash flow and earnings over time.
• Rapid adoption of 5G and data hungry applications, with 59 percent of postpaid subscribers already on 5G plans, positions Pelephone to keep lifting service ARPU and roaming revenues, which would support sustained top line and EBITDA growth in the mobile segment.
• The anticipated removal of structural separation and integration of yes into Bezeq Fixed line can unlock NIS 1.2 billion of tax assets, streamline overlapping operations and enable converged offerings, which could enhance net margins and accelerate net profit growth.
• Scaling cloud, digital and ICT services on top of Bezeq’s fiber and data connectivity, evidenced by high single digit revenue growth in these activities, taps into increasing enterprise digitization and may drive a richer revenue mix with higher margin contribution.
• AI driven efficiency initiatives across customer service and network operations, combined with premium TV and fiber bundles at yes that are growing subscribers and ARPU, are likely to lower operating costs per user while lifting average revenue per account, which would support margin expansion and higher EBITDA.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Bezeq The Israel Telecommunication's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 16.4% in 3 years time.
• Analysts expect earnings to reach ₪1.5 billion (and earnings per share of ₪0.53) by about December 2028, up from ₪1.4 billion today.
• 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 17.7x on those 2028 earnings, up from 13.3x today. This future PE is greater than the current PE for the IL Telecom industry at 9.8x.
• 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 8.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Israeli mobile market remains structurally overcrowded with four network operators and over twenty MVNOs. Management itself expects the market to stay very competitive for years, which could cap ARPU recovery from current low levels and pressure mobile segment revenue and earnings growth.
• Following completion of the nationwide fiber rollout and the current take up rate of only 34 percent, Bezeq still relies on continued migration to fiber and higher ARPU to drive growth. If adoption slows or price competition intensifies on fiber bundles, fixed line revenue and broadband driven margin expansion may undershoot expectations.
• Recent EBITDA and net profit growth at group level have been materially boosted by yes valuation changes and cost streamlining. If these one off impacts normalize while core growth stays around 2 percent, headline profitability could flatten, limiting further expansion in net margins and earnings.
• Regulatory decisions on wholesale access and structural separation are not included in current guidance and could move unfavorably, for example through stricter wholesale terms or pricing pressure, which would weigh on fixed line revenue, constrain operating leverage and dampen long term earnings growth.
• Geopolitical and macroeconomic volatility in Israel remains a background risk despite recent improvements. Any renewed escalation that hits consumer spending or business investment could slow demand for telecom, cloud and ICT services, reducing top line growth and putting downward pressure on EBITDA and free cash flow.

Valuation

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

• The analysts have a consensus price target of ₪7.44 for Bezeq The Israel Telecommunication 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 ₪8.0, and the most bearish reporting a price target of just ₪6.6.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₪9.2 billion, earnings will come to ₪1.5 billion, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of ₪6.64, the analyst price target of ₪7.44 is 10.7% 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.