Declining Voice Revenues And Rising Energy Costs Will Drain Value

Key Takeaways

• Shrinking core revenues and tougher competition challenge Orange Polska's growth, while new technologies fail to fully offset these pressures.
  
• Rising costs, demographic decline, and weak payment resilience further threaten profitability and long-term earnings potential.
  
• Strong growth in fiber and telecom services, pricing power, and digital transformation position the company for sustained margin expansion and long-term earnings improvement.

Catalysts

Provides telecommunications services for individuals, businesses, and wholesale customers in Poland.

• Ongoing decline in traditional voice and SMS revenues as customers migrate to Over-the-Top services like WhatsApp and VoIP will continue to erode Orange Polska's core revenue streams, limiting the company's ability to offset these losses even as it pursues growth in fiber and 5G.
  
• Rising energy costs and tightening environmental regulations will force Orange Polska to increase capital and operating expenditures to invest in energy-efficient network upgrades, causing a sustained squeeze on net margins if not matched by sufficient efficiency gains.
  
• Intensifying competition from low-cost MVNOs and new alternative connectivity solutions threatens to commoditize both fiber and mobile markets, increasing downward pressure on ARPU and resulting in slower revenue growth and potential margin compression.
  
• High impairment levels in receivables, with recent provisions nearly at pandemic highs, signal persistent risk in consumer and B2B payment resilience, which could result in higher bad debt expenses and negatively affect net income growth.
  
• Continued slow demographic growth, including Poland's declining population and emigration trends, will translate to a shrinking addressable customer base over the long term, placing a structural cap on the company's top line revenue and eventual earnings potential.

Orange Polska Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Orange Polska compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Orange Polska's revenue will grow by 2.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.8% today to 8.2% in 3 years time.
• The bearish analysts expect earnings to reach PLN 1.1 billion (and earnings per share of PLN 0.85) by about July 2028, up from PLN 877.0 million today. The analysts are largely in agreement about this estimate.
• 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 10.0x on those 2028 earnings, down from 13.5x today. This future PE is lower than the current PE for the GB Telecom industry at 15.6x.
• 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 8.85%, as per the Simply Wall St company report.

Orange Polska Future Earnings Per Share Growth

Risks

• The company is experiencing strong and consistent growth in its core telecom services, with revenues increasing by over 7% year-over-year, underpinning a higher direct margin and driving almost 3% growth in EBITDA, which supports both revenue and net earnings.
  
• There has been a significant increase in fiber customer base, up 15% year-over-year, and fixed broadband ARPO (average revenue per offer) has accelerated by 4.6%, reflecting a shift to higher-margin fiber offerings that could bolster net margins in the long term.
  
• Orange Polska is successfully executing price increases in both postpaid and prepaid segments, which have been well received in the market, delivering ARPO growth and pointing toward improved earnings and sustainability of cash flows.
  
• Ongoing cost transformation and efficiency initiatives, including increased use of AI and digital tools, as well as the next planned transformation wave, are expected to drive further reductions in operating expenses and enhance EBITDA margins and net profit over time.
  
• The company's ongoing investments in 5G spectrum and EU-subsidized fiber rollout, coupled with effective commercial strategies such as upselling TV and content bundles, position it well to benefit from secular trends in digitalization and increased connectivity needs, providing structural support for revenue and earnings growth.

Valuation

• The assumed bearish price target for Orange Polska is PLN6.57, which represents two standard deviations below the consensus price target of PLN9.38. This valuation is based on what can be assumed as the expectations of Orange Polska'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 PLN10.8, and the most bearish reporting a price target of just PLN6.1.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be PLN13.6 billion, earnings will come to PLN1.1 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 8.8%.
• Given the current share price of PLN9.04, the bearish analyst price target of PLN6.57 is 37.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.