Polish Telecom Network Will Falter Amid Demographic And Legacy Pressures

Key Takeaways

• Demographic trends and customer shifts to digital services threaten revenue growth and drive declines in traditional telecom segments.
  
• High investment needs, regulatory risks, and intense competition are set to constrain profitability and limit dividend expansion.
  
• Strong recurring revenue and margin growth driven by fiber expansion, digital transformation, and new ICT services, alongside effective cost control and strategic financial flexibility.

Catalysts

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

• While Orange Polska continues to benefit from the expansion of its fiber and 5G network, long-term demand growth for telecom services in Poland is expected to be constrained by demographic realities, such as an aging and shrinking population, ultimately putting pressure on subscriber growth and capping future revenue increases.
  
• The rapid adoption of free and low-cost OTT communication services is projected to accelerate revenue declines from legacy offerings like voice and SMS, disproportionately impacting operators like Orange Polska which maintain a relatively high exposure to these traditional channels, and threatening overall top-line trends.
  
• Structurally high capital requirements for further fiber and 5G rollout, including the next stage of Swiatlowód Inwestycje investment, will continue to put significant pressure on free cash flow and net margins, with future required network upgrades likely to consume a high proportion of earnings and limit dividend growth potential.
  
• Intensifying regulatory scrutiny over pricing practices and data privacy, evidenced by provisions for potential government fines and ongoing investigations, raises the risk of further compliance costs and unexpected charges, directly eroding net income in future periods.
  
• Sustained competitive pressures in both consumer and B2B segments, with aggressive discounting and new pricing strategies from competitors like T-Mobile, are set to compress ARPU and operating margins, restricting Orange Polska's ability to grow EBITDA and putting at risk its longer-term profitability.

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 7.2% 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 August 2028, up from PLN 920.0 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 9.9x on those 2028 earnings, down from 12.4x today. This future PE is lower than the current PE for the GB Telecom industry at 14.1x.
• 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 9.01%, as per the Simply Wall St company report.

Orange Polska Future Earnings Per Share Growth

Risks

• Orange Polska is maintaining strong commercial momentum with ongoing growth in core customer bases, particularly in consumer broadband and convergence, which is driving recurring revenue growth and ARPU expansion-this suggests a structural support for revenue growth.
  
• The company is successfully realizing large-scale FTTH (Fiber-to-the-Home) rollouts, with high take-up rates, agreements for further expansion through its FiberCo joint venture, and demonstrated capacity to convert investments into profitable customer growth, thus offering upside to both revenue and direct margins.
  
• Ongoing digitalization in Poland, continued 5G deployment, and increasing B2B ICT demand are boosting opportunities beyond traditional telco, potentially supporting sustained top-line and EBITDA expansion over the secular trend horizon.
  
• Robust cost control and efficiency programs, alongside strategic debt refinancing and low net indebtedness, are unlocking improved net margins and leaving scope for shareholder returns, with management affirming a safe balance sheet and dividend flexibility.
  
• Orange Polska's positioning as a key infrastructure and ICT partner-especially for defense, public sector, and cybersecurity projects-creates new resilient revenue streams in areas of long-term spending growth, supporting earnings and cashflows beyond consumer telecom.

Valuation

• The assumed bearish price target for Orange Polska is PLN6.54, which represents two standard deviations below the consensus price target of PLN9.33. 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 9.9x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of PLN8.69, the bearish analyst price target of PLN6.54 is 32.8% 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.