Opening Fiber Network To 25 Million Homes Will Strengthen Future Market Position

Key Takeaways

• Expansion and monetization of fiber network and spectrum auction could drive revenue growth and boost service quality in nonurban areas.
  
• Strategic cost efficiencies and focus on telecom margin growth are expected to improve profitability amid inflationary pressures.
  
• Increasing competition and regulatory challenges threaten revenue stability and net margins, while energy resale and IT&IS sectors face slow rebounds.

Catalysts

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

• Orange Polska is focusing on expanding its wholesale activities by opening access to 2.5 million households on its fiber network, which can drive future revenue growth by enhancing its infrastructure monetization.
  
• The ongoing consultation process for the 700 megahertz spectrum auction could potentially improve coverage and service quality in nonurban areas, boosting customer acquisition and retention, thus positively impacting future revenue and earnings.
  
• Continued healthy growth in customer base for high-speed fiber and convergence services is projected to be a key driver of ARPO growth, contributing to increased revenue and profitability.
  
• Challenges in the business segment and IT/IS revenues are being addressed with plans for rejuvenation, which could lead to renewed growth, enhancing future revenue streams from B2B operations.
  
• The implementation of cost efficiencies in response to inflationary pressures and the focus on growing the direct margin from telecom services are expected to support improvements in net margins and overall profitability.

Orange Polska Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orange Polska's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 8.3% in 3 years time.
• Analysts expect earnings to reach PLN 1.2 billion (and earnings per share of PLN 0.93) by about February 2028, up from PLN 784.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the GB Telecom industry at 16.6x.
• 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 8.19%, as per the Simply Wall St company report.

Orange Polska Future Earnings Per Share Growth

Risks

• The environment on the business market remains challenging due to low demand and intensive competition, which could impact revenue stability.
  
• There's a concern that the proposed starting prices for the 700 megahertz spectrum are higher than benchmarks set by other countries, potentially affecting the cost structure and, consequently, net margins.
  
• The IT&IS revenue rebound is taking longer than expected, with low demand, especially from the public sector, potentially affecting overall earnings.
  
• Energy resale revenues have dropped due to regulatory impacts and market volatility, which have previously contributed positively to profits.
  
• Working capital requirements increased due to business project developments, which may affect cash flow generation negatively.

Valuation

• The analysts have a consensus price target of PLN8.795 for Orange Polska 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 PLN10.0, and the most bearish reporting a price target of just PLN6.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN13.9 billion, earnings will come to PLN1.2 billion, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of PLN7.92, the analyst price target of PLN8.8 is 10.0% 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.