Fiber Expansion And Efficiency Gains Will Support A Steady Long Term Outlook

Catalysts

About Orange

Orange is a telecom operator focused on fixed and mobile connectivity, convergent offers, IT services and cybersecurity across France, Europe, and the Middle East and Africa.

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

• Continued fiber adoption in France, with over 10,000,000 fiber customers and strong net adds over the last 12 months, supports the fixed customer base and can help underpin future retail service revenues.
• Creation of PremiumFiber in Spain with 12,000,000 premises and 5,000,000 customers concentrates fiber assets, which can improve infrastructure monetisation and support service revenue and EBITDAaL from Spanish operations.
• Sustained double digit revenue growth in Middle East and Africa for 10 consecutive quarters, combined with an ambition for double digit EBITDAaL growth in 2025, points to a growing contribution from these countries to group revenues and earnings.
• Ongoing cost efficiency programmes, including procurement, AI and operational initiatives, are already reflected in 3.7% EBITDAaL growth and a 0.7 point margin rate improvement, which can support net margins if executed consistently.
• Early retirement and broader cost optimisation plans, together with disciplined eCapEx and a CapEx to sales ratio around 15%, provide levers to protect organic cash flow and earnings even if certain revenue lines such as wholesale remain under pressure.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Orange's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 8.3% in 3 years time.
• Analysts expect earnings to reach €3.4 billion (and earnings per share of €1.28) by about January 2029, up from €911.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.4x on those 2029 earnings, down from 42.7x today. This future PE is lower than the current PE for the US Telecom industry at 42.7x.
• 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 7.75%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The planned French consolidation around Altice France and the potential acquisition of additional MASORANGE ownership could lead to higher leverage than some investors are comfortable with. This may affect credit ratings and increase financing costs, putting pressure on future earnings and organic cash flow.
• The structural decline in wholesale revenues in France, combined with a still competitive low end in mobile and broadband, could outweigh modest retail growth. This would limit top line progress and make it harder to expand net margins and EBITDAaL over time.
• Orange Business is facing a difficult IT market and soft French macro conditions. Management already indicates that limiting the decrease in EBITDA in 2025 is difficult, which could hold back group earnings growth and slow any improvement in overall profitability.
• If consolidation in France or Spain triggers tougher antitrust remedies, extended approval timelines or extra divestments, integration benefits could be smaller or more delayed than expected. This would reduce potential synergy gains and weigh on EBITDAaL and future earnings.
• A continued need for high network investment in areas such as security, AI and resilience, together with copper decommissioning and early retirement commitments, could keep capital intensity and cash costs elevated. This may limit growth in organic cash flow and constrain any improvement in net margins.

Valuation

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

• The analysts have a consensus price target of €15.85 for Orange 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 €20.0, and the most bearish reporting a price target of just €13.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €41.5 billion, earnings will come to €3.4 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of €14.62, the analyst price target of €15.85 is 7.8% higher. 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.