We are initiating coverage of Orange with a Buy rating and a fair value of €17.1. We believe that Orange is currently trading at an unjustified discount. Orange is efficiently managing its national business model while the French market is getting back on track. Its healthier balance sheet makes it possible to seize external growth opportunities, especially on an international scale, and we consider a dividend increase to be likely by 2017.
Thanks to a French market showing signs of recovery and to its unique premium positioning, Orange France appears to be in a position to make up for the revenue losses related to the roaming agreement with Free and to DSL unbundling. We anticipate a revenue decline of 0.6% in 2016, vs. -0.8% in 2015, with a stabilization expected by 2017. EBITDA should stabilise in 2016, before going slightly up in 2017 and 2018.
International markets are expected to fuel the Group’s growth
in the coming years. After +5.2% in 2015, we anticipate a further revenue increase of 3.6% over the period 2016-2018 in the AMEA area, while the Spanish division, invigorated by the acquisition of Jazztel, should help Orange achieve +2.6% growth by 2018 in Europe. Furthermore, a debt ratio below 2x should enable the Group to carry out new selective external growth transactions.
We forecast an EBITDA increase of 2.8% in 2016, to €12.77bn, and then +1.7% over 2017-2018. In our opinion, capex will raise to €6.9bn in 2016, then to €7.1bn in 2017 and 2018 as the company will invest massively in its French and Portuguese fibre networks.
We consider a dividend increase from €0.6 to €0.8 per share in 2017 to be conceivable, as this would bring the dividend yield closer to that of market comparables, i.e. 5.5%. Orange is currently trading at 4.7x its 2016 EBITDA, implying a discount of about 30% to its peers. Our DCF based fair value stands at €17.1.
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