(BFM Bourse) – The American bank raised its opinion on the stock by two notches to “buy” versus “underperformance” previously. The bank believes that the group’s cash generation should improve thanks to lower investment needs and a less intense competitive environment.
It is not often that Orange sits at the top of the CAC 40. The telecoms group nevertheless occupies first place in the Parisian index this Wednesday, thanks to an increase of 2.3% around 3:50 p.m., to 11,030 euros.
The stock of the company led by Christel Heydemann benefits from a significant recommendation upgrade from Bank of America which went from “underperform” to “buy”, which amounts to going from “sell” to “buy”, with a price target of 13 euros, i.e. a potential of more than 20%.
For the American bank, the company could begin to “check all the boxes that investors are looking for in the landscape of European telecom operators”.
This profile corresponds to the following elements: improving trends in competitive pressure, downward oriented investment spending (capex), consolidation opportunities, ownership of telecoms infrastructure, and improved yield dividend supported by increased cash generation.
“Orange’s investment thesis stands out in our opinion as one of the few in the sector to capture all of these elements while having an attractive valuation,” emphasize Bank of America analysts.
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The merger with Masmovil, a big source of synergies
The establishment believes that in its domestic markets, Orange faces competitive pressure that is still significant but less than in the past, particularly in fixed internet. He estimates that the main indicator of group profitability, namely Ebitdaal, i.e. gross operating income after rent, should increase by 2% to 3% per year over the period 2024-2026, growth that he describes as “robust ” (it should be noted that Orange’s Ebitdaal in Europe decreased by 3.8% on average between 2019 and 2022).
Especially since the group has growth engines abroad, in the “Africa Middle East” region, or even in Spain where the market is growing again.
In this country, moreover, Orange decided last year to merge its activities with those of Masmovil to create a joint venture. This operation must nevertheless come under the scrutiny of the European Commission, which has expressed certain concerns about the operation. Bank of America expects this marriage to be approved, with some concessions.
However, the bank considers that the synergies drawn from this operation could be significant, recalling the figure of 450 million euros per year, at cruising speed, mentioned by the two companies. Which could “boost” the joint venture’s operational cash flow generation by 40% to 50%, according to its calculations.
Cash and “Totem” as assets
Furthermore, Orange’s cash creation is set to increase. After years of sustained investment in the fiber network, the group should see its capex fade. In its strategic plan delivered at the start of the year, the group estimated that its “ecapex” (to simplify economic investment spending) should go from a peak of 18% of revenues in 2021 to around 15% over the 2023 period. -2025.
As a result, Bank of America estimates that Orange’s organic cash flow in telecoms should increase by more than 10% over the period 2023-2025. “We believe that the growth in cash flow could allow the company to enter the group of companies that pay dividends with sustainable growth” and thus obtain a valuation premium on the stock market, explains the bank.
Another point: while many telecom operators have sold off their “towers”, that is to say their telecom infrastructures, to improve their balance sheets and free up cash, Orange still owns these assets 100% via its subsidiary. Totem. This should grant a valuation premium to the French group compared to its peers – such as Telefonica or Deutsche Telekom – who have sold it, considers Bank of America. Notably because this allows it to reduce its exposure to inflation by operating this activity internally. In addition, Orange can always, if it feels like it, monetize part of this asset. According to the bank’s calculations, a sale of 50% of the capital could bring it 5 billion euros…
Julien Marion – ©2023 BFM Bourse
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