FREE

Orange Polska: Signs of regaining internet market share

Following a ca. 14% share price drop YTD (vs -7% for the WIG index), we upgrade OPL to BUY (from NEUTRAL) and lift our FV to PLN 5.8 (from PLN 5.2) on a stronger than expected drop in commercial costs (low SAC/SRC and lower marketing). Although FTTx rollout and client adoption develops in line or even slightly ahead of OPL and our expectations, its long-term commercial success is still not yet obvious mainly due to ongoing (CPS + NET) or hypothetical further market consolidation (T-Mobile + UPC Polska or Play + UPC) but since 2Q17 ca. 80% of FTTx gross adds come from outside which means that OPL has already started to rebuild its market share in the fixed-line market. OPL’s biggest strength looks to be the full convergence and combination of the second-biggest mobile base in Poland and widest high-speed fixed-line infrastructure whose importance is starting to be noticed by other mobile market players (CPS acquired NET, T-Mobile negotiates wholesale access to OPL’s FTTx network, Vodafone acquired UPC cable assets in Europe). OPL’s biggest weaknesses are still: (1) lowest efficiency among all listed PL telcos (lowest EBITDA margin, FCF Yield or workforce efficiency); (2) legacy fixed-voice services (ca. 10% of revs in 2017). Although we do not include them in our model, we see three potential positive cash one offs in 2018 like: (1) one-off FTTx access fee from T-Mobile; (2) receivables refinancing; and (3) lower than exp EC fine, which support our upgrade.