Orange Polska – Catalysts for growth finally noticed by the market
In spite of the market consensus, Orange Polska’s share price has increased by 48.5% since the issue of our November recommendation, surpassing the broad-based index by > 43 pp. The company has been executing its business transformation plan announced in September 2017, which results in lower indirect costs (including headcount reduced to 13.4 thousand, i.e. by >15% in two years), a greater number of convergent B2C clients (1,276 thousand as at the end of Q1 2019), and a falling churn rate. Additionally, as we pointed out in our last recommendation, the company has generated FCFE again after a long break (our assumption for 2019 is PLN 450 million). Recently, Orange has also raised its service prices, which induced euphoria among investors. However, we believe that given the current share price, there is little chance of its further strengthening. Following an update of forecasts (also taking into account the first effects of the price raises) and of indices for the peer group (increase of 2019 EV/EBITDA median to 5.6x), we set a new target price at PLN 7.50, which implies a 2.9% growth potential. Thus, we downgraded our investment recommendation from “buy” to “hold”. Additionally, we would like to stress that we expect Q2 2019 results to be poor. Our EBITDaL estimate is PLN 693 million. The result is flat YoY, however, it is lower by nearly 6% net of real estate sale profits. The company struggles to put a stop to the fall in high-margin legacy business turnover, and the higher B2C prices will be reflected in the company’s results with a delay. In our opinion, the release of weak readings will lead to a sentiment cool-down. Therefore, we think now is a good time to cash in on your investment.
Orange Polska SA is a supplier of telecommunications services in Poland. Co. provides services, including fixed-line telecommunication services, Integrated Services Digital Network, voice mail, dial-up and fixed access to the Internet and Voice over Internet Protocol. Co. is one of Poland's three DCS 1800 and GSM 900 mobile telecommunications providers. Co. provides also third generation UMTS services. In addition, Co. provides leased lines, radio-communications and other telecommunications value added services, sells telecommunications equipment, produces electronic phone cards and provides data transmission, telephone directories, multimedia services and various Internet services.
Set up in 1986, mBank (originally BRE – Export Development Bank) is Poland’s 4th largest universal banking group in terms of total assets and 5th by net loans and deposits at the end of June 2019. mBank has one of the oldest brokerages in Poland – we have been providing brokerage services since 1991 - and the biggest, serving about 300 ths clients.
We provide all brokerage services available in the Polish capital market (i.e. Warsaw Stock Exchange, non-public markets and forex) in a way that meets the expectations of all groups of investors, both individual and institutional. Participating in the dynamic growth of the Polish capital market since its inception, we have acquired competences and experience needed to provide the highest quality of service and we have won the trust and satisfaction of our Clients.
Over the past decade, mBank's Equity Research Team has been consistently ranked among the top research teams in Parkiet's annual institutional investor surveys (Parkiet is Poland's leading daily business newspaper). mBank analysts provide coverage on an extensive list of companies, mainly in Poland but also elsewhere in the CEE region: Austria, Czechia, Portugal, Ukraine and Hungary.
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