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Morningstar | As Expected, Iliad Reported a Return to Revenue Growth in 1Q; Shares Undervalued

After an abysmal 2018, as we expected, Iliad returned to revenue growth in the first quarter of 2019. Revenue grew 7.7% year over year versus our full-year projection of an increase of 5.5%. However, that growth isn’t as strong as it first appears, as it includes the acquisition of Jaguar Networks during the quarter, lapping no revenue from Italy last year, and contains a 30% increase in device sales that carry minimal margin. Iliad didn’t disclose margins, so we don’t know what impact those device sales had on profitability. For now, we don’t anticipate any significant changes to our EUR 143 per share fair value estimate or narrow moat rating. We believe the shares are undervalued.

Of greater concern than revenue growth, the firm still lost 50,000 wireless subscribers in France. However, there are signs that the competitive intensity seen in the past year in the country is becoming more rationale, which should help all operators. On the fixed-line side, Iliad reported it added 150,000 fibre-to-the-home, or FTTH, subscribers. FTTH now accounts for 17.7% of its broadband base, which helped push its average revenue per user up EUR 0.70 in the quarter.

The firm also generated EUR 81 million in revenue in Italy. Iliad continues to grow its wireless subscriber base at a solid rate in Italy, gaining 472,000 customers in the quarter, which takes its total to 3.3 million. We project continued strong wireless subscriber growth in 2019 reaching over 5 million customers by year-end.

The firm also announced the provisional sale of the majority of its wireless towers in France and Italy to Cellnex. If the deal closes it will initially provide Iliad with EUR 2 billion in cash, which will significantly strengthen its balance sheet.