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Morningstar | Iliad Reported Mixed 1H Results with Weak Revenue, but Solid Margins; Shares Undervalued

Iliad reported mixed first-half results, with weak revenue, but solid margins. We are maintaining our EUR 163 fair value estimate and narrow moat rating. The firm reported revenue that was basically flat year over year versus our full-year projection of growth of 3.8%. Results in France in both the fixed-line and wireless segments were below our expectation. In the fixed-line business, it grew its fibre-to-the-home, or FTTH, base by almost 75% to 734,000. However, its total broadband base only grew by 5,000 customers and actually declined during the first half. While we are pleased with its FTTH success as these customers pay higher prices, we are concerned with the drop off in basic broadband customers. Management claimed it has implemented a number of changes including a reduced 12-month price with a one-year commitment at the regular price, which has already returned net subscriber growth to positive in July and August.

Likewise, on the wireless side, Iliad is showing subscriber growth in its higher-priced 4G offerings, which increased 23.5% from the year-ago period, but total wireless subscribers declined during the first half of the year as low-end customers left. This is a concern as a major focus of the firm has been to upgrade low-end customers to higher price points, which is generally cheaper than attracting wholly new subscribers.

Offsetting the weakness in revenue in France, was strong subscriber growth in Italy and better cost control. Iliad reached 1.5 million subscribers in Italy during August, which is far ahead of our previous projections. However, this is partly due to much lower prices, which started at EUR 5.99 per month and have now been increased to EUR 6.99 versus our expectation of around EUR 10. That said, the firm increased its EBITDA margin in France to 37.3% up almost 1% from the previous year.

Additionally, with the faster subscriber growth in Italy, Illiad is gaining scale sooner than we anticipated, which should help keep its operating losses down in the country. Thus, we are now expecting a smaller EBITDA margin decline in 2018 and 2019 than previously due to its entrance into Italy.