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Morningstar | Orange Reported Slightly Better 2018 Results; Maintaining FVE; Shares Undervalued

Orange reported 2018 results that were a bit better than our projections, but we don’t expect any significant changes to our EUR 19 per local share fair value estimate. Our narrow moat remains intact, and we believe the shares are undervalued. The firm reported revenue grew 0.9% year over year versus our estimate of 0.1% growth. EBITDA was also slightly higher at EUR 13 billion, but relative to reported revenue, the EBITDA margin, at 31.4%, was a touch less than our projection of 31.5%.

In its home market of France, revenue grew 0.9%, its second year of growth. Orange’s convergence strategy is working well with convergent customers increasing 2.6% from the year-ago period to 6.1 million. Additionally, the average revenue per converged offer increased slightly, while churn remains below the average of nonconvergent subscribers. Its fibre build is also performing well,  with a 29.7% increase for the year to 2.6 million subscribers. We expect convergence and fibre to continue to drive revenue growth in France and throughout Europe.

In Spain, operations are benefiting from the same dynamics, with convergent customers improving 1.1% to 3.1 million. With 85% of its retail broadband customers now subscribe to a converged offering. Orange also added 623,000 fibre subscribers for the year. The rest of its European operations are further behind in moving to convergence, but it is starting to matter with Poland adding 152,000 fibre customers during the year. These countries continue to show some wireless subscriber growth as well. However, the main driver of wireless growth is Africa and the Middle East. In total, Orange added 1.3 million wireless subscribers in 2018, taking its total wireless base to 203.6 million. In Africa and the Middle East, revenue increased 3.2% year over year, which remains the fastest growing region. We expect these trends to continue, with Africa and the Middle East continuing to have the fastest revenue growth.

Orange has successfully completed its last cost-cutting plan, and management announced it will be sharing a new plan during 2019. We expect additional cost-cutting programs to be announced, allowing continued expansion of its EBITDA margin.