EUR 850.00 For Business Accounts Only

Morningstar | Proximus Reported Mixed 4Q Results and Weak Guidance; Reducing FVE to EUR 26; Shares Undervalued

Proximus reported mixed fourth-quarter results, with revenue that was light but EBITDA margins ahead of our projections. The firm reported revenue grew 0.4% versus our expectation of an increase of 1.3%. However, management provided future margin guidance that was lower than we anticipated. We are reducing our fair value estimate to EUR 26 from EUR 28. However, our narrow-moat rating remains intact, and we believe the shares are undervalued.

In the consumer division, revenue declined 1% in the quarter, year over year, as declines in the traditional fixed line (down 3.3% to 2 million), and prepaid wireless subscriber (falling 14.4% to 772,000) bases continue. While these were partially offset by subscriber gains in contract wireless (up 3.2% to 2.65 million), broadband (increasing 3.2% to 1.6 million), and pay TV (growing 2.5% to 1.9 million), it wasn’t sufficient to offset the other declines, especially when postpaid average revenue per user also fell 0.8% to EUR 27. We expect these trends to continue. However, the prepaid wireless base is becoming small enough that its declines should become less important over time.

In the enterprise division, revenue declined 0.8% in the quarter as fixed voice revenue, primarily from legacy services, fell 6.7%. However, this was partially offset by a 4.1% increase in its active wireless base. We were particularly pleased to see its information and communications technology, or ICT, sector generate revenue grow of 3.9%. While some of this growth is due to acquisitions, we are happy to see Proximus improve its ICT capabilities, which should provide additional growth opportunities.

Proximus generated an EBITDA margin of 30.6%, which enabled the full year to hit 32.2% versus our estimate of 31.8%. However, management guided for flat margins in 2019, where we had projected continued margin expansion.

Proximus continues to push its converged product, which saw 6.1% growth in households. Growth is being driven from upselling services to existing customers, so the firm’s base of single-, double-, and triple-play customers shrank. We think the movement to quad play is good for the long-term health of the business but is pressuring revenue in the short term as Proximus provides price discounts to incentivize customers to upgrade.