Morningstar | Proximus Reports Strong 2Q Results, but We Expect to Maintain Our FVE; Shares Undervalued
Proximus reported strong second-quarter results in both revenue growth and EBITDA margin, which more than offset its weak first quarter. However, we expect to maintain our EUR 28 per share fair value estimate and narrow moat rating. Despite the almost 8% increase in the stock price after the earnings release, we believe the shares are still undervalued.The firm reported that revenue increased 2.6% year over year in the quarter, which increased its revenue growth for the first half to 1.2% versus our full-year projection of 0.8%.
The consumer segment revenue declined 0.2%, within which fixed-line telecom revenue grew 1% as broadband and pay TV grew faster than voice services declined. This more than offset wireless revenue that fell 2.3% as its prepaid subscriber base declined 16.6% to 832,000 while its postpaid base only improved 2.4% to 2.7 million. However, the more important aspect to us is the continued growth in converged services, which added 35,000 customers in the quarter and now has 439,000 subscribers. These tend to generate higher revenue and have lower churn, which increases their lifetime value.
The enterprise segment generated 2.4% revenue growth as its wireless business increased faster than its fixed-line revenue fell. However, the important growth was from its information and communication technology, or ICT, group that grew 6.5%. With such growth and the decline in fixed-line, ICT is now the enterprise segment’s largest division.
The division that really impressed us was its international carrier services division that grew 8.9%. While this was primarily due to the acquisition of TeleSign, its voice traffic actually increased. This growth is in contrast to mid- to high-single-digit declines at most of its major competitors. This better growth led to an improved EBITDA margin of 33.9% for the quarter and 32.7% for the half year versus our full-year projection of 31.7%. However, we’ve already modeled significant margin expansion in the future.
Proximus supplies integrated telecommunications services on the Belgian market. Co.'s activities are divided into four segments: Consumer Business Unit (CBU), which sells voice products and services, internet and television, on fixed and mobile networks, to residential customers; Enterprise Business Unit (EBU), which caters to professional customers; Service Delivery Engine and Wholesale, which centralizes all the network and IT services and costs, provides services to CBU and EBU and sells these services to other telecom and cable operators; and International Carrier Services, which focuses on international carrier activities.
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