We expect earnings at Orange, formerly France Telecom, to benefit over time from continued operational improvements under the company’s new five-year strategic plan. Under the current plan, which began this year, the company is focused on adding new features as its 5G network ramps up, accelerating growth in developing and emerging markets, integrating artificial intelligence in every aspect of the business, and achieving its sustainability goals. Of course, in the telco sector, the primary attraction for investors is income, and this is why best stocks fight over high income and profitability on their statements. Orange’s current indicated dividend yield of more than 5% is attractive in a low interest rate environment. In our view, the shares are suitable for income-oriented investors. Orange S.A. is listed on the New York Stock Exchange in the form of American Depositary shares (ADSs), each representing one ordinary share.
Orange shares have underperformed the benchmark over the past three months, with a 6% decline, compared to a 4% gain for the EAFE ETF (EFA). They have also underperformed over the past year, with a 30% drop, against a 3% decline for the index. ORAN has also underperformed its benchmark and that of the US Telco industry (ETF = IYZ) over the past five years. Orange reports revenue, EBITDA and cash flow after each quarter, but reports net profit only twice a year—after the second and fourth quarters. On July 31, ORAN released its most recent results. The company posted 1H20 revenue of 20.8 billion euros, up 0.3% from the prior year in the same currency. Adjusted EBITDA declined 1% to 5.9 billion euros; the adjusted EBITDA margin was 28.5%. Net income declined 12% to 1.0 billion euros due to higher legal costs. On a per share basis, the company earned 0.38 euros. In U.S. dollars, at an average euro/dollar exchange rate of $1.12/euro, Orange posted first-half revenue of $23.3 billion and EPS of $0.43. Along with the first-half results, management reiterated its financial objectives for 2020. These include ‘flat to positive’ adjusted EBITDA excluding the impact of COVID-19, and organic cash flow from telecom activities of more than 2.3 billion euros.
EARNINGS & GROWTH ANALYSIS
The company’s business is organized into five segments: France (43% of 1H20 revenue); Spain (12%); Other Europe (13%); Africa & Middle East (14%); and Enterprise (19%). The fastest-growing segments in 1H20 includes Africa & Middle East, with revenue growth of 4% driven in part by growth of fixed broadband Orange Money; and France, up 1.6%, which stemmed from growth in wholesale services. The slowest-growing segments were Other Europe (-1.6%) and Spain (-4.6%). Most of the revenue growth was driven by increased demand for the company’s ‘convergent offers,’ which include landline, broadband, television and wireless services. The COVID-19 pandemic caused a slowdown in roaming and equipment sales. Management keeps a close eye on margins. The adjusted EBITDA margin in 1H20 was 28.5%, essentially the same year-over-year. Turning to our estimates, we expect Orange to benefit from continued strong demand for combination service packages in the company’s primary markets of France, Spain, and Africa and the Middle East. We also expect increased demand for premium services to boost average revenue per user, and look for increased data usage in most markets. We expect margins to benefit from workforce reductions through attrition, as well as from additional cost savings efforts. In general, we expect modest growth for the telcos under our coverage, and ORAN is no exception. The company reported EPS of $0.70 in 2019, and under normal circumstances we would expect EPS of $0.75 in 2020 and $0.80 in 2021. Current market conditions are far from normal, of course, and our estimates are slightly lower: $0.67 for 2020 and $0.71 for 2021.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength ranking on ORAN is Medium, the middle rank on our five-point scale. The company’s net debt at year-end 2019 was 25.5 billion euros, same with the prior year. The company’s goal is to lower its net debt/EBITDA ratio to ‘around 2-times’ in the medium term. In 2019, the ratio was 1.96-times. The company’s profitability is sound, with EBITDA ratios typically near 30%. Orange pays a dividend, which it has cut due to the uncertainty caused by the coronavirus pandemic. The company has now proposed a dividend of 0.50 euros per share for fiscal 2020. Our dividend forecasts are 0.50 euros (US $0.57 per ADS) for 2020 and 0.70 euros (US $0.57 per ADS) for 2021. The current indicated yield, based on our 2020 USD estimate, is about 5.2%. We note that ADS dividends will be affected by currency translation, and that dividends paid to investors who are not residents of France are subject to French withholding tax of up to 30%.
MANAGEMENT & RISKS
Stephane Richard has served as chairman since early 2011 and as CEO since April 2010, after joining the company in 2009 as head of French Operations. He was previously Chief of Staff in the French Ministry for the Economy, Industry and Employment. Ramon Fernandez has served as CFO since 2014, and since May 2018 has led Orange’s European operations outside of France and Spain. Prior to joining Orange, Mr. Fernandez held several senior positions in the French government. Investors in ORAN shares face risks. Orange faces risks from adverse regulatory developments in its international markets and from the loss of high-value contracts. It also faces risks from competition, uncertain economic conditions, currency translation and the impact of the COVID-19 pandemic.
Orange (formerly France Telecom) is a global leader in telecommunication services. The company has operations in 28 countries, with a focus on Europe and Africa, but generates more than 40% of its revenue from France. The French government has a 23% ownership stake in the company. The company employs 135,000 persons.
We think that ORAN shares are attractively valued at current prices near $11, below the midpoint of their 52-week range of $10-$16. The shares have been in a bearish pattern of lower highs and lower lows since January 2018, but we see support around $10. On the fundamentals, ORAN shares are trading at 16-times our 2020 EPS estimate. This is below the telco industry average P/E of 17. We like the high dividend yield of about 5.2% and think the shares are suitable for income-oriented investors. Our target price remains $15.