Orange S.A.: The Upside Must Be Understood

seekingalpha09-16

Orange is the leading telecommunications company in France, and one of the better investments in the industry I've made over the past few months.The company has a significant upside due to investments...

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J Studios/DigitalVision via Getty Images Dear readers/followers, I've been talking myself hoarse about Orange (NYSE:ORAN) for a number of years at this point. I have a very solid stake in this company for the long term both in my private and commercial portfolio, and in this article, I will show you the reason I believe firmly in the outperformance of this telecommunications operator for the long term. If you follow my work, you will know that I typically tend to focus on undervalued companies with upside potential - the clearer that upside potential is, the better. I also typically demand a dividend for my risk, meaning I want the company to pay me a sort of interest for the capital I invest. The higher, the better, though when it comes to the interest component, I am cognizant of the company's risk. The fundamentals obviously matter a great deal - though when it comes to this, what I am interested in is that the company is long-term sound. I don't really care if the upside takes 1–3 years if I can see that the upside is likely. I view myself as picking companies like spirits/wines. I pick them, I let them mature, and most of them (statistically speaking, looking back 5 years), end up maturing more or less as I expected them to. Some generate less, some generate more, and some mature even faster than I expected in the first place. That's my approach, and that is why I'm happy about Orange. Not only has this company matured very well, but it's also shown potential to mature even better and with a higher upside than I expected. That's what we will look at here - why I am actually buying more, and raising my PT for Orange S.A. Orange S.A. - Going into 2H24 and 2025-2026E. So, first off, I am not the only one to increase my PT for this company. It's also wrong to call Orange a company that no matter the valuation has done well. That's why I didn't buy Orange back in 2019 or before, but rather started buying in 2021 and slightly before. Because that's when the company \"popped\" up on my radar. Orange operations span several countries, with the home region, France. My latest article on the company can be found here and since that time has performed a nice 10x to the market in less than 90 days - though this has more to do with a 10% to a 1% RoR than anything else. My own position is up double digits.   Seeking Alpha Orange RoR (Seeking Alpha Orange RoR) While I understand investors being uncertain about the company, I'm going to show you here that there are no fundamental reasons for such hesitation. Orange's strategy across its markets is the epitome of simplicity, with a special focus on France. The company is maintaining market share in both mobile and fixed markets while offsetting pricing and FX pressures with a combination of OpEx and labor cost reductions. This is in turn limited by political and legal factors. The company is further installing the FFTH network in France, which automatically results in better long-term financials and margins for the company, but the company took heavy hits in CapEx during the build out phase. That's why in many of my earlier articles you find me talking about the company's elevated costs - but this is now over. The company appeals to both income and value investors, with a dividend yield of over 6%. My YoC is well over 7% for this telco, and I'm happy to invest at 6%+ as well. The company's results for 1H24 came out 1 day after my last article, so here I'm going to integrate them into my thesis. As I said in that piece, they were positive, and in fact the catalyst for the upward momentum that we've been seeing in the stock. What's working? The company's execution is fully on track. Orange remains the French market leader, has managed to move into a strategic fiber direction with MASORANGE, and delivered very solid 1H financial results, confirming any short-term upside investors were expecting with a double-digit 17.4% OCF growth.    Orange IR (Orange IR) What you see above is expected to result in an FCF over 18 months of €4.2B, of which shareholder returns will be a non-trivial part. The company's leverage has also improved. There is a market slowdown in the core market of France, which means that growth in postpaid and FBB has gone down to around 1% per quarter, but the company has market leadership with a very stable fixed market and a sustained competitive market with low churn in mobile. The company's pricing strategy in the home market is a big part of this - and again, best-in-class churn here.   Orange IR (Orange IR) The company focuses on both volume and value, and this strategy is starting to show good results. Churn is actually improving. Meanwhile, the MASORANGE Fiber segment is moving forward. A joint FiberCo is being discussed with Vodafone Spain, covering 11.5M premises. MASORANGE and VOD would become the long-term anchors of such a company, with 4M customers, allowing for both openings of capital of this FiberCo, which would further accelerate Orange's delevering plan. Plan for this Fiberco is a closing in 1H25, in about one year, with a targeted capital structure of 50/50 between MASORANGE and VOD-Spain. This FiberCo would then be deconsolidated from MASORANGE. In short, strategic directions and moves are being made and executed. In terms of P&L's and KPI's, there are no fundamental worries for me here. Revenues are single-digit growing, and EBITDA is growing by over 2.5% on a quarterly basis YoY, with eCapex slightly up, but not worryingly so. It's OCF and FCF that were the stars of the show with 17% and 21%+ growth respectively. Oh, and the company, which was once very levered, is now at less than 1.95x net debt/EBITDAaL. This makes Orange one of the lowest-levered telecommunications companies not only in Europe, but the world, while also maintaining that 6%+ dividend, and potentially growing it. The company estimates a dividend of €0.75/share for the native in 2025 to 2024, which brings the current native estimated yield to 6.9% - so that's what you're investing in. Investing in a BBB+ rated Telco with an EPS growth estimate of 14.5% is likely to continue to outperform in my estimate, that's an \"easy sell\" for me, and why I continue to invest in Orange here. The company remains the market leader, and a potential merger with MasMovil would consolidate the market further and create massive synergies on the cost and income side, while also reducing competitive pressure. Also, as I have said before, I remain positive about any company that shows it can \"manage\" pushes into the African market - and I believe Orange to be one of the companies that seems able to do just this. This is something that most EU telcos don't have. On the flip side, meaning risk, the company's main market is politically fraught, and with pricing competitiveness in the mobile segment, and the secondary Spanish market still needs to improve. And while Africa comes with untold possibilities of growth, it also comes with equally untold macro and political risks, so the company needs to move carefully. This is what creates the dynamics and the ups and downs of this situation and position for Orange. For valuation, we have the following after 1H24. Orange Valuation - An upside of over 20% annually is possible with this setup. In my last article, I declined to call the company \"cheap\", and this is a stance I still hold at this time. The company isn't really cheap, but at the same time, it's not far from it, given that I am slightly raising my PT. In my last article, I gave the company's native ticker, ORA, a PT of €13. I'm now raising that to €14 ahead of expected synergies and upsides. If we take the bullish stance, and estimate the company at 13x P/E or above, then the company could annualize at almost 30%, and a PT of €18/share. (Source: F.A.S.T. Graphs Paywalled Link) But that is where I believe we find the danger of getting exuberant. So let's cut some of that exuberance down. Risks and negatives for Orange include, aside from the aforementioned operational risks, the fact that the company over the past 10–20 years most often has failed to meet its estimates negatively. Well over 50% of the time, the company has, with a 10-20% margin of error, done far worse than analysts expected. There were reasons for this. The company is approaching the tail-end of a decade-long transformation, so shareholders have indeed been made to wait a long time. But this is a risk worth mentioning. You need to be able to stomach a bit of volatility if you want to be an Orange shareholder. I would say generally, European majors have a bit more volatility to them than NA given the political situations here. But this should in the end does not take away from the very likely development of a double-digit EPS growth in the next few years. 2024E alone is set to bring over 20%, and that's more or less confirmed at this time. Also, if the dividend forecasts hold, then you will be investing at a YoC of close to 7.5% at this price for the 2026E yield, which coupled with the overall upside could most definitely give you alpha here. Logically speaking, I say that Orange at less than 11x P/E at this time for the native is being traded too low for the upside that is inherent from this growth, resulting from strategic moves and further improvements. Consequently, the company is undervalued and I say it's a \"BUY\" How much upside depends on how much we discount the company here. My €14 native PT comes to around a 10.6x P/E for 2026. That's right - I'm forecasting at lower than the company is currently valued at 10.9x, and given the growth profile I am still estimating 18.75% per year, or a 48% total RoR on this investment. That's the bearish case. One bullish case for the company implies an upside of 81% RoR, or 30% RoR at a 13.2x P/E, and a PT of €17.9, but if we use the 20-year average P/E upside, then we get an upside going close into the triple digits, at 33.4% per year, to 14.3x. And I want to point out, that Orange managed 14.3x normalized only a year ago - entirely possible. This is why I remain very positive about Orange, and why I am, in fact, an investor in the company here. ORAN is the USD ADR - a very attractive ticker to invest in as well given its liquidity, and the company's PT here for this one is translated to $15.5/share as of this article. Thesis  Orange is one of the more appealing telcos in terms of valuation in Europe. It's no longer as good in an international context given what else is available on the market today, but it's still with a good upside. That upside is 11-20%, which is well above the overall market here, depending on where you forecast the company. I now believe the upside is even better for later periods, and would consider the company having been cheap as little as some weeks ago. Orange remains a \"BUY\" here as of September 2024. A price target that I would consider attractive for investment based on my goals would be around €14.5/share - though every investor, of course, needs to look at their own targets, goals, and strategies. I would also always consult a finance professional before making investment decisions such as this. I am raising my PT for the company as of this article.  Here are my criteria and how the company fulfills them (italicized).  This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansions/reversions.  I can no longer call Orange a \"cheap\" stock. It's now attractive, but not cheap. Cheap would be below €10.5/share.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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