On Dec 20, 2013, we upgraded our recommendation on Orange (ORAN) to Outperform. The upgrade was based on a positive estimate revision in the company’s earnings for 2013. Despite a dismal third quarter performance, the company’s efforts toward driving up 4G expansion to support wireless growth in France and other key regions has uplifted its market position among European wireless operators, compelling a positive outlook. Moreover, Orange is driving substantial growth across Africa and the Middle East, which contributes nearly one-third of its total customer base. Over the long term, we foresee Orange as largely benefiting from growth in mobile data business, driven by LTE network expansion that fosters the positive outlook on the company.
Over the last 60 days, Orange earnings estimates for 2013 experienced a strong momentum. The Zacks Consensus Estimate for 2013 earnings per share has moved up to $1.26 from $1.18 per share in the past 60 days, reflecting strong earnings expectation. We believe the positive market sentiment for Orange is backed by its effort to improvise its market condition in Europe. The company, in the first half of the year, registered revenue growth in France and Poland driven by improvement in fixed services. Orange also registered success in the mobile business with significant acceleration in mobile contract net adds in key European markets like France, Poland and Spain. Further, a significant upsurge in the broadband customers in France, Spain and Poland also led to an improving business scenario for Orange.
With respect to LTE deployments, Orange is ramping up infrastructural development in France and other European countries. The company has accelerated 4G rollout with 500 cities covered at the end of September, representing 32% of the French population and intended to tap over 40% of the population by 2013 end. In Spain, the company remains one of the leading telecom carriers in 4G deployment and expects to cover 24% of the population by this year. Besides Europe, the company is also focusing on Africa and the Middle Eastern markets. The company has already launched 4G in two countries in this market and expects to launch 4G in two more regions, namely, Senegal and Botswana. Going forward, the company has also reached an agreement with leading automaker – Renault – for a research project to test the automotive uses of 4G/LTE connectivity for a motorist’s safe access to virtual office, video conferencing and cloud gaming.
Further, Orange aims to reduce €600 million ($970 million) in cost reduction by the end of 2013 and continues to strengthen its balance sheet by maintaining its net debt-to-EBITDA ratio target of 2 and 2.2 by the end of 2013 and 2014, respectively. The company expects to generate an operating cash flow of more than €7 billion for 2013, of which 86% has been already generated as of Sep 30, 2013. Given the economic uncertainty and competitive pressures, Orange intends to distribute dividends based on operating cash flow generation. The company would return 40–45% of operating cash flow to shareholders in the form of dividends in 2013
As a result, the tailwinds over the near term encourage our positive outlook on the company.