France Telecom offers little to support growth forecasts

France Telecom has presented its targets for the period 2011-15 at an Investor Day in Paris. This follows its 'Conquests 2015' plan presented in July 2010 and subsequent announcements such as plans for Orange Business Services (September 2010) and the FTTH roll-out in France (February 2011).

Some elements of the strategy already announced:

• Focus on emerging markets, where revenues should double within three years (18 June 2010);
• Further cooperation with Deutsche Telekom on network sharing, Wi-Fi roaming, M2M, R&D and joint procurement (11 February 2011); sharing agreements are already in place in Austria and Poland, as well as the joint venture Everything Everywhere in UK; the procurement project has also started (18 April 2011);
• Working towards network sharing in Austria, Romania en Slovakia (27 April 2011); in Belgium (Base) and Spain (Vodafone) it’s already working with partners;
• A review of assets for possible sale, outside France, Poland and Spain (3 May 2011).

'Adapt' and 'Conquer'

The new plans add to the above. The period 2011-2015 is split in two phases:

• 2011-2013: the ‘Adaptation Phase’. The company will invest and expand in new markets, such as apps. The company will also be strengthened. Sales growth is expected at an average 0.6 percent per year (CAGR), and EBITDA is estimated at a cumulative EUR 45 billion. Capex will total EUR 18.5 billion. Operating cash flow, defined by FT as EBITDA minus capex, is put at EUR 27 billion. Capex will be 12.6 percent of revenues, excluding FTTH in France, with a peak of 14 percent in 2012.
• 2014-2015: the ‘Conquest Phase’. A return to sustainable growth, with a revenue CAGR of 2.7 percent and EBITDA CAGR of 3.4 percent. Cumulatieve capex is forecast at EUR 11 billion, and operating cash flow will grow at a CAGR of 9 percent. Capex will drop to 10 percent of revenues.

The company also targets cost savings from network sharing and IT. These are expected to reach EUR 3 billion per year by 2015. For the FTTH plans in France, the company will invest as earlier announced EUR 2 billion. France Telecom will also sell minority stakes in companies where it has no operational control, such as in Austria (35 percent in Orange Austria) and Portugal (20 percent in Sonaecom). The dividend was set at EUR 1.40 per share for 2011 and 2012.

A look back, and forward

First we compare the targets to the company’s recent results (2009, 2010 ) and the market expectations to 2015 (see table).

EUR bln	2009A	2010A	2011E	2012E	2013E	2014E	2015E
Sales	46.13	45.50	45.79	45.43	45.36	44.83	44.94
EBITDA	16.28	15.64	15.27	15.05	14.95	14.77	14.71
Capex	5.32	5.52	6.12	5.84	5.70	5.63	5.44

We see that the targets for the first phase are in line with market expectations, although capex will probably be higher than is currently expected. However, the aim to accelerate growth in the second phase is not in line with current market estimates, which predict a continued erosion in results. Estimates for 2014 and 2015 should be taken with a grain of salt, as most analysts do not provide estimates beyond 2-3 years. The coming days will show whether the market was impressed by the plans and the presentation from CEO Stephane Richard. If so, the estimates should move up.

France: difficult market

The first reaction from investors was slightly negative, with a small drop in the share price. This reflects the fact that the targets for 2014 and 2015 are a bit of a shot in the dark. Furthermore, France (in 2010 good for 49% of sales and 59% of EBITDA) is no easy market:

• A fourth mobile operator (Iliad/Free) will enter the market in 2012.
• A bit of a half-hearted FTTH strategy, where the target of 10 million homes passed in 2015 (see our commentary ‘If KPN wants to match the French FTTH plans, it should buy out Reggefiber’) is difficult to square with the capex budget of just EUR 2 billion. Furthermore, there is significant competition in FTTH, from Iliad/Free, Numericable, SFR and numerous local initiatives.
• Possibilities à la KPN to cut jobs are more limited, due to the public status of many of the 170,000 employees. FT did recently estimate that in the period to 2020, around 30,400 employees should be eligible for retirement.

Positive effects include an end to sharp cuts in termination rates and expected economic recovery. Outside France, much will depend on good portfolio management. This includes the sale of minority stakes as well as takeovers, such as Meditel (Morocco, September 2010) and Korek Telecom (Iraq, March 2011). At the same time, the level of risk is growing, due to the political developments in the Middle East and North Africa region. Cost savings, though network sharing and the cooperation with DT, are also important.

Conclusion

At the moment it’s not totally clear what FT expects to support the growth targets for after 2013, apart from economic recovery and an easier comparison (the big cuts in MTA end in 2012 and Free Mobile is expected to start in early 2012). In addition to acquisitions, investments from the preceding years should make a contribution, but then it’s curious that the investment level (capex as a percentage of sales) for the period from 2014 is projected to quickly drop back to 10 percent. This puts growth in the period after 2015 at risk. In short, after years of contraction through both competition and regulation, the question for France Telecom and the telecom sector general is can it return to the status of growth sector? Or do we need to settle for the low growth seen in the utilities sector?

This post originally was published here on May 31, 2011 as a translation of this Background article (subscription required)