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Orange shares down as Morgan Stanley cuts rating amid French market struggles

Published 04/12/2024, 13:54
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Investing.com -- Shares of Orange SA (EPA:ORAN) fell over 2% Wednesday after Morgan Stanley (NYSE:MS) downgraded its rating, citing concerns over the company's French operations and ongoing political uncertainty. 

Analysts at Morgan Stanley believe that despite a relatively stable performance in international markets, Orange’s domestic operations in France, which represent a substantial 57% of its enterprise value, are facing mounting challenges.

The downgrade, which shifts the stock’s rating to "equal-weight" from "overweight," comes as Orange struggles to achieve meaningful growth in its key French market. 

Despite benefiting from factors such as price hikes, falling energy and labor costs, and relatively easy comparisons with the previous year, the company is forecasted to see only a modest 0.4% increase in EBITDAaL for 2024. 

More concerning for the company is the projection that its French operations will face a decline in EBITDAaL growth from 2024 to 2026, with a negative annual growth rate of -1.3%, reversing earlier expectations of modest growth. 

This shift is largely due to escalating competition in the French telecom sector, which has intensified in recent months.

The main issue lies in the increasing retail competition in France, where aggressive pricing strategies from rivals are putting pressure on Orange's profitability. 

Telecom (BCBA:TECO2m) players like Free have introduced enticing offers, such as convergent family packages with mobile services at drastically reduced prices, forcing Orange to rethink its pricing strategies. 

Morgan Stanley analysts suggest that while Orange may not lose customers in large numbers, it is likely to see a decrease in its average revenue per user, which would erode profitability. 

Moreover, the cost of acquiring and retaining customers is expected to rise, adding further strain to Orange’s financial outlook.

Adding to the pressure, Orange's operations in France were hit hard last year by rising energy costs and increased competition, leading to a 3.6% drop in EBITDAaL. 

While there were hopes that this year would see a recovery, the reality is proving more difficult. Analysts at Morgan Stanley note that even with tailwinds like lower energy prices, Orange’s margins remain under threat, and the company may not be able to reverse the negative trend in EBITDAaL growth.

The outlook for consolidation in the French telecom market also appears bleak. Morgan Stanley analysts point out that political and regulatory hurdles make any potential mergers or acquisitions in the sector unlikely, at least in the short term. 

This leaves Orange with limited options for boosting its position in France through strategic changes.

Despite offering attractive free cash flow yields and a dividend yield of about 8%, Morgan Stanley sees little in the way of positive catalysts to drive significant improvement in Orange’s stock price in the near future. 

The brokerage has lowered its price target for the company by 17%, down to €12.5 per share, reflecting a weaker outlook for its core French operations.

The analysts at Morgan Stanley further note that Orange’s other markets, including its operations in the Middle East and Africa, have performed relatively well. 

However, these markets contribute only a small proportion (around 16%) of the company’s EBITDAaL, meaning their positive performance is not enough to offset the struggles in France.

In the context of its peers, Morgan Stanley analysts continue to favor companies like Deutsche Telekom (OTC:DTEGY), Swisscom (SIX:SCMN), and BT in the European telecom space, as they see better growth prospects and a more stable competitive environment in those markets.

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