Orange SA Shares Fall After Downgrade

Shares of Orange SA (EPA:ORAN) fell over 2% on Wednesday following a downgrade by Morgan Stanley (NYSE:MS) due to disquiet over its French operations amid political uncertainty.

Analysts from Morgan Stanley noted that although international performance remains relatively stable, Orange's domestic operations in France, which account for 57% of its enterprise value, face significant challenges.

The stock's rating was downgraded from "overweight" to "equal-weight," as Orange struggles for substantial growth in France.

Despite advantages including price hikes, declining energy and labor costs, and easy comparisons to last year, a meager 0.4% increase in EBITDAaL for 2024 is forecasted.

Worryingly, growth in EBITDAaL is projected to decline in French operations from 2024 to 2026, with a negative annual growth rate of -1.3%, reversing previous growth expectations.

This downturn is primarily due to increased competition in the French telecom market, with rising retail competition exerting pressure on Orange's profitability.

Competitors like Free are aggressively lowering prices with family packages, compelling Orange to rethink pricing strategies.

Morgan Stanley analysts indicate that while customer loss may not be severe, reduced average revenue per user is anticipated, which could further impact profitability. Additionally, customer acquisition and retention costs are likely to rise, complicating Orange’s financial prospects.

Last year, Orange's operations in France suffered significantly from soaring energy costs and stiff competition, resulting in a 3.6% decline in EBITDAaL.

While some hoped for a recovery this year, challenges persist. Morgan Stanley analysts observe that even with falling energy prices, Orange's margins are still under pressure, making it tough to rebound in EBITDAaL growth.

The outlook for consolidation in the French telecom market is also grim, as political and regulatory issues render mergers and acquisitions improbable in the near term. This leaves Orange with few strategic options for enhancing its position in France.

Despite attractive free cash flow yields and about an 8% dividend yield, Morgan Stanley finds minimal positive catalysts to drive Orange’s stock price upward soon.

Consequently, the brokerage has reduced its price target for the company by 17%, lowering it to €12.5 per share, reflecting a pessimistic outlook for its core French operations.

Moreover, while Orange has performed well in other markets, including the Middle East and Africa, these account for only 16% of the company’s EBITDAaL, rendering their positive impact insufficient to balance the difficulties in France.

In comparison with peers, Morgan Stanley favors companies like Deutsche Telekom (OTC:DTEGY), Swisscom (SIX:SCMN), and BT in the European telecom market, as they exhibit better growth potential and a more stable competitive landscape.