Orange is still under pressure but a potential future event might help

<p>Orange (formerly known as France Telecom) is up around 9% (at time of writing) partly on the back of its latest market update. Overall growth […]</p>

Orange (formerly known as France Telecom) is up around 9% (at time of writing) partly on the back of its latest market update.

Overall growth is still elusive but the French telecoms player is set to continue with cost cutting efforts to stabilise margins.

The company reported a 4.5% year-on-year decline in overall revenue for 2013 at €41bn; earnings before interest, tax, depreciation and amortisation (EBITDA) came in at €12.7bn, that’s a 7.5% decrease.  But thanks partly to lower impairment charges, the company’s net profit came in at €2.1bn (up from €1.1bn in 2012).

Meanwhile, on a regional basis, sales in France decreased around 6.6% at €20bn and EBITDA saw a decline of some 8% at around €7bn. Orange attributes the weakness partly to a decline in mobile services’ average revenue per user (ARPU).

Indeed, it is well known that Orange faces tough conditions in France, where it generates around 49% of revenue.

Economic woes aside, the shakeup of the competitive landscape in the form of Iliad’s entry into the market in 2012 with its lower-cost mobile offering, has certainly been widely-discussed.  Orange is not alone; the company’s competitors Bouygues Telecom and SFR (owned by Vivendi) have also felt the heat.

So, under pressure, Orange embarked on cost cutting measures as one way to maintain decent profits.  That’s reasonable enough, and at €7.02bn in operating cash flow, those efforts have indeed helped the company hit its target of “more than €7bn” in operating cash for 2013.

But long term, cost cutting alone will not suffice.

Admittedly, Orange has made other efforts for a boost, which includes talks regarding network sharing arrangements with rivals in a bid to further reduce costs.  Not to mention the company’s stated intent to bolster its presence in Africa and the Middle East (combined revenue here grew at a decent 4.7% in 2013).

But its businesses in those regions are still relatively too small to significantly move the needle – revenue from its Africa and the Middle East business is just some 10% of overall group revenue.

Still, a forthcoming event may well prove favourable for Orange.

Vivendi’s SFR is currently on the block – reports suggest the business has received a bid from Bouygues, among others.  Sure, the identity of the eventual consolidator would determine what follows.

Should Bouygues emerge as winner, mobile competition reduces – likely price increases comes to mind – and that should give Orange a boost.

That’s assuming regulators give the said consolidation a nod, of course.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.