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Iliad - Equity Analysis

We foresee Iliad SA's growth halting due to increasing competition from major European telecom companies and a saturated European wireless subscription market. However, Iliad still has significant growth potential in the broadband segment, with many users yet to be reached.

Company Overview

Iliad, a French telecom provider, focuses on offering affordable cellular services while maintaining high standards of efficiency, innovation, and customer satisfaction. Using a revolutionary pricing model, Iliad has challenged incumbent telecom providers in France and internationally. The company offers TV services, internet access, mobile plans, and bundled packages, many with low prices and unlimited data options. By integrating owned and leased network assets, Iliad optimizes infrastructure to save costs while delivering high-quality service. Despite its low-cost approach, Iliad invests in customer support systems and technological advancements, including 5G and network infrastructure. Operating under the Iliad Italia brand, Iliad has expanded into other European countries like Italy to grow its customer base and enter new markets. The company's main income sources are subscription fees for telecom services, with additional revenue from value added services and advertising. Overall, Iliad's strategy focuses on providing affordable telecom services driven by efficiency, innovation, and customer satisfaction.

Industry Overview and Competitive Positioning

Iliad SA operates in France, Italy, and Poland with a strong presence. In France, through its subsidiary Free S.A.S., it holds a significant position in the telecom market, commanding a 22% market share as of January 2024, with 23.4 million subscribers. Despite intense competition from major players like Orange, SFR, and Bouygues, Iliad has maintained its competitiveness. In Italy, Iliad holds a 13% market share, primarily due to its later entry into the broadband sector. The acquisition of 60% of Play Communications SA in 2021 allowed Iliad to enter the Polish market,

We anticipated minor growth in the Wireless Subscription segment due to market saturation. In Italy and France, wireless subscriptions increased by 2% from 2019 to 2023, with a saturation ratio of 129% and 107%, respectively. The terminal growth rate in wireless subscribers is estimated at 1%. Conversely, the Wireline Segment is expected to see growth due to increased Capex for optical-fiber rollouts, particularly in Italy and Poland where adoption rates are still low. This growth is expected to boost margins, with the broadband segment driving significant growth.

Iliad faces stiff competition across its operating regions. Key competitors include Telecom Italia, Vodafone Italia, Wind Tre, and Fastweb in Italy; Orange S.A., Altice, and Bouygues Telecom in France; and T Mobile Polska, Polkomtel, Netia, and Inea in Poland. In 2023, Iliad demonstrated strong organic growth of 8.2%, outperforming major telecom competitors.

Iliad Group is expected to achieve significant growth in key financial metrics by 2028. The ARPU for mobile services is projected to reach €19.4 per month (CAGR of 3.7%), and for broadband services, €47.7 per month (CAGR of 3.4%). Mobile segment revenue is expected to grow from €9,183 million in 2023 to €10,659 million in 2028 (16% growth), while broadband segment revenue is anticipated to rise from €5,483 million to €6,864 million (25% growth). EBITDA is projected to grow from €4,314 million in 2023 to €6,133 million in 2028 (42% increase), and unlevered free cash flow (FCFF) is expected to more than double from €1,881 million to €3,910 million. Capex is forecasted to remain stable in the short term and then decrease to €1,421 million by 2028, reflecting improved

Business Strategy

Iliad SA's business strategy focuses on offering affordable telecom services while maintaining high standards of efficiency, innovation, and customer satisfaction. Utilizing a revolutionary pricing model, Iliad challenges incumbent providers both in France and internationally. The company offers a wide range of services, including TV, internet, mobile plans, and bundled packages, often with unlimited data options. Iliad optimizes its infrastructure by integrating owned and leased network assets, reducing costs while ensuring high-quality service delivery. Emphasizing customer experience, Iliad invests in support systems to quickly address user concerns. Technological advancement is a priority, with significant investments in 5G and network expansion.

Porter's Five Forces

Using the 5 Forces of Porter framework, we can assess Iliad SA's industry competitiveness and strategic positioning. The threat of new entrants is low to moderate due to high capital requirements and regulatory hurdles, which limit new companies from establishing themselves easily. Iliad's entry was challenging but anticipated by market incumbents, with no new significant entrants expected currently.

The intensity of rivalry is high, driven by strong competition among established players like Telecom, Vodafone, and Wind Tre. Iliad's market entry intensified competition through aggressive pricing, prompting similar responses from competitors. High exit barriers and the presence of major players, such as state-owned Telecom Italia, add to the competitive intensity.

The threat of substitutes is moderate to high, with alternatives like VoIP, messaging apps, and internet-based communication platforms posing significant threats to traditional telecom services. Customers' price sensitivity and low differentiation among providers exacerbate this threat.

The bargaining power of buyers is moderate to high, particularly in mature markets with multiple service providers. The ease of switching and presence of low-cost alternatives increase buyer power, further amplified by Iliad's competitive pricing strategy.

Suppliers hold moderate bargaining power, dominated by key players like ZTE Corporation, Huawei, and Ericsson. Despite regulatory constraints limiting cartel formation, Iliad's market position provides some leverage for favorable negotiations.

Complementors, such as smartphone manufacturers and potential cloud service providers, enhance Iliad's value proposition by boosting demand through complementary products. Strategic partnerships with these complementors can strengthen Iliad's competitive position and expand its product ecosystem.

Financial Analysis

Ratio Analysis

The financial ratios for Iliad SA from 2019 to 2023 reveal a mix of strengths and challenges. Profitability improved with gross profit margins rising to 71.47% in 2023 and operating margins peaking at 19.39% in 2022, though net profit margins fell to 3.44% in 2023, indicating potential non-operational cost pressures. Liquidity ratios remained below 1, highlighting potential short-term financial concerns. Solvency showed increased leverage with a significant rise in the debt to equity ratio in 2021 and 2022, though a slight improvement was noted in 2023. The interest coverage ratio's sharp decline to 1.73 in 2023 underscores financial stress. Asset turnover ratios improved, indicating better asset utilization. Valuation metrics showed a fluctuating EPS and a high P/E ratio of 33.89 in 2023, suggesting market optimism despite recent profit declines. The FCF yield's increase to 0.43% in 2023 points to enhanced cash generation. Overall, while Iliad demonstrates strong profitability and efficiency, its ability to manage liquidity and solvency will be crucial for sustaining growth and investor confidence.

Revenues Forecast

Our revenue forecast for Iliad is based on the understanding that its competitive advantage in offering affordable telecom services in the wireless segment will diminish as competition intensifies, exemplified by the creation of other affordable telecom providers such as Tree and Ho. Mobile. We project a 5% growth rate for the first two years, tapering to the forecasted industry average of 1% thereafter. This assumption hinges on the expectation that user growth will directly translate to revenue growth.

In contrast, we see significant growth potential in the broadband/fiber segment. With low fiber utilization rates in Poland and Italy, and Iliad’s recent participation in public and private initiative networks (PINs) to provide accessible fiber connections in remote regions of France and Italy, we believe Iliad can capture a larger user base in this segment. Consequently, we forecast a prolonged growth period in the wireline market, with a 5% growth rate before it converges to the industry average. Moreover, since Iliad currently pays rental fees for the copper pair from the incumbent operator for DSL, the transition to its own fiber network is expected to boost revenue growth beyond subscriber growth. We estimate a 7% revenue growth as Iliad installs its fiber network, before aligning with the industry average.

Ultimately, Iliad’s market share is expected to increase from an aggregate market share of 20% in France, Italy, and Poland in 2023 to 22% in 2028, driven mainly by growth in the wireline segment as more subscribers are captured.

Intrinsic Valuation

We utilized the Discounted Cash Flow (DCF) model to derive the share price using both the exit multiple method and the perpetuity growth method to calculate the enterprise value. For the exit multiple method, we applied the EV/EBITDA multiples of telecom service companies in Western Europe (8.1x) and wireless telecom companies in Western Europe (6.7x), weighted by the share of revenues generated by Iliad in these two segments. For the perpetuity growth method, we estimated the terminal FCF growth rate using a blend of the Communications Services Industry rate, the historical inflation rate, and the average GDP growth rate. It is important to note that Iliad has no diluting instruments.

Using the DCF method, we determined a share price of €676.87 through the exit multiple method, suggesting that Iliad’s shares are currently traded at a significant 272% discount to their fair value. This valuation highlights a considerable undervaluation in the market. In contrast, the perpetuity growth method indicates an unrealistic valuation for Iliad’s shares, primarily due to the company’s substantial reliance on debt financing. Iliad benefits from a strong credit rating, which allows it to secure debt at low interest rates and effectively exploit the benefits of a tax shield. Despite the unrealistic nature of the perpetuity growth method’s share price, it nonetheless underscores a strong undervaluation of Iliad’s stock.

The gap between Iliad’s intrinsic value and market value is mainly due to its shares not being publicly traded since their delisting from Paris Euronext in late 2021. This lack of market trading prevents effective price discovery. Currently, Iliad’s shares are predominantly held by Xavier Niel, who significantly influences the company’s decisions due to his large ownership stake. This concentrated ownership and lack of market liquidity contribute to the substantial undervaluation when comparing the intrinsic value to the market value.

Sensitivity Analysis on Iliad's Share Price

WACC and Betas Estimation

The provided tables detail Iliad Group's Weighted Average Cost of Capital (WACC) analysis. The WACC calculation shows the target capital structure with 68.1% debt-to-total assets and 31.9% equity-to-total assets. The cost of debt, rated BB, has an after-tax cost of 3.3%, while the cost of equity is calculated at 11.9%, incorporating a risk-free rate of 2.90%, a market risk premium of 5.9%, and a relevered beta of 1.51. The resulting WACC is 5.2%. The comparable companies' unlevered beta table lists levered and unlevered betas for Orange, Vodafone, Telefonica, Ekinops, and Ericsson. The relevered beta, adjusted for Iliad's capital structure, is 1.51. The WACC sensitivity analysis explores the effects of varying debt-to total assets ratios and pre-tax cost of debt on the WACC.

Relative Valuation Using Trading Comparables

Iliad SA is being evaluated relative to 13 high-growth comparable companies in the telecommunications and technology sectors. These companies have been selected based on their high growth metrics, similar to those of Iliad. The key metrics considered include revenue, EBITDA, net income, and various trading multiples such as EV/Revenue, EV/EBITDA, and P/E ratios for the years 2022 and 2023.

The 13 companies considered as peers for this analysis are Altice Europe, Telefonaktiebolaget LM Ericsson, Ekinops SA, T-Mobile US Inc., Nokia Corporation, Telefónica SA, SoftBank Group Corp., China Mobile Limited, China Telecom Corporation Limited, China Unicom (Hong Kong) Limited, SK Telecom Co., Ltd., Orange S.A., and BT Group plc.

The median trading multiples derived from the comparables are crucial in calculating the implied share price for Iliad. Specifically, the EV/Revenue multiple is 1.1x, the EV/EBITDA multiple is 5.6x, and the P/E multiple is 17.1x.

Revenue Multiple: Implies a share price of €425.26 for Iliad.

EBITDA Multiple: Implies a share price of €646.90 for Iliad.

P/E Multiple: Implies a share price of $91.34 for Iliad.

The wide range in implied share prices reflects the variability in valuation multiples among the comparables, suggesting that Iliad's higher growth and margins justify a premium valuation.

Piotrosky F-Score

The Piotroski F-Score is a financial metric used to evaluate the strength of a company’s financial position based on nine criteria related to profitability, leverage, liquidity, and operating efficiency. Our analysis of Iliad SA using the Piotroski F-Score yielded a score of 8 out of 9, indicating strong financial health. The company demonstrated positive net income, operating cash flow, return on assets, and improvements in gross margin and asset turnover ratio. However, there was a decrease in the current ratio, suggesting a need for attention to liquidity management. Overall, Iliad SA shows robust financial performance based on this assessment.

IIliad S.A. Risk Overview

Cybersecurity Threats: As data volume grows, so does the risk of data breaches. Tightening data privacy regulations require enhanced data management and security protocols. In 2023, 53% of telecom companies expect cybersecurity breaches to cost over $3 million.

Regulatory Landscape: Iliad’s $106 million investment in an NVIDIA AI supercomputer aims to integrate AI into operations. However, evolving EU AI regulations pose risks. A survey indicates 61% of telecom leaders see regulatory risks significantly impacting their businesses.

Business Interruption: Cyber-attacks and supply chain vulnerabilities can cause significant disruptions. Geopolitical upheaval and the pandemic have highlighted overreliance on critical suppliers.

Workforce Risk: The tech sector faces talent shortages and competition from startups. High salaries in markets like the US add pressure, necessitating global workforce mobility. Universities are developing IT security programs to address future needs.

ESG and Rating

In 2022, Iliad created a sustainability committee and conducted a materiality assessment to evaluate its sustainability impact. Key priorities include achieving carbon neutrality, upholding ethical practices, enhancing cybersecurity, improving network quality, and ensuring workplace safety. Iliad plans to invest €1 billion over 15 years to achieve environmental goals, such as improving data center performance, promoting eco-friendly sales strategies, and reducing fleet emissions. The company also aims to enhance energy efficiency and increase renewable energy capacity. Iliad has an ESG rating of 39 (satisfactory) by Refinitiv, indicating efforts toward sustainability but with room.

Appendix A - Statements Projections

Appendix B - Cashflows Projections

Appendix C - Revenues Projections


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