SFR Results Mask Broader Growth Opportunities

BMI View: The challenging operating conditions within France's mobile telephony market are reflected in SFR's latest financial results, relating to the quarter ended March 2014. The operator was recently sold to help its erstwhile parent shore up its debts while the lead shareholder in rival Bouygues Telecom is also mulling a withdrawal from a sector that now poses considerable risks to investment. Yet, France continues to enjoy the highest overall score within BMI's proprietary Industry Risk/Reward Ratings and this article explores why this is so.

SFR reported a 5.8% decrease in operating revenues, to EUR2.443bn, in Q114, while EBITDA contracted by 11.0% to EUR625mn over the same period. The operator's total mobile subscriber base rose by 3.2% y-o-y to 21.293mn, although it shrank by 0.3% during the quarter. Retail revenues fell by 8.9% y-o-y to EUR1.611mn and the postpaid retail subscriber base also contracted during Q114, both movements causing further diminution of retail ARPUs. Although SFR has ceased reporting detailed financial indicators while its sale to Altice-controlled Numericable is being processed, BMI believes that its operating and profit margins are under considerable pressure.

Ahead Of The Pack
France Telecoms Ratings Vs Western Europe Average, Q314

The company - along with peers Orange and Bouygues Telecom - is having to invest heavily in next-generation networks and services in order to stay relevant in a market that has been undermined by the aggressive pricing tactics of newcomer Free Mobile as well as over-reliance on resellers and mobile virtual network operators (MVNOs) to maintain organic subscription growth, while seeking to increase its exposure to the more valuable postpaid market.

With rising operating costs, falling revenues and variable organic subscriber growth now widespread across the French mobile market, it seems something of a paradox for France to score as highly as it does in our regional ratings. France has an overall score of 66.6 out of 100 in our Q314 ratings, keeping it ahead of more vibrant markets such as the UK (65.1) and Germany (62.5) as well as the European average (58.7), at least on most fronts.

What makes France ultimately more attractive from a return on investment perspective is that demand for broadband services is much stronger than that for mobile. In part, this is due to the relative under-penetration of broadband versus mobile saturation, but is also linked to the growing demand for video-led converged multiplay services and the roll out of very high-speed broadband infrastructure such as VDSL and 3G/4G wireless broadband plus - increasingly - fibre-to-the-home (FTTH). France's large, youthful and urban-centric population also counts hugely in the market's favour within our ratings system. SFR saw its broadband customer base rise to 5.25mn in Q114, including 221,000 FTTH and 528,000 multi-play customers.

With a significant share of the broadband and pay-TV markets, we believe SFR's new owner will be able to see a significant return in its investment in the mobile operator within the next five years, despite its recent poor financial performance, as it integrates the three platforms. We have adjusted the weighting of our European ratings to emphasise the wireline broadband sector over the saturated mobile market, enabling BMI's ratings system to highlight otherwise hidden investment opportunities across the region.

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Related sectors of this article: Telecoms, Broadband, Mobile
Geography: France

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