Equity Research Report: Orange SA

Universidade do Minho Escola de Economia e Gestão Tiago Miguel Rodrigues Martins Equity Research Report: Orange SA Master´s Project Master´s in Management Specialization in General Management Supervised by Professor Doutor Gilberto Loureiro July 2024 Equity Research Report: Orange SA Tiago M. R. Martins UMinho | 2024 i DIREITOS DE AUTOR E CONDICES DE UTILIZACO DO TRABALHO POR TERCEIROS Este  um trabalho acadmico que pode ser utilizado por terceiros desde que respeitadas as regras e boas prticas internacionalmente aceites, no que concerne aos direitos de autor e direitos conexos. Assim, o presente trabalho pode ser utilizado nos termos previstos na licenca abaixo indicada. Caso o utilizador necessite de permisso para poder fazer um uso do trabalho em condices no previstas no licenciamento indicado, dever contactar o autor, atravs do RepositriUM da Universidade do Minho. Licenc  a concedida aos utilizadores deste trabalho Atribuico-NoComercial-SemDerivaces CC BY-NC-ND https://creativecommons.org/licenses/by-nc-nd/4.0/ ii STATEMENT OF INTEGRITY I hereby declare having conducted this academic work with integrity. I confirm that I have not used plagiarism or any form of undue use of information or falsification of results along the process leading to its elaboration. I further declare that I have fully acknowledged the Code of Ethical Conduct of the University of Minho. iii Acknowledgements First and foremost, I want to give a big thanks to my parents for always being there for me, no matter what decisions I've made. They've always supported me through the good times, but especially during the tough moments throughout my academic journey. I also want to acknowledge the important role my whole family has played, especially my grandparents and my brother. They've provided constant support and motivation, never letting me give up. I can't forget to mention my friends, especially my closest ones, for their daily messages of encouragement and belief in me, even when I doubted myself. Lastly, a huge thanks to Professor Gilberto Loureiro for always being available to help and clarify any doubts I had. His countless ideas and suggestions have significantly improved the quality of my work. iv Resumo Este Relatório de Equity Research  o resultado do Projeto final de Mestrado realizado no ambito do Mestrado em Gestão (Especialização Financeira) da Universidade do Minho. Este consiste na estimação do valor das ações de uma empresa cotada, neste caso, sobre a Orange SA, uma multinacional francesa na indstria de Telecomunicações. O resultado deste Relatrio  uma recomendaco de compra das aces da Orange, com preco alvo de 11.96 €, o que representa um potencial de valorizaco de 12.87% relativamente ao preco atual (09 Março 2024) de 10.60 €. A estrutura do Relatrio  baseada nas diretrizes recomendadas pelo CFA Institute. O primeiro captulo inclui o sumrio do Relatrio, onde está explicita a recomendaco de investimento. Em seguida, é sucintamente descrita a história da empresa, complementada posteriormente no 3º Capítulo com a descrição geral daquilo que é o negócio core da Orange. O 4º Capítulo engloba todos os pontos de referência da posição competitiva, nos quais são mencionados todos os pontos chave e diferenciadores face aos peers, explicando o modelo de negcio da empresa, o processo de criaco de valor e uma lista dos servicos que oferece. De seguida, uma lista de pontos-chave relativos  empresa e, fundamentalmente, à indústria das telecomunicações, anunciando aquilo que demonstrou nos últimos anos e o que poderá vir a ser a mesma num futuro próximo. Posteriormente, é elaborada uma anlise ao desempenho da empresa, e ao dos seus pares, relativo  sustentabilidade ambiental, responsabilidade social e tica corporativa (ESG). O captulo seguinte relata o estudo dos relatrios financeiros passados, bem como a estimaco do desempenho futuro. Ainda neste captulo  feita uma comparaco atravs do uso de rcios financeiros entre a Orange e as empresas pares. Estas análises convergem para a "Avaliação", na qual os Fluxos de Caixa Futuros são estimados. Juntamente com métricas de desempenho futuro da empresa e informações sobre os mercados financeiros, esses elementos são empregados para determinar o valor intrínseco da empresa e, consequentemente, o seu Capital Próprio. Simultaneamente, realiza-se uma avaliação do Capital Próprio utilizando múltiplos calculados a partir dos índices financeiros. Segue-se uma análise detalhada das premissas utilizadas na estimativa do valor do Capital Próprio, que é construída através do estudo da flutuação percentual de variáveis-chave e dos seus impactos no valor das ações em resposta a essas oscilações. O Relatório finaliza com a descrição minuciosa dos possíveis riscos que a empresa pode enfrentar, destacando o impacto provável desses desafios e como essas contingências podem-se se refletir no valor do Capital Próprio. Concluindo, o Equity Resarch Report descreve amplamente o modelo de negcio da Orange e o plano estratégico sobre a qual está assente. De relevar a importante faceta que a indústria das telecomunicações tem vindo a desempenhar nos últimos anos no espetro global, e que tenderá a acentuar-se cada vez mais a curto-médio prazo. Perante todos estes fatores e face a toda a conjuntura económica na qual está inserida, fazem da Orange uma boa oportunidade de investimento. Palavras-Chave: Anlise de Pares, Anlise de Sensibilidade, Avaliaco de Empresas, Capital Prprio, ESG, Fluxos de Caixa Futuros, Orange, Mercados Financeiros, Recomendaco de Investimento, Telecomunicações, Avaliação. v Abstract This Equity Research Report is the result of the Master's final Project carried out within the scope of the Master in Management (Specialization In Finance) program at the University of Minho. It consists of an evaluation of the Equity of a public company, in this case, on Orange SA, a French multinational in the Telecommunications industry. The outcome of this Report is a Buy recommendation for Orange shares, with a target price of 11.96 €, which represents an upside potential of 12.87% relative to the current price (as of March 09) of 10.60€. The Report’s structure is based on the guidelines recommended by the CFA Institute. The first chapter includes a summary of the report, explicitly stating the investment recommendation. Subsequently, the company's history is briefly described, further complemented in the 3rd chapter with an overview of Orange's core business. The 4th chapter encompasses all benchmarks of the competitive position, outlining key points and differentiators from its peers. It explains the company's business model, value creation process, and lists the services it offers. Following this, a list of key points related to the company and fundamentally the telecommunications industry, outlining recent developments and future prospects, is presented. Later, an analysis of the company's performance and that of its peers is conducted, focusing on environmental sustainability, social responsibility, and corporate ethics (ESG). The following chapter details the study of past financial reports and estimates future performance. In this chapter, a comparison using financial ratios between Orange and peer companies is also made. These analyses converge into the "Valuation" section, where Future Cash Flows are estimated, alongside future performance metrics and market information, determining the intrinsic value of the company and, consequently, its Equity. Simultaneously, an Equity assessment is conducted using multiples calculated from financial ratios. A detailed analysis of the assumptions used in estimating Equity value follows, constructed through the study of the percentage fluctuation of key variables and their impacts on stock value in response to these fluctuations. The report concludes with a meticulous description of potential risks the company may face, emphasizing the likely impact of these challenges and how such contingencies could be reflected in the Equity value. In conclusion, the Research Report extensively describes Orange's business model and the strategic plan on which it is based. It highlights the crucial role the telecommunications industry has played globally in recent years, expected to intensify in the short to medium term. Considering all these factors and the economic context in which it operates, Orange appears to be a promising investment opportunity. Keywords: Corporate Valuation, Equity, ESG, Financial Markets, Future Cashflows, Orange, Telecommunications, Investment recommendation, Peer analysis, Sensitivity Analysis, Valuation. vi Disclaimer: This Equity Research Report was prepared for academic purposes only by Tiago Miguel Rodrigues Martins, a student of the Master’s in Management at the University of Minho. The report was supervised by a faculty member acting merely as an academic mentor. Neither the author of this report nor the supervisor are certified investment advisors. This report should be read as a pure academic exercise of a Master student. The information used to produce this report is generically available to the public from different sources and believed to be reliable by the student. The student is the sole responsible for the information used in this report, as well as the estimates and forecasts, application of valuation methods, and views expressed. The University of Minho and its faculty members have no unique nor formal position on those matters and do not take responsibility for any consequences of the use of this report. The purpose of this Equity Research Report is to arrive at an investment recommendation for the shares of Orange SA, a public French company, in the industry of Telecommunications Services, listed in both the Euronext Paris and BIT (Borsa Italiana), under the ticker symbol ORA. They are also listed on the New York Stock Exchange (NYSE) under the ticker ORAN. vii Table of Contents Investment Summary………………………………………………………………………………………………………………………………1 History of Orange SA……………………………………………………………………………………………………………………………….2 Brief………………………………………………………………………………………………………………………………………….2 History and Management Team……………………………………………………………………………………………..……….2 Business Description……………………………………………………………………………………………………………………..………..2 Building infrastructure and Operating Networks………………………………………………………………………………..3 Offering Connectivity, financial, IT and Cybersecurity Services…………..…………………………………………………3 Competitive Positioning…………………………………………………………………………………………………………………………..4 Solid Performance across 8 operating countries………………………………………………………………………………..4 Value creation through innovation…………………………………………………………………………………………………..4 Continuing to expand 4G coverage and speeding up 5G Network development…………………………………………5 Industry Dynamics………………………………………………………………………………………………………………………………….6 The consumer remains at the centre as demand for data rises………………………………………………………………6 Driving business adoption in the Iot………………………………………………………………………………………………….7 Network evolution shapes in the future of Telecom……………………………………………………………………………..7 Enabling ecosystems…………………………………………………………………………………………………………………….8 Porter´s 5 Forces Model……………………………………………………………………………………………………………….8 Environmental, Social and Governance……………………………………………………………………………………………………….9 ESG Peer Summary…………………………………………………………………………………………………………………….10 Environmental………………………………………………………………………………………………………….……………….10 Social………………………………………………………………………………………………………………………………………11 Governance………………………………………………………………………………………………………………………………13 Financial Analysis…………………………………………………………………………………………………………………………………15 Ratio Analysis………………………………………………………………………………………………………………………………………17 Valuation Analysis…………………………………………………………………………………………………………………………………21 Relative Valuation…………………………………………………………………………………………………………………………………22 Sensitivity Analysis……………………………………………………………………………………………………………………………….23 Investment Risks……………………………………………………………………………………………………………………………….….26 Economic Risks………………………………………………………………………………………………………………………….26 Financial Risks…………………………………………………………………………………………………………………………..27 Regulatory and legal Risks……………………………………………………………………………………………………….…..29 Appendixes………………………………………………………………………………………………………………………………………….30 References………………………………………………………………………………………………………………………………………….35 4 Orange's robust performance in its eight European operating countries is anchored in its convergent offers and multi-service strategy. Additionally, the company continues to advance its acquisition policy, capitalizing on the consolidation of the European telecoms market. This strategic approach aims to bring substantial benefits to all Orange customers across the continent (Figure 8). Solid performance across eight operating countries In 2022, Orange demonstrated strong commercial performance in France, acquiring 1.3 million fiber customers and achieving the best mobile net additions (581,000) since 2017, accompanied by the lowest churn rate. Other European countries experienced growth, with a 2.9% increase in retail services driven by convergence and BtoB market growth. In Spain, efforts to restore margins resulted in a return to growth in the second half of the year, despite a 1.5% annual revenue contraction. Belgium achieved high operational performance with 2% revenue growth, focusing on the high-speed network market (Figure 9). Luxembourg adapted its portfolio in line with its challenger position, capitalizing on the 5G network launched in 2020. Poland achieved 4.7% revenue growth, primarily due to fiber network expansion. In Slovakia, the service portfolio expanded with new generation offers, and in Romania, the 5G network extended to 23 urban areas. A 5G spectrum auction in Romania supported ongoing digital transformation. Moldova's strong performance resulted from the transition to fiber-optic networks, reaching over 2 million customers with a high-quality mobile network. Value creation through innovation In the dynamic landscape of increasingly evolving technologies, Orange Innovation leverages the expertise of 8,000 employees, including 680 researchers, to develop impactful solutions that are both competitive and create value for the Group and its stakeholders. Teams, both in France and globally, conduct experiments in key areas such as network virtualization, the Internet of Things (IoT), and artificial intelligence, collaborating closely with Orange Business teams. Orange actively engages in numerous collaborative research projects and initiatives, leading approximately 50 projects with French, European, and international partners. The company forges partnerships with seven competitive clusters, five research chairs, and three shared laboratories, highlighting its commitment to advancing innovation through collaborative efforts. With nearly 10,000 patents filed, Orange possesses the second-largest intellectual property portfolio among European operators. This extensive portfolio includes crucial patents for various telecom standards, encompassing essential technologies like radio, 4G, and 5G, as well as audio and video compression coding. Orange is strategically positioned for the future, holding substantial intellectual capital Competitive Positioning Figure 8 – Mobile Customers Figure 9 – Main Source of Countries Growth Source: Orange Annual Report 2022 Source: Own Estimations 5 in areas such as cybersecurity (with over 500 patents and software pieces), quantum computing, and artificial intelligence. In 2022 alone, the company added 207 new inventions to its unique technological assets, actively licensing them to over 2,000 industrial partners worldwide. To encourage innovation within the startup ecosystem, Orange established one of the first accelerator networks globally—Orange Fab. With a presence in Europe, Africa, the Middle East, and North America, the Orange Fab accelerators provide support to promising startups in business development and management practices. These programs focus on specific themes, aiming to generate new business opportunities through partnerships with Orange business units and external partners. For over a decade, Orange has been a pioneer in bringing fiber-optic internet to homes and businesses, leading the European market by making 61.7 million homes fiber-ready and deploying almost 46 million fiber-to-the-home (FTTH) connections by the end of 2022. The rapid deployment and dense network facilitated gaining 1.1 million customers in 2022, expanding the total customer base to 12.9 million. The commitment extends to Africa and the Middle East, where Orange aims to serve 1.3 million fiber customers by 2025, contributing to increased digital coverage and regional development. In France, Orange dominates the fiber market (Figure 10) with 7.2 million customers at the end of 2022, marking a significant increase of 1.3 million from 2021. Notably, half of FTTH internet subscription sales were to new retail customers, emphasizing the potency of fiber as a customer acquisition tool and a major growth driver. The FiberCo Orange Concessions increased FTTH availability to over 2.5 million households in rural areas, covering 80% of the population with speeds up to 2 Gb/s. France boasts one of the largest fiber footprints in Europe. In Spain, Orange has made 16.8 million homes fiber-ready, while in Poland, the fiber customer base experienced a robust growth of 23.9% in 2022. Continuing to expand 4G coverage and speeding up 5G network deployment Orange is committed to expanding its 4G coverage, reaching nearly 99% of the population in its eight operating countries in Europe. In mainland France, the 4G network already covers 99.7% of the population, with ongoing investments in rural areas, including participation in the New Deal Mobile initiative. This initiative, launched by Arcep and the French government in 2018, aims to enhance mobile coverage across the country. Furthermore, Orange is accelerating its 5G network deployment. The 5G networks are currently available in Botswana and seven European countries—France, Luxembourg, Poland, Romania, Slovakia, Spain, and Belgium. Figure 10 – Fibber Connections Source: Orange Website 6 The telecommunications industry faces a strategic challenge due to its utility-like nature, providing essential services to billions of consumers and businesses worldwide. The sector anticipates a threefold increase in global data consumption, driven by video traffic, from 3.4 million petabytes in 2022 to 9.7 million petabytes in 2027. However, providers face limited pricing power in the increasingly commoditized connectivity and data services market. Revenues from internet access, serving as a proxy for broadband spending, are expected to grow at a modest 4% CAGR, reaching US$921.6 billion by 2027. Simultaneously, telecom companies (telcos) must make substantial investments in costly infrastructure to support customer needs. With the ongoing transition to 5G and the adoption of newer technological standards, telcos are projected to invest a significant US$342.1 billion in their networks in 2027 alone. Telecom companies, while continuing their emphasis on cost-cutting, optimization, and automation, are identifying growth opportunities in various areas. These include Internet of Things (IoT) solutions, private 5G networks for business customers, fixed wireless home broadband for households, and the provision of digital infrastructure, data, content, and platform services customized for sectors like entertainment and media (E&M), healthcare, manufacturing, and mobility in specific markets. In pursuit of these growth areas, telcos are strategically focusing on becoming more adept at collaborating within the broader ecosystems that are driving transformation in the expansive telecommunications industry. 1. The consumer remains at the centre as demand for data rises In the business-to-consumer (B2C) sector, telecom companies are witnessing increased demand driven by evolving user preferences, particularly as new devices with higher data requirements emerge. This demand is predominantly fueled by the surge in video consumption, constituting nearly 79% of the projected 9.7 million petabytes of data consumed in 2027 (Figure 11). The additional data consumed by video between 2023 and 2027 alone is expected to surpass the total data consumption across all categories in 2022. Traditional communications data, which experienced a 104% rise from 2018 to 2022, is projected to grow at a more moderate rate of 26.8% from 2023 to 2027. A combination of technological innovations, fierce competition, and changing consumer expectations, partly influenced by cost-of-living pressures, is contributing to a decline in the price of data. Consequently, internet access revenues are expected to grow roughly in line with global GDP, reaching $921.6 billion in 2027 from $757.7 billion in 2022, reflecting a 4% CAGR. Recognizing the challenges in relying solely on connectivity revenues, telcos are actively seeking diversification into additional revenue streams, including content subscriptions and Internet of Things (IoT) applications. Industry Dynamics Figure 11 – Global Data Consumption Source: PWC Report 7 2. Driving business adoption fon the internet of things In the business and corporate customer segment, the adoption of Internet of Things (IoT) is increasing across various industries, although revenues have seen linear growth rather than exponential. Current constraints in chipsets and networks limit the promised low energy, for many simple IoT use cases. Businesses face challenges in deploying and managing IoT solutions, emphasizing the need for a collaborative ecosystem involving telcos, software and cloud providers, and system and business integrators to develop more effective and scalable solutions. Over the next five years, enterprises' strong interest in IoT use cases is expected to translate into increasing revenues. IoT devices, which have become commonplace, will become pervasive, with the total number of installed devices projected to rise from 16.4 billion in 2022 to 25.1 billion in 2027—approximately three devices for every human on the planet. The consumer sector is forecasted to experience the most significant growth, with the number of devices approaching 10 billion in 2027. This growth reflects consumers' adoption of home ecosystems built around multiple devices, with smart speakers serving as control points for various systems, communicating through protocols like IFTTT (If This Then That) and Matter (Figure 12). Given the growing demand for high-speed and low-latency networks across diverse industries, telcos are seeking efficiency and scalability by partnering with specialists across their ecosystems. The landscape for IoT is evolving from telcos working alone to ecosystems comprising telco and tech players, each contributing complementary strengths. In the B2B context, there is a heightened focus on private networks connecting onsite IoT devices to analytics and robotics, requiring a range of services from cloud, telecom, hardware and software providers, including edge computing services, security, integration, and private network installation and operation (Figure 13). 3. Network evolution shapes the future of the telecom industry The future for telcos and their customers is becoming increasingly diverse in terms of network choices. By the beginning of 2023, nearly 200 telcos had rolled out 5G networks, with more expected to follow in the subsequent year. 5G is projected to become the leading smartphone connection type in 2025, surpassing 50% of the total, and is forecasted to rise to over two-thirds by 2027. While fiber deployment is gaining momentum, the adoption of Open Radio Access Networks (Open RAN) remains niche but is witnessing notable initiatives (Figure 14). Historically, capital spending on successive generations of mobile network technology has occurred in ten-year cycles, with substantial growth in 2021 and 2022 as the industry invested in 5G build-out. Total telecom capital expenditure (capex) increased by 4.2% in 2022 to reach US$319.1 billion, the highest in the ten-year period. Looking ahead, the growth rate in both fixed and mobile broadband investment is expected to decline annually through 2027 due to higher inflation and interest rates, instilling caution in capital spending. Figure 12 – Different Application for Iot devices Figure 13 – 5G Impact on Telecom Ecosystem Figure 14 – 3G, 4G and 5G World Connections Source: PWC Report Source: PWC Report Source: Everest Group 8 In 2026, mobile network capex is predicted to surpass fixed broadband investment. Key drivers for telco capex growth include 5G deployment, expansion of fixed fiber infrastructure, cloud system migration, and exploration of open-source network solutions. The sustained high level of investment intensity will continue to place pressure on telcos' financing and debt levels, emphasizing the need for improving operational efficiency, monetization, and cost control (Figure 15). Many operators, including TMobile US, Rain, Singtel, Vodafone, STC, and Orange itself, have launched 5G standalone networks. Some are investing in neutral host networks, offering access to multiple providers, while others aim for economies of scale and synergies through mergers, pooling resources to invest in integrated and scalable 5G networks. Enabling ecosystems The Global Telecom Outlook highlights a rapidly evolving industry (Figure 16), presenting both challenges to existing business models and significant opportunities for incumbents and new entrants. Regardless of the chosen focus areas and pockets of growth, it is evident that substantial investment in time, money, strategic thinking, and resources will be essential for the telecom industry to innovate. Entering an era where revenue growth and optimization opportunities may be limited, coupled with an increase in the cost of capital, all carriers are required to master the capabilities of being a utility. This involves efficiently constructing and operating network assets to earn back the cost of capital with an added margin. Companies must prioritize the monetization of assets through sales or carve-outs as they adapt their strategic priorities to navigate the changing landscape. Porter´s 5 forces model: Threat of New Entrants: LOW High Capital Requirements : The telecommunications industry demands significant capital investments in network infrastructure. Orange has invested billions in developing and maintaining its extensive fiber-optic and mobile networks. Regulatory Barriers : Strict regulations and licensing requirements, especially in the allocation of spectrum, act as barriers. Orange, being a well-established player, navigates these regulatory landscapes effectively. Bargaining Power of Suppliers: LOW Diverse Supplier Base : Orange sources network equipment from various global suppliers like Ericsson, Nokia, and Huawei. This diversity minimizes dependency on a single supplier. Standardized Inputs : The majority of network components and devices follow industry standards, reducing the bargaining power of individual suppliers. Orange's scale allows negotiating favorable terms. Figure 15 – Growth Rate in Capital Expenditures in Networks Figure 16 – Evolution of Telecom Market in France in USD B$ Source: PWC Report Source: Mordor Intelligence and Own Estimates CAGR: 2.335% 9 Bargaining Power of Customers: MODERATE Consumer Choice : Customers have a range of telecom providers to choose from. Orange competes by offering competitive pricing plans, innovative services like Orange TV, and superior customer service. Switching Costs : While customers can easily switch providers, the hassle involved, and potential loss of bundled services may moderate their bargaining power. Orange's focus on customer experience helps retain loyalty. Threat of Substitute Products: LOW/MODERATE Alternative Technologies : Emerging technologies like Over-The-Top (OTT) services or satellite communication pose a moderate threat. Orange combats this through strategic partnerships (e.g., offering OTT services) and emphasizing the reliability and speed of its networks. Essential Service : Telecommunications services are considered essential, and Orange's diversified offerings, including mobile, broadband, and enterprise solutions, make it a preferred choice. Rivalry among Existing Players: MODERATE Competitive Pricing : Orange competes on pricing, regularly adjusting its plans to stay competitive with rivals like Vodafone and Deutsche Telekom. Innovation : To stand out, Orange focuses on innovation, such as its involvement in 5G development and smart city initiatives. The launch of Orange Bank demonstrates its commitment to diversification beyond traditional telecom services. This detailed analysis showcases how Orange SA navigates the complexities of the telecommunications industry, leveraging its strengths to mitigate potential risks and maintain a competitive position (Figure 17). As corporations increasingly acknowledge the significance of environmental sustainability, social responsibility, and ethical governance, the evaluation of Environmental, Social, and Governance (ESG) factors has become indispensable. Over the past five years, Orange SA has witnessed a steady uptrend in its ESG scores, highlighting its significant commitment to longterm value and risk management (Table 1). In the telecom industry, where distinct weights are assigned to each dimension, the one that stands out is the social aspect, accounting for over half of it. Environmental, Social and Governance (ESG) Figure 17 - Porter´s 5 Forces Model Table 1 – ESG Score Evolution Source: Own Estimations Source: Refinitiv Eikon and Own Methods 10 The company's dedication to social responsibility is reflected in robust scores over the years, accompanied by continuous improvements in the environmental and governance pillars. Despite advancements, the governance score still indicates a huge potential for further refinement. Notably, the controversies score has exhibited significant relative growth, signifying Orange's proactive approach in addressing and managing contentious issues. The exploration of these dynamics will be made in the subsequent sections, detailing every metric and the relative position of Orange when compared to its peers. ESG Peer Summary As we can analyze by Table 2, Orange SA stands favorably among its competitors, despite some rivals boasting higher ESG scores, such as Singapore Telecommunications Ltd and Telstra Group. The robust overall performance is attributed to its outstanding Social Pillar Score of 90.44, constituting more than half of the ESG Score of 79.80. This distinct advantage in the Social Pillar sets Orange SA apart from its peers, surpassing even the best competitor by a clear margin. On the flip side, a conspicuous and distinctly negative factor emerges upon scrutinizing the table. The Governance Pillar Score is unequivocally the least favorable among all industry competitors. Despite its relatively modest weight of 26.5%, it significantly diminishes the final score, restraining Orange SA from securing an even more prominent position in the industry. The factors contributing to this performance will be thoroughly analyzed later on. Concerning the environmental factor, Orange SA positions itself in an intermediary stance with a score (still quite satisfactory) of 80.5. Regarding the ESG controversies score, it falls just short of BCE.TO, which is still commendable and offers ample room for improvement. Environmental Orange's commitment to environmental sustainability is clear in its ambitious targets for reducing greenhouse gas emissions. The company aims for a 45% reduction in emissions by 2030 across three categories: direct emissions from buildings and vehicles (scope 1), indirect emissions from purchased electricity and heating (scope 2), and upstream and downstream indirect emissions (scope 3). Lead the Future, Orange's strategic plan, reinforces climate change mitigation goals, targeting a 30% reduction in scope 1 and 2 CO2 emissions related to digital activities and a 14% reduction in scope 3 emissions by 2025. Table 2 – ESG Peer Summary Source: Refinitiv Eikon And Own Estimates 11 Renewable energy adoption is a key focus for Orange, with 37.8% of its electricity sourced from renewable sources in 2022. Power Purchase Agreements (PPAs) and agreements ensuring a Guarantee of Origin contribute to this effort, covering a significant portion of the company's electricity needs. Orange is also investing in solar energy generation systems across its sites in Africa and the Middle East. The company emphasizes energy efficiency in networks, buildings, and vehicles, achieving a 6.3% reduction in scope 1 and 2 CO2 emissions in 2022 (Figure 18). The Green ITN program employs AI to optimize consumption, advanced standby modes, and network sharing, resulting in substantial energy savings since 2015. Orange is actively working on reducing scope 3 emissions, incorporating environmental criteria in tenders and encouraging suppliers to lower their emissions (Appendix 3). The company targets a 14% reduction in scope 3 emissions by 2025. In alignment with France's energy-saving plan, Orange introduced measures to decrease building-related energy consumption and shared eco-friendly guidance. The company is also addressing emissions from tertiary-sector buildings and company vehicles, with plans to reduce energy consumption by 40% and transition to electric vehicles. Eco-design principles are integral to Orange's product and service development, aiming to ensure all Orange-branded products meet eco-design criteria by 2025. The company views eco-design as a driver of innovation and a means to differentiate itself in the market, emphasizing training and recruitment in this area. In summary, upon a more direct examination, as can be seen in the Table 3, the Environmental Pillar Score reveals some different outcomes across its three segments, albeit all bearing comparable significance. Unlike the innovation segment, which has exhibited less-than-satisfactory values over the past five years with no apparent alterations, the resource use category has consistently delivered highly positive results, indicative of an incredible performance. Despite emissions witnessing a decline since 2020 one could still assert that they exhibit commendable outcomes. Social Data protection governance structure Orange's social commitment is essentially related to data protection, increasing digital technology accessibility, and promoting diversity and inclusion. It involves collaboration with stakeholders across all operating countries (Appendix 4). A fundamental aspect of this commitment is ensuring data protection through a solid governance structure. The focus on cybersecurity is evident in a security improvement policy that assesses and manages risks, especially cyber threats. Figure 18 – Scope 1,2 and 3 Emissions Table 3 - Environmental Score Evolution Source: PWC Report Source: Refinitiv Eikon and Own Methods 12 In 2022, over 23,000 employees underwent extensive training, totaling more than 214,000 hours, covering cybersecurity fundamentals, General Data Protection Regulation (GDPR), and encryption tools. Additionally, guidelines on personal data protection were disseminated to points of contact, available in five languages on the company's intranet. In response to escalating cyber threats, customer data protection becomes a very important subject. Orange provides a comprehensive set of solutions for business customers in France, that includes for example "Suite de sécurité pro” and "SugarSync". Orange Cyberdefense, a leading provider of cybersecurity services in Europe, collaborates with businesses of diverse scales, offering customized data security solutions. Diversity and inclusion, powerful drivers of long-term performance Orange is dedicated to promoting digital literacy and ensuring universal access to fundamental digital skills. Through initiatives like the Orange Foundation's programs and digital workshops conducted by Orange in France, Orange Studio in Poland, and Garage Labs in Spain, a comprehensive and accessible understanding of essential digital concepts is provided. Since its launch in 2014, the Supercodeurs program has educated children aged 9 to 13 across several operating countries, introducing them to digital challenges and potential careers. In Africa and the Middle East, the Digital Schools program, supported by the Orange Foundation, has equipped primary school pupils with tablets and educational materials, facilitating their engagement with digital technology. In 2022, the Orange Foundation's Women's Digital Centers program significantly contributed to the social and professional integration of nearly 7,000 women. From early 2021 to late 2022, one million individuals benefited from Orange's digital support and training initiatives. The objective is to extend this impact to 2.5 million people between 2021 and 2025 and reach six million by 2030. Orange is committed to promoting gender balance and attending inclusivity in technical and digital professions. The Hello Women program launched in over 20 countries, primarily in Europe and Africa since 2021, aims to increase the percentage of women in innovation and technological roles from 21.2% to 25% by 2025. To support women in reaching management positions, the group targets 35% of women in management networks by 2025. The percentage of female Executive Committee members increased significantly from 28.6% to 41.7% in 2022. Over 500 promising female employees across various countries received support through development and mentoring programs. Orange prioritizes work-life balance for its employees by facilitating remote working, offering flexible hours, and introducing familyfriendly measures. A landmark gender equality agreement signed in December 2021 provides male employees in France with an additional five working days of paid paternity leave, totaling 33 days. Ensuring equal opportunities, Orange supports individuals with disabilities through a fair and inclusive recruitment process, promoting employee well-being, providing adapted solutions for customers, and collaborating with suppliers in the sheltered employment sector. The Neuroteam program focuses on supporting neurodivergent individuals, promoting awareness, providing inclusive management and recruitment training, and demonstrating how neurodiversity drives innovation. 13 In 2022, Orange reaffirmed its commitment to boosting LGBT+ representation by co-signing a charter by L’Autre Cercle. Over 450 individuals in France were trained on understanding religious beliefs, and support was extended to the non-profit organization Club 21e Sicle’s efforts to combat origin-based inequality. In promoting inclusive artificial intelligence (AI), Orange believes diverse AI teams are crucial to reducing bias. The International Charter for Inclusive AI, launched in partnership with the Arborus endowment fund in 2020, has accumulated nearly 125 endorsements. Following a Bureau Veritas audit in 2020, Orange became the first company to be awarded the "Gender Equality European & International Standard – Artificial Intelligence" (GEEIS-AI) label, renewed in 2022. To emphasize the notorious work carried out in the social pillar by Orange, as we can see from the figure above, all metrics have demonstrated excellent performance over the past 5 years, with a particular emphasis on product responsibility and community, where the scores have remained consistently perfect for several years. Regarding the workforce and human rights, the scores have slightly decreased since 2018, but still present satisfactory results, indicating room for good improvement (Table 4). Governance In 2022, Orange implemented a new governance structure by separating the roles of Chair and Chief Executive Officer. Independent director Jacques Aschenbroich (Figure 19) serves as the non-executive Chairman, overseeing the Board of Directors (Appendix 2), while CEO Christel Heydemann (Figure 20) leads the executive management team. This model ensures adherence to principles of power separation and independence, enhancing monitoring and oversight. The 15-member Board, appointed for four-year terms, reflects diverse corporate expertise and skills aligned with Orange's strategy and purpose (Appendix 5). Support from three specialized committees The Board is composed by three distinct committees, each chaired by an independent director: The Audit Committee, the Governance and Corporate Social and Environmental Responsibility Committee (GCSERC), and the Strategy and Technology Committee (STC). These committees cover different aspects, such as financial reporting, risk management, internal control, ethics, debt and liquidity management, development projects, strategic planning, major projects, multi-year investment programs, technological partnerships, governance processes, corporate officers' compensation, CSR priorities, and workplace policies (Figure 21). Table 4 – Social Score Evolution Figure 19 – Jacques Aschenbroich Figure 20 – CEO Christel Heydemann Source: Refinitiv Eikon and Own Methods Source: Orange Annual Report 2022 Source: Orange Annual Report 2022 20 utilization, and, as mentioned earlier, the impact of acquisitions and mergers by Orange. The forecast indicates that this ratio will stabilize at 3.29 by 2027, slightly surpassing the industry median of around 3.11. Now turning to the Debt/Equity ratio, it is evident that this ratio has consistently exceeded the industry median of 0.87 year after year (Figure 36). From 2017 to 2022, the ratio has progressed almost every year, with the total debt being 1.51 times higher than equity in 2022. At first glance, this might suggest a riskier position in terms of indebtedness, especially when compared to peers. However, this higher ratio is beneficial for Orange as it efficiently utilizes debt to finance growth projects and investments that generate returns higher than the cost of debt. My forecasts for the future (2023-2027) anticipate a decreasing ratio. As mentioned earlier, with a constant debt value reflective of 2022, a natural decline is expected, reaching a ratio of 1.35 in 2027. In both solvency ratios, Orange converges towards the average of its peers and, therefore, approaches what would be an optimal capital structure. Moving on to the analysis of activity ratios, it is essential to note that certain assumptions regarding operating activities remain constant throughout the analyzed periods in the valuation process. Specifically, Accounts Receivables, Accounts Payables, Days Sales Outstanding (DSO), Days Payable Outstanding (DPO), and the Cash Cycle (DSO - DPO) are among these assumptions. Regarding the Return on Equity (ROE), it has exhibited significant fluctuations since 2017, peaking at 14% in 2020 (Figure 37). In the following year, a sharp drop in net income led to historical lows of 0.7%. When compared to the telecommunications sector average (14.3%), it's noteworthy that the company is in a clearly unfavorable position in this metric, and clearly needs improvement. For the future, with a forecasted stabilization of debt and reduced subsequent leverage, an increase to 7.8% is expected in the next 5 years. Regarding the Return on Assets (ROA), this ratio has also shown oscillations in recent years, reflecting the poor performance in 2020 and a rapid recovery in subsequent years. For the period 2023-2027, constancy is projected, with an expected fixation at 2.4%. Comparing with its peers, it exhibits a significantly lower ratio—the average of 3.44% far surpasses Orange's 1.96%, clearly highlighting the need for improvement, not only in this ratio but also in ROE (Figure 38). This improvement could be achieved in the future, for instance, through some of the new services that Orange aims to provide, particularly those related to Orange Business and Orange Cyberdefense. Figure 36 – Solvency Ratios Figure 37 – ROE Evolution Figure 38 – ROE and ROA Source: Refinitiv Eikon and Own Calculations Source: Refinitiv Eikon and Own Calculations Source: Refinitiv Eikon and Own Calculations 21 The valuation process entails a comprehensive analysis of multiple components that impact Orange as a business operating in diverse countries and industries, exposed to various sources of risk and opportunities. To begin with, the estimation of the cost of capital is crucial, as it measures the market-required rate of return as a firm. The process starts with the calculation of the cost of debt, which takes into account the riskfree rate, assumed here as the 10-year Germany Treasury rate long-term average (2.359%), and the ratingbased default spread for the French market (0.53%), extracted from Professor Aswath Damodaran's datasets from January 2023. The tax shield effect of debt, using the FY 2022 effective tax rate (32.59%), is also incorporated to arrive at the after-tax cost of debt for Orange, which is 1.95%. Next, the cost of equity is determined as a weighted average of the revenues split by region, recognizing that different economies require different rates of return. The calculation is done using the CAPM model, with the unlevered beta for Orange's industry, Telecom Services (0.47), obtained from Professor Aswath Damodaran's datasets and levered using the Debt-toEquity ratio based on FY 2022 values. The equity risk premium for each corresponding region, also from Professor Aswath Damodaran's datasets (Appendix 9), is multiplied by the beta and added to the riskfree rate to arrive at the region's cost of equity. The overall cost of equity for the firm is estimated to be 10.01%. To arrive at the cost of capital (WACC), the debt and equity are weighted relative to the total enterprise value. With an Equity to EV of 39.8% and Debt to EV of 60.20%, the resulting cost of capital is 5.15% (Table 10). Although it was not subsequently used as a reference, an alternative WACC was also calculated by me based on seven companies comparable to Orange. For this purpose, the formula containing the beta, debt, equity, and tax margin of each of these companies was applied. After averaging the unlevered beta of each company, an unlevered beta of 0.47 was achieved (Table 11). Since this value was quite similar to the average of 49 Telecom Services companies, the value I used for the WACC calculation was 0.47 (following Damodaran's assumptions). The next step in the valuation process is estimating the Free Cash Flow to the Firm (FCFF), which measures the cash flows that both debt holders and shareholders are entitled to. The FCFF is calculated by adding back the depreciation to the after-tax operating profit and then subtracting the change in working capital and the capital expenses, which are both indicators of reinvestment in the company: Valuation Analysis Table 10 – Cost of Debt Table 11 – Alternative Beta using Peers Figure 39 – EBIT to FCFF (M €) Source: Aswath Damodaran´s Website/Databases and Own Estimates Source: Refinitiv Eikon and Own Calculations Source: Own Calculations 22 This process is represented by the waterfall in Figure 39, and is done for the defined growth period, which runs from FY 2023 to FY 2027. It is also represented on Appendix 10 the construction of FCFF for all the years from 2017 until 2027. The Terminal Value is the present value of future cash flows beyond the defined growth period, i.e., from FY 2028 and beyond. The Terminal Value is calculated by applying a perpetual growth formula to the FCFF of FY 2027, using the WACC as a discount rate and a growth rate for the perpetuity cash flows. The growth factor is estimated using the resulting methodology from Revenues, with the long-term target resulting from the average of the annual growth rate estimated from the period 2023-2027: 1.205%. To arrive to the Enterprise Value (EV) of 76,793 M€ (Appendix 11) I discounted the FCFF to the cost of capital in each year, starting in Year 2024. In the last year2027 the value of FCFF was then added to the Terminal Value, and then discounted to the Cost of Capital. To arrive at the value of Net Debt, the process was already explained above on Financial Analysis, and related to the Shares Outstanding I assumed they remained constant from 2022 onwards – 2658 Millions of Shares. Based on the valuation process outlined in this text, the estimated intrinsic value of Orange is 11.96€ (Figure 40). As of today (March 9th, 2024), the market price of Orange is 10.60€ indicating that the stock is currently undervalued, with an upside of 12.87%. However, it's important to note that the final share price will depend on various factors, including market sentiment and future business performance. Nonetheless, a thorough valuation process can provide investors with a more informed perspective on the potential value of investing in Orange. Relative valuation is an alternative methodology to traditional Discounted Cash Flow (DCF) models for valuing a company. This approach uses market multiples as an indicator of how much a security is undervalued or overvalued compared to its industry peers (Table 12). The central principle of relative valuation is that assets with similar characteristics should have comparable valuations. As such, it provides a means for investors to compare a company's valuation to its industry average in a specific metric. To calculate the industry average, I used the weighted average of the total market capitalization of all peers and Orange. Starting with the analysis of the comparison to the current share price, I first analyzed the Price to Sales (P/S) ratio (Table 13), which measures a company's market capitalization to its sales volume. My findings indicate that Orange undervalued by 67% when compared to the current price. Next, I examined the Price to Earnings (P/E) ratio, which measures a company's net income relative to its market capitalization. Relative Valuation Figure 40 – Enterprise Value (M €) and Share Price € Table 12 – Orange Pricing Ratios comparison with Peers Table 13 – Orange Pricing Ratios Source: Own Calculations Source: Refinitiv Eikon and Own Calculations Source: Refinitiv Eikon and Own Calculations 23 My analysis reveals that Orange is undervalued relative to its peers by 51%. This significant price discount highlights Orange's superior ability to convert sales into net profits, making it an attractive investment opportunity for all types of investors – both debt holders and shareholders. Moving on to Enterprise Value (EV) ratios (Table 14), I examined the EV to Sales (EV/S) ratio, which, similar to the P/S ratio, compares a company's enterprise value to its sales volume. Orange was found to be undervalued by 56%, which is lower than the previous metric. This finding suggests that the market values the equity of Orange more highly than its overall enterprise value, likely due to factors such as growth prospects, brand strength, or a competitive advantage in the market. In addition, I analyzed the EV/EBIT and EV/EBITDA ratios. My results indicate that Orange is undervalued by 17% and 40%, respectively, further supporting the conclusion that Orange is undervalued relative to its peers. Moving on to the analysis of the Discounted Cashflow Valuation (Figure 41), Orange is still undervalued in every metric, but with a much smaller difference. Nevertheless, the metrics still show a considerable discrepancy, except for EV/EBIT, which is undervalued by only 5%. Overall, Orange has been evaluated as undervalued according to all possible metrics, which indicates clearly a similar conclusion when compared to DCF Valuation, which clearly sets a buy investment recommendation to all investors. In this section, I aim to further refine the valuation process by testing the sensitivity of Orange stock price to the assumptions made thus far. Specifically, I examine the impact of variations in both growth rates, margin levels and discount rates on the final share price. The tests are conducted to provide a more comprehensive analysis of the underlying risk factors inherent in Orange´s operations and market environment. As such, the outcomes of these tests will serve as critical inputs in the formulation of informed investment decisions. The results of these tests are presented in Figure 42. In order to assess the sensitivity of Orange´s stock price to the underlying assumptions of the valuation process, 4 tests were conducted. The first test (Figure 43) varied the terminal growth and the Cost of Capital by 10%. In the second test (Figure 44), the defined period CAGR in Revenues was varied by 10%, with the Cost of Capital also varying by 10%. The third test (Figure 45) assessed the impact of varying the defined period CAGR in Revenues by 10% against the terminal growth, which was also varied by 10%. Lastly, the fifth test (Figure 46) compared the impact of varying the EBIT Margin by 5% against the terminal growth rate, that varying by 10%. Sensitivity Analysis Table 14 – Orange EV Ratios Figure 41 – Relative Valuation with DCF and current price Figure 42 – Different Scenarios for 4 variables Source: Refinitiv Eikon and Own Calculations Source: Own Calculations Source: Own Calculations 24 WACCTERMINAL GROWTH RATE Analyzing the Figure 45, it becomes clear that the WACC (Weighted Average Cost of Capital) is the variable that exhibits the greatest impact on the Orange stock price level when compared to the terminal growth rate. Specifically, when we vary the WACC from the best to the worst-case scenario, the stock price shows a positive change of 79.20% and a negative change of 51.71% compared to the base scenario, resulting in a total variation of 130.90%. This impact is more pronounced in scenarios with lower growth rates, in the terminal growth test its peak variation is 132.61%, a little bit more pronounced then when compared to higher growth scenarios that have a maximum variation of 130.40%. The other variable that presents a significant impact on Orange share price is the terminal growth. In particular, it is observed that the variation in this variable, ranging from +20% to -20%, has a notable impact on the stock's final valuation. Specifically, the total fluctuation in regard to the base case amounts to 14.59% upwards and 11.69% downwards, respectively, corresponding to a total variation of 26.28% (Figure 44). Notably, this impact is more pronounced in the "higher WACC" scenarios, where it reaches 32.44%, compared to the "lower WACC" scenarios, where it only reaches 26.78%. Therefore, the sensitivity analysis reveals that the terminal growth variable is also a crucial determinant of Orange´s share price. It is also noteworthy that when the WACC is at its minimum (4.18%) and the terminal growth rate is at its maximum (1.45%), the stock price reaches its highest possible level at €24.69 (106.32% above the predicted base scenario). Conversely, in the opposite scenario, the lowest price can reach €4.93 (-58.78% compared to the base scenario). WACCCAGR for Revenues Evaluating the defined Compound Annual Growth Rate (CAGR) for Revenues, the analysis indicates that its variation from the best, +20%, to the worst, -20%, results in a total fluctuation of 78% concerning the base case, with a 52.49% increase and a 26.12% decrease. Importantly, the impact becomes more pronounced in the "higher WACC" scenarios, reaching 127.73%, compared to the "lower WACC" scenarios, where it only reaches 58.35%. Figure 43 – Test 1 of Sensitivity Analysis Figure 44 – Terminal Growth rate variation Figure 45 – Test 2 of Sensitivity Analysis Source: Own Calculations Source: Own Calculations Source: Own Calculations 25 When applying a WACC that is 20% lower and a CAGR Revenue Growth that is 20% higher than the base scenario, we arrive at the highest stock price among all the tests: €29.82 - approximately 149.26% higher than the price predicted by the DCF Valuation. WACCEBIT Margin The analysis referent to EBIT Margin reveals that its variation from the best, +10%, to the worst, -10% causes a total fluctuation of 62.04% in regard to the best case, with 31.79% upwards and 30.24% downwards. This relationship shows that the peak variation is guaranteed when the lowest the terminal growth rate and the lowest the EBIT Margin. Then so, the higher will be the impact on Orange Share price66.24% and 32.57%, respectively. When we are comparing to the WACC, the peak variation happens when the EBIT Margin is the lowest164.06% and when the WACC is the highest100.85%. Terminal GrowthCAGR Revenue In regard to the long-term and short-term growth test, the observed impact on the share price across all combinations exhibits less variability than the previously mentioned tests, apart from the EBIT marginterminal Growth test. The defined CAGR Revenues variable still contributes a noticeable impact, with fluctuations ranging between 72.78% in the “higher growth” environment and 84.68% in the “lower growth” scenario. The terminal growth variable exhibits much less significant impact on share price, with fluctuations ranging from 31.82% in the “lower growth” scenario to 21.06% in the “higher growth” scenario. In conclusion, the sensitivity analysis performed in this study indicates that WACC is the variable with the greatest impact on the share price of Orange, followed by defined period CAGR, EBIT margin and lastly terminal growth rate (Figure 48). The impact of these variables on the share price is higher in the scenarios with higher WACC and lower growth rates. The lowest recorded price in these tests – 2.94€ – is 72.29% lower than the current share price (10.60€) and 75.45% lower than my base case, while the best-case scenario – 29.82€ – shows an incredible 181.35% increase in share price compared to the current price and a 149.26% increase compared to my base case. Figure 46 – Test 3 of Sensitivity Analysis Figure 47 – Test 4 of Sensitivity Analysis Figure 48 – Impact of the Variables on Share Price Source: Own Calculations Source: Own Calculations Source: Own Calculations 26 Economic Risks | ER Innovation & Competition (ER1) Probability: LOW | Impact: MODERATE In recent times, the telecom industry has been constantly marked by an intense competition and continuous technological advances, a trend that is expected to increase even further in the upcoming years. Orange, like any other company in the sector, thus faces the risk of being at a clear disadvantage compared to its direct competitors in terms of technological innovation. That being said, failing to remain at the vanguard of technological trends could eventually result in a loss of market share, decreased revenue and, above all, decreased profitability for Orange. As in other areas, the industry landscape is characterized by both well-established competitors and new emerging entrants, that could result in a potential threat of pressure on prices and impacting overall profitability. These events would lead to a scenario similar to the one explored in test 4 of sensitivity analysis, where both the medium and longterm profitability are punt into question. In Figure 49, the maximum impact of a loss 20% in the medium and long-term growth rate is -36.58% on share price (compared to the base-case scenario)- 7.59€, and in the opposite, a 20% gain in both medium and long-term growth would result in a price of 20.38€– 70.33% above target price. Geopolitical Risk (ER2) Probability: LOW | Impact: HIGH Orange faces geopolitical risks that arise from changes in government policy, trade dynamics, or security threats, one of them being the potential impact of protectionist measures on its business activities in certain markets. For example, shifts in visa regulations, could influence Orange's ability to provide telecom services in certain regions, with a direct negative impact on revenue streams and profitability. Moreover, trade barriers and restrictions may interfere with Orange's cross-border operations and affect the mobility of services. Geopolitical risks can also be regarded when looking at security threats, such as cyber-attacks, which can threaten Orange's operations and reputation, in the sense that it could lead to data loss, legal complications, and reputational damage. Like we have been experiencing in recent times, with examples like Covid or the Russian War, political instability and conflicts in various countries can represent additional geopolitical risks for Orange, impacting the ability to operate in them markets. These types of conflicts also have the capacity to disrupt the company's supply chain, and then affect its ability to deliver good services to customers. Such a scenario is observable in test 2 of sensitivity analysis, where both the cost of capital and the medium-term profitability are affected. In Figure 50, the maximum impact of a 20% increase in the cost of capital and a loss in 20% profitability is -72.37% on share price3.31€ Investment Risks Figure 49 – Test 4 Visualization Figure 50 – Test 2 Visualization Source: Own Calculations Source: Own Calculations 27 (compared to base-case scenario), and the other way around that can be said that is a potential for a share price of 29.82€ (149.26% higher than price target), clearly indicating the huge potential both variables can have on the Valuation process. Taxation Risk (ER3) Probability: LOW | Impact: MODERATE Orange is confronted with tax risks, that mainly relate to fluctuations in tax rates and policies. That way, changes in tax policies represent an important part of taxation risk, because such changes can seriously impact compliance requirements and boost managerial duties. To add to that, alterations in tax policy can affect Orange's competitiveness in certain markets, as local companies might be with a competitive advantage due to the offered tax incentives or exemptions. Taxation risk also has the potential for tax disputes or audits, meaning the possibility of additional tax liabilities or legal costs for the company. The judgment of certain tax laws by different tax authorities could then generate controversies on owed taxes, causing potential challenges for the company. The impact of this risk can be proxied to test 2 of sensitivity analysis. In Figure 51, we can perceive the impact that both the cost of capital and the defined CAGR in Revenues can have on the Firm Value. Analyzing the graphic, when a 20% decrease in the WACC and a 20% increase in the profitability are applied we reach a maximum for Firm Value of 124.261 M€, around 62% higher compared to base case. On the other hand, the higher the WACC and the lower the CAGR for Revenues, the lower will be the Firm value, which can drop to 53,779 M€, being around -30% lower than base case. Financial Risks| Interest Rate Risk (FR1) Probability: MODERATE | Impact: MODERATE Orange is exposed to interest rate risks, particularly concerning changes in borrowing costs, as it may need to borrow funds for various purposes, them being financing operations or investing in new technologies. Deviations in interest rates can seriously impact the cost of borrowing for Orange, which could translate into potential changes in interest expenses and influencing overall profitability. Another area of interest rate risk for Orange could be seen in the potential impact on the cost of capital (here WACC), as it can influence the company's ability to raise funds through equity or debt financing and then affecting Orange's capacity to make strategic investments in growth opportunities or distribute value to its shareholders. In Figure 52, when varying both the cost of capital and the EBIT Margin, a minimum of 2.94€ and a maximum of 26.50€ can be reached, making that a total variation of around 197% between the 2 extremes, when compared to the base case scenario. Derived to the facts mentioned before, it is very important for Orange to explore these interest rate dynamics to maintain a balance between financial costs, capital structure, and service demand. This can be observed in both test 1 (Figure 43),2 (Figure 44) and 3 Figure 51 – Impact of WACC and CAGR Revenue on Firm Value Figure 52 – Test 3 Visualization Source: Own Calculations Source: Own Calculations 28 (Figure 45) of sensitivity analysis, in the WACC axis, where the maximum impact of a 12% increase in the cost of capital is -51.71% on share price (compared to basecase scenario). Foreign Exchange Risk (FR2) Probability: HIGH | Impact: MODERATE Orange is exposed to significant currency exchange rate fluctuationsoperating in 28 countriesand because of that is vulnerable to changes in exchange rates between them currencies. One very important aspect affected by currency exchange rate fluctuations is related to revenue, and since Orange generates revenue in different currencies, changes in exchange rates can lead to discrepancies in the reported revenue when converted into the company's reporting currency. This can set up some challenges in precisely assessing the company's financial health and performance. As rapid currency devaluations can result in higher expenses and so creating a significant impact in profit margins, the company may need to implement strategies such as currency hedging to mitigate the risks associated with these fluctuations. Moreover, as Orange engages in international financial transactions and investments, changes in exchange rates can also influence assets and liabilities valuations. This may contribute to gains or losses on the company's balance sheet, creating an impact on its overall financial position. Its effects can be observed in Figure 53, with the variation of both EBIT Margin and the cost of capital clearly impacting the Firm Value. If the impact of a maximum 20% increase in the EBIT Margin and 20% decrease in the WACC is applied, the Firm Value will reach around 115.419 M€, 50% higher than the base case of 76.793M€. Even though the negative impact of the combination of these variables is still significant, around 30%, the positive impact still has a greater weight on the share price. Inflation Risk (FR3) Probability: HIGH | Impact: HIGH As one of the largest telecommunications companies in the world, Orange faces inflation risks that can manifest in many ways, them being for example increased input costs, higher wage inflation or even potential price pressure from customers. A potential problem for Orange could be the cost of inputs such as raw materials, network infrastructure or technology licenses, in a sense that these rising operating costs can translate into lower profit margins for the company. Another aspect to bear in mind is related to wage inflation in different countries, potentially a cause of another inflation risk for Orange. In Figure 54, these impacts can be comparable to test 1 of sensitivity analysis, where both the cost of capital and the terminal growth rate are affected. The maximum impact of a 20% increase in the cost of capital and a loss of 20% in the TGR is -58.78% (compared to base case scenario). Figure 53 – Impact of WACC and EBIT Margin on Firm Value Figure 54 – Test 1 Visualization Source: Own Calculations Source: Own Calculations 29 Furthermore, as we are currently in times of rising inflation, Orange faces potential price pressure from customers as they may try to negotiate lower prices in order to control their own costs, which poses a huge challenge in terms of sustainability of profitability. In addition, inflation may contribute to changes in customer preferences and demand, as they may shift their spending to essential or high-value telecom services or even postpone their investments in information and communication technologies. To try to avoid this, Orange must proactively address these dynamics in order to adapt to a constantly changing customer behavior and maintain its competitive position in the industry (Figure 55). Regulatory and Legal Risks | RL Probability: MODERATE | Impact: LOW Orange, as a global telecom company, is subject to a bundle of regulations, such as, data privacy laws, telecom regulations, labor laws, and other legal frameworks regarding the telecom industry. Non-compliance with these regulations can expedite fines, legal repercussions, and damage to the company's reputation. In recent years, the telecom sector is under increasing analysis all over the world, especially in areas related to cybersecurity or even data protection. Violations of these regulations can translate in substantial costs and legal obligations, that being the reason why Orange has implemented a strong obedience and governance measures to address that risks. To conclude it needs to be explained that the company places a strong emphasis on ethical practices and compliance, enduring dedicated teams to assure attachment to the diverse regulatory panorama across all its operational countries. Figure 55 – Investment Risks Matrix Source: Own Estimates