Proximus guides for earnings squeeze in 'bold' three-year plan

Proximus calls its latest three-year plan bold2025, but investors were clearly unpersuaded by the pitch. The Belgian telco incumbent's share price opened 5.4% down in Brussels this morning after it warned that dividends would be halved in future. While the stock was performing better by the time locals tucked into their lunchtime moules frites, it was still trading at a discount to its closing price last week. Domestic earnings are expected to shrink in 2023 and not return to the 2022 level for another two years. Timid2025 seems more apt.

The strategic update may unsettle investors in other European telcos with similar problems. Proximus expects an earnings squeeze despite forecasting domestic sales growth of 2% – at the midpoint of its guidance. Inflation is the culprit, according to the company's update. Throughout the industry, energy prices have spiked after Russia's invasion of Ukraine, and staff hit by a cost-of-living crisis are demanding pay increases. In total, those expenses represent about 30% of a typical European operator's costs, according to research by Moody's, a ratings agency.

The answer, as far as Proximus is concerned, involves "a second wave of cost savings," designed to cut expenses by €220 million (US$238 million) over the next three years. Divestments worth more than €400 million ($433 million) over this period are also planned. Among other things, Proximus is selling its Brussels headquarters to Immobel, an investment fund, and opting to lease back part of the property.

Figure 1: Belgium's biggest operator does not expect earnings to recover until the mid-2020s.
(Source: Henri Martin/Alamy Stock Photo)

All this should help conserve resources for the big fiber push. Proximus aims to supply high-speed, full-fiber services to about 50% of Belgian households by 2025 and 95% of them by 2032. But its "gigabit" network covered only 19% of households at the end of September, according to its third-quarter results (it has yet to publish results for the full year), and fiber rollout is costly. For the first nine months of 2022, Proximus pumped €841 million ($910 million) into capital expenditure, some 14% more than it spent for the same part of 2021. That increase was blamed squarely on the fiber project.

Capital expenditure is projected to peak this year at €1.3 billion ($1.4 billion) before dropping back to what Proximus calls "normalized" levels after 2023. This, along with its divestment activity and efficiency measures, should aid a recovery on the earnings front, with free cash flow expected to increase starting in 2024. But net debts over the 2022-25 period are forecast to reach up to three times annual earnings (before interest, tax, depreciation and amortization), compared with the ratio of 2.3 last year. And dividends for 2024 and 2025 are being "rebased" to €0.60 ($0.65) per share, down from €1.20 ($1.30) now.

Alarming cuts

Talk of another "wave" of cuts may alarm staff. Proximus cut around 1,500 full-time jobs in 2020, about 12% of the previous group total. Apart from selling real estate and divesting non-core assets, it has relatively few options for lowering costs. Telecom networks cannot function without electricity. Phasing out older technologies is difficult while even a few customers are still using them. Proximus does not expect to switch off its 3G network until the end of next year, for instance, even though most of its mobile customers have shifted to 4G and 5G technologies. Removing roles may seem much easier, especially where jobs can be automated.

Proximus's update is not entirely devoid of service ambition. It talks of modernizing its IT platforms "to enable ecosystems of the future" and gushes about its "digital-first mindset" and forthcoming apps that will supposedly delight customers. But its press release was short on the details and operators have not typically thrived as app developers – or as anything bar connectivity providers, their most ardent critics would say.

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Executives are probably right to present the fiber deployment as a once-in-a-lifetime, capital-intensive upgrade that cannot be avoided. The future completion of civil-engineering work across Belgium should come as a massive relief, freeing up funds and allowing Proximus to focus on other, service-related activities. With lower capital intensity, Proximus would be in a stronger position to reward shareholders or inject funds into potential growth areas.

More so than many of Europe's operators, it could do with a boost. Since the start of 2020, the Proximus share price has fallen by nearly 64% amid concern about long-term prospects and immediate inflationary pressure. Sadly, today's "bold" three-year plan did not live up to its billing.

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— Iain Morris, International Editor, Light Reading