Morningstar DBRS Assigns Issuer Rating of BBB (high), Stable Trend to Proximus S.A.

DBRS Ratings GmbH (Morningstar DBRS) assigned an Issuer Rating of BBB (high) with a Stable trend to Proximus S.A. (Proximus or the Company). Proximus, headquartered in Brussels, is Belgium's largest telecommunications provider, delivering a comprehensive range of digital communication solutions both domestically and internationally.

KEY CREDIT RATING CONSIDERATIONS
The assigned credit rating reflects (1) Proximus' leading position in Belgium's telecommunications sector, bolstered by substantial investments in fibre and 5G infrastructure that enhance network quality and coverage; (2) the stability provided by majority ownership by the Belgian government, aligning Proximus with national infrastructure goals and potentially facilitating access to strategic infrastructure projects; (3) Proximus' diversified service portfolio, including mobile, broadband, and enterprise solutions, which supports revenue stability in a competitive market; and (4) solid financial metrics, with debt-to-EBITDA forecast around 2.8 times (x) to 3.0x and EBITDA-to-interest coverage exceeding 12x as of 2024, notwithstanding that these levels are relatively weak compared with historical performance following debt-funded acquisitions.

The credit rating also considers (1) the competitive pressures in Belgium, particularly from Telenet, Orange Belgium, and the recent entry of a fourth competitor, the CityMesh-Digi Communications joint venture, which may affect Proximus' market share and pricing flexibility; (2) regulatory obligations to provide open access to its fibre network, which may affect pricing power but also support shared infrastructure investments; and (3) high capital expenditure requirements for Proximus' ongoing fibre expansion, targeting 70% household coverage by 2028 as well as sizeable investments in higher-growth markets, largely through acquisitions.

CREDIT RATING DRIVERS
Morningstar DBRS expects Proximus' credit metrics to continue supporting the current credit rating, resulting in a Stable trend. A positive credit rating action would require a material, sustained improvement in the Company's business risk profile, such as a notable increase in size and expanded geographic reach, alongside the maintenance of leverage metrics at or below current levels and operating margins exceeding Morningstar DBRS' expectations. Conversely, Morningstar DBRS could take a negative credit rating action as a result of adverse changes to Proximus' business risk profile, including increased competition, inflationary or pricing pressures that compress operating margins below forecast expectations, and/or the loss of major contracts not offset by new business gains. Additionally, Morningstar DBRS could also take a negative credit rating action if the Company adopts more aggressive strategies, such as pursuing acquisitions outside its core expertise, adopting aggressive financial policies, or significantly increasing debt levels, resulting in a weaker financial risk profile.

EARNINGS OUTLOOK
Morningstar DBRS forecasts low- to mid-single-digit annual revenue growth, with Proximus' group revenue projected to surpass EUR 6.8 billion by F2026, driven by network expansion, inflation-linked price increases, and acquisitive growth. However, Morningstar DBRS expects competition and lagged inflationary cost increases to exert pressure on Proximus' margins, limiting the full benefit of margin enhancement strategies and recent acquisitions. Consequently, EBITDA is projected to grow by 1.5% to 2.0% in F2025, followed by moderate earnings growth in F2026.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates that Proximus' cash flow from operations will align with its stable earnings trajectory, potentially yielding a low positive or slightly negative free cash flow after capital expenditures, dividends, and working capital needs in 2024, before normalising thereafter. This cash flow is expected to support Proximus' capital allocation priorities, including network investments, shareholder returns, and targeted acquisitions.

Proximus maintains a balanced capital management approach, preserving flexibility for debt-funded acquisitions within its financial policy limits. Recent acquisitions, including a majority stake in Route Mobile for total consideration of EUR 812 million and an estimated downsizing gain of EUR 90 million, underscore the Company's commitment to broadening its digital identity and communications platform as a service (CPaaS) offerings, further diversifying Proximus' revenue base on an international scale.

CREDIT RATING RATIONALE
Proximus' credit rating reflects the stability of its revenue base, derived from essential telecommunications services with a high proportion of fixed contracts that mitigate volatility in various economic conditions. Morningstar DBRS expects inflationary cost pressures to be mitigated by annual price increases of up to 4%, helping to protect EBITDA margins. For F2023, Proximus reported revenue of approximately EUR 6 billion, with EBITDA reaching EUR 1.77 billion, representing steady year-over-year growth from both domestic and international operations.

Liquidity remains solid, with cash reserves of EUR 245 million as of the latest reporting period, supplemented by an undrawn EUR 700 million revolving credit facility and EUR 50 million overdraft facility, providing ample flexibility for operational and strategic needs.

Morningstar DBRS recognises Proximus' prudent leverage management, with net leverage within its target range, guided by a capital allocation framework prioritising dividends and strategic acquisitions in growth markets. Morningstar DBRS expects Proximus' continued investments in fibre and 5G infrastructure to drive long-term revenue growth and competitive differentiation in the Belgian market. Morningstar DBRS expects the successful integration of acquisitions, including the Route Mobile transaction, to support Proximus' EBITDA margins and broaden its international reach in digital services, reinforcing its credit profile over the medium term.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Proximus, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Proximus, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Proximus, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Communications Industry (26 June 2024), https://dbrs.morningstar.com/research/435057

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for this credit rating include Proximus' F2023 Annual Report and Accounts, the Company's Q3 2024 results and presentation, and information and news updates available on Proximus' website. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

This credit rating concerns a newly rated issuer. This is the first Morningstar DBRS credit rating on this issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/442590.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Marvin Pokies, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: November 05, 2024
Last Rating Date: Not applicable as there is no last rating date.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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