Exclusive Use of Sam MCHUGH at EXANE S.A
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EQUITIES TELECOM OPERATORS FROM TARGET PRICE EPS 18e EPS 19e UNDERPERFORM NEUTRAL TELECOM ITALIA -37% -6% -12% EUR0.55 TARGET PRICE (DOWNSIDE 31%) EUR0.38 Bargain Hunters Beware Downgrading TI to Underperform; TI is likely to remain a value trap 3 SEPTEMBER 2018 at 16:41* TI has fallen ~23% YTD, underperforming the SXKP by 12%, which itself has underperformed the Sam McHugh SXXP by 13%. A quick look at any comp sheet will show you it is trading at around 4.75x (+44) 207 039 9544 EV/EBITDA (Bloomberg) a hefty ~25% discount to peers. So as investors search for “value” one [email protected] can understand why TI often comes up. However our latest work on The Future of Fibre (published today) has led us to challenge our own long term growth assumptions for TI. In short we have San Dhillon become significantly more bearish, leading to significant cuts to our medium term estimates. We (+44) 207 039 9446 cut our price target from EUR0.60 to EUR0.38 (c30% downside) & downgrade TI to Underperform. Kohulan Paramaguru, CFA (+44) 203 430 8546 Our work identifies Italy and TI as facing the biggest risk to the fixed line outlook in Europe Alexandre Roncier (+44) 203 430 8437Exclusive Our work shows TI’suse wireline business of is over-earning relative to peers. Critically now that Open Fiber has secured project financing and Iliad has launched, we think the downside risks will begin [email protected] to be crystallised. Firstly we think the market still underestimates the negative impact Open Fiber’s Specialist sales rollout will have on broadband ARPUs, voice telephony revenues and TI’s market share. Secondly Gareth Hollis Sam asMCHUGH the market has focused on the impact of Iliad on the wireless market, the impact on the wireline (+44) 207 039 8730 market has been overlooked. We believe falling mobile data prices will increase the attractiveness of mobile broadband to the marginal fixed broadband consumer, constraining broadband ARPU and penetration. Whilst mobile voice pricing/allowances at TIM/Vodafone have reached a level where they will start exerting structural downward pressure on TI’s fixed voice ARPU’s. Iliad’s launch has triggered further mobile price cuts and Brazil at a turning point Elsewhere, after a brief period of stabilisation, Italian mobile prices have fallen further over the summer as the outlook continues to deteriorate. We also review the outlook for TIM Brasil who has operated in a unique sweet spot for 18 months, but now several supportive factors are beginning to turn against them, leading us to conclude the outlook is more challenging than consensus believes. We cut our Brazilian valuation by 15%. Our group level OpFCF estimates are 10% below consensus by ‘20, our FCF estimates are 30% below guidance and we expect leverage to remain >3.0x until at least 2022. In our view TI will remain a value trap for a long time. Price (31 August 2018) EUR0.55 Performance(1) 1w 1m 3m 12m Market cap (EURbn) 14.5 Absolute(%) (8) (17) (20) (32) Free float (EURbn) 9.1 Rel. Telco Operators(%) (5) (11) (17) (22) EV (EURbn) 49.2 Rel. MSCI Europe(%) (8) (15) (20) (35) 3m avg volume (EURm) 60.1 Reuters / Bloomberg TLIT.MI / TIT IM Country / Sub Sector Italy / Incumbent Telcos Financials 12/17 12/18e 12/19e 12/20e Valuation metrics(2) 12/17 12/18e 12/19e 12/20e EPS, Adjusted (EUR) 0.08 0.06 0.07 0.07 P/E (x) 9.5 8.6 7.8 8.1 EPS, IBES (EUR) 0.05 0.07 0.08 0.08 Net yield (%) 0.0 0.0 0.0 0.0 Net dividend (EUR) 0.00 0.00 0.00 0.00 FCF yield (%) 2.7 3.7 5.0 5.4 EV/Sales (x) 2.8 2.6 2.6 2.6 Sales (EURm) 19,828 19,143 18,787 18,494 EV/EBITDA (x) 6.4 6.1 6.0 6.0 EBITA, Adj. (EURm) 4,204 3,770 3,795 3,785 EV/EBITA (x) 13.1 13.0 12.8 12.6 Net profit, Adj.(EURm) 1,778 1,295 1,429 1,375 EV/CE (x) 1.1 0.9 0.9 0.9 ROCE (%) 5.8 5.0 5.0 4.9 Net Debt/EBITDA, Adj. (x) 3.4 3.6 3.6 3.5 Source: Exane BNPP (estimates), Thomson Reuters (consensus) (1) In listing currency, with dividend reinvested (2) Yearly average price for FY ended 12/17 * Date and time (London Time) on which the investment recommendation was finalised. It may differ from the date and time of broad dissemination on the website. See Appendix (on p45) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures. For the exclusive use of Sam MCHUGH at EXANE S.A. (04-Sep-2018) Price at 31 Aug. 18 / 12m Target Price EUR0.55 / EUR0.38 -31% TELECOM ITALIA (Underperform) Reuters / Bloomberg: TLIT.MI / TIT IM Analyst: Sam McHugh (+44) 207 039 9544 Incumbent Telcos | Telecom Operators - Italy Com pany Highlights EURm 2.4 Enterprise value 49,194 Market capitalisation 14,542 Free float 9,075 1.6 3m average volume 60 1.2 Performance (*) 1m 3m 12m Absolute (17%) (20%) (32%) Rel. Sector (11%) (17%) (22%) 0.8 Rel. MSCI Europe (15%) (20%) (35%) 12m Hi/Lo (EUR) : 0.88 -38% / 0.55 +0% CAGR 2006/2018 2018/2020 EPS restated (**) (8%) 3% 0.4 Target Price CFPS (7%) (1%) Price 3.8*CFPS Relative to MSCI Europe Price (yearly avg from Dec. 07 to Dec. 17) 2.2 1.3 1.0 1.0 0.9 0.8 0.6 0.9 1.1 0.8 0.8 0.5 0.5 0.5 PER SHARE DATA (EUR) De c. 07 De c. 08 De c. 09 De c. 10 De c. 11 De c. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e No of shares year end, basic, (m) 19 407.000 19 407.000 19 407.000 19 433.963 19 280.700 19 280.700 19 281.000 19 334.900 19 364.000 21 067.200 21 230.915 21 230.915 21 230.915 21 230.915 Avg no of shares, diluted, excl. treasury stocks (m) 19 407.000 19 407.000 19 407.000 19 420.482 19 280.700 19 280.700 20 139.957 21 026.163 21 608.906 22 157.192 21 690.300 21 230.915 21 230.915 21 230.915 EPS reported, Gaap 0.12 0.11 0.08 0.15 (0.25) (0.08) (0.03) 0.07 (0.00) 0.09 0.05 0.06 0.07 0.06 EPS company definition EPS restated, fully diluted 0.14 0.12 0.09 0.13 0.03 0.08 0.04 0.04 (0.01) 0.09 0.08 0.06 0.07 0.07 % change (14.3%) (15.7%) (23.7%) 41.8% (75.4%) 150.8% (56.3%) 3.0% NS NS (3.2%) (24.7%) 9.9% (3.6%) Book value (BVPS) (a) 1.1 1.1 1.1 1.2 0.9 0.8 0.7 0.8 0.7 0.8 0.8 0.9 0.9 1.0 Net dividend 0.080.050.050.060.040.020.000.000.000.000.000.000.000.00 STOCKM ARKET RATIOS De c. 07 De c. 08 De c. 09 De c. 10 De c. 11 De c. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e P / E (P/ EPS restated) 15.0x 10.9x 11.3x 7.8x 28.8x 9.5x 17.4x 23.8x NC 9.5x 9.5x 8.6x 7.8x 8.1x P / E relative to MSCI Europe 136% 99% 73% 63% 244% 70% 104% 136% NC 53% 61% 60% 60% 67% P / CF 4.7x 3.0x 3.0x 2.9x 3.7x 2.4x 3.1x 5.4x 4.6x 3.5x 3.2x 2.3x 2.3x 2.3x FCF yield 6.8% 9.4% 7.0% 9.7% 7.4% 13.8% 10.9% 2.8% (4.8%) 1.7% 2.7% 3.7% 5.0% 5.4% P / BVPS 1.93x 1.22x 0.98x 0.86x 0.98x 0.95x 0.87x 1.16x 1.52x 1.01x 0.97x 0.63x 0.60x 0.57x Net yield 3.7%3.8%4.8%5.7%4.6%2.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0% Payout 55.5% 41.2% 53.9% 44.1% 132.8% 24.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EV / Sales 2.84x 2.28x 2.31x 2.23x 2.00x 1.81x 2.05x 2.56x 3.22x 2.72x 2.78x 2.57x 2.58x 2.58x EV / Restated EBITDA 7.5x 5.9x 5.5x 5.2x 4.9x 4.6x 5.0x 6.3x 8.2x 6.3x 6.4x 6.1x 6.0x 6.0x EV / Restated EBITA 14.7x 11.8x 10.9x 9.8x 8.8x 8.4x 9.4x 12.4x 17.4x 13.2x 13.1x 13.0x 12.8x 12.6x EV / NOPAT 23.4x 18.8x 17.3x 15.6x 12.2x 11.7x 13.0x 17.2x 24.2x 18.4x 18.2x 18.1x 17.7x 17.5x EV / OpFCF 14.1x 11.9x 10.3x 10.5x 10.4x 8.9x 10.0x 17.4x 79.5x 19.7x 18.0x 17.2x 16.3x 15.5x EV / Capital employed (incl.