Equity Research - Colombia Company Update nd June 2 , 2017 Telecom, IT & Media ETB Two steps to complete divestment Rating: BUY TP: COP 715 We are updating our 2017E T.P for ETB to COP 715/share and reiterating CREDICORP CAPITAL RESEARCH our BUY recommendation. This, in consideration of the favorable transaction floor, set at COP 671/share implying a 8.2% premium, a 1.2x Steffania Mosquera P/BV and a 6.3x 2016 EV/EBITDA multiple. But also, because we see the +(571) 3394400 ext. 1025 case for a possible premium resulting from the auctioning process amid [email protected] the controlling stake (86.4%) divestment held by the District of Bogotá, which grants tag along rights. Moreover, we think ETB could be favored Juan Camilo Dauder by its strategic market position, with a cutting edge infrastructure and +(574) 2042525 ext. 4155 improving fundamentals. [email protected] Sale process sets an opportunity for minority shareholders, with no downside in case it concludes successfully. The District is going through Stock Data the sale of its 86.4% stake in ETB. Minority shareholders have tag along rights Ticker etb cb in case of a transaction that results in the transfer of +30% stake of the Price (COP) 620 company, while the District is in the sale process of its controlling stake Target (COP) 715 (86.4%). If a strategic shareholder is interested in acquiring control, which should not be available under COP 671/share, minority shareholders should Total Return 15% have a minimum premium of 8.2%, once the sale process concludes. LTM Range 560 - 655 ETB as a unique asset. ETB is the only massive provider of FTTH in Market Cap (USD mn) 758 Colombia, with 1.3mn connected households in Bogota. Among the current Shares Outstanding (mn) 3,550 telecom environment of heavy competition, this asset should be valuable either Free Float 11.6% for fortifying an existing position in Colombia, or for entering the Colombian ADTV (USD mn) 0.12 market with an important position in a venue such as Bogota. That said, upside from the transaction is subject to interest from third parties and favorable bid incentives in the auction scheme. Furthermore, relative valuations set Price Chart (COP) and Volume (USD mn) up to 29% premiums when compared to current prices. 120 3 Improvement in cost structure. ETB had an upturn during the last year in 110 terms of cost structure, with a positive trend. EBITDA margin was set at 23% 2 during 1Q16 and reached 35% during 4Q16. This resulted in the first y/y 100 increase in EBITDA since 2011, despite the fact that revenues remained flat. 90 USD mn Furthermore, moderation in CAPEX continues to favor DCF for the company, 1 with a COP 400 bn CAPEX, below the company’s guidance. 80 Turning point in revenues. The company's revenues were flat during 2016, with a 20% decrease in fixed line and double digit growths in mobile, TV and 70 0 May-16 Sep-16 Jan-17 May-17 internet. Revenue from fiber and mobile was worth 21% of the top line during 2016, compared to 10% during 2015. This was mainly driven by non copper ETB COLCAP users almost doubling during 2016. The continuation of this trend, with decreases in fixed line but double digit increases in mobile, TV and internet result in an acceleration of the revenue growth starting in 2017. Valuation Sumary Sources: Bloomberg 2014 2015 2016a 2017E 2018E EV/EBITDA 2.6x 4.4x 5.7x 4.6x 4.4x IMPORTANT NOTICE (US FINRA RULE 2242) This document is intended for P/E nm nm nm nm nm INSTITUTIONAL INVESTORS and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail P/BV 0.6x 0.8x 1.1x 1.2x 1.4x investors. Credicorp Capital may do or seek to do business with companies covered in its research reports. As a result, investors should be aware that the firm P/CF nm nm nm nm nm may have a conflict of interest that could affect the objectivity of this report. Div Yield 3.4% 21.9% 0.0% 0.0% 0.0% Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 18 1to 22, Analyst Sources: Company Reports and Credicorp Capital; E Credicorp Capital Estimates Certification on Page 18. Additional disclosures on page 22. Credicorp Capital ETB Charts ETB - Company Summary Company description Sector: Telecoms & Media Empresa de Telecomunicaciones de Bogotá (ETB) is a telecommunications prov ider w ith a strong Rating: Buy position in Bogotá w ith almost a 130 y ears ex perience. The company currently prov ides local and long- Target Price: 715 distance fix ed-line serv ices and broadband serv ices (34.1% market share in Bogota), TV serv ices (7.8% in Bogota) mobile v oice and internet. Stock Data Ticker etb cb Positives Concerns Price (COP) 620 - Attractiv e relativ e v aluations - Highly competitiv e market LTM Range 560 - 655 - Strong brand recognition and presence in Bogota - Decrease in ETB's customers in fix ed line Market Cap (USD mn) 758 - Only operator w ith massiv e FTTH Shares Outstanding(mn) 3,551 Free Float 12% ADTV (USD mn) 0.1 Income Statement COP mn 2014 2015 2016E 2017E 2018E LTM Revenue Breakdown Rev enues 1,416,447 1,460,006 1,458,533 1,485,966 1,612,329 EBIT 29,429 (252,439) (215,677) (198,478) (180,092) Data EBITDA 554,639 402,525 424,787 506,491 541,289 26% Mobile Net Income (36,492) (68,659) (254,686) (242,644) (221,724) 9% EPS (COP) -10.3 -19.3 -71.7 -68.3 -62.4 EBIT Margin 2.1% -17.3% -14.8% -13.4% -11.2% EBITDA Margin 39.2% 27.6% 29.1% 34.1% 33.6% TV 5% Net Margin -2.6% -4.7% -17.5% -16.3% -13.8% Balance Sheet Internet COP mn 2014 2015 2016E 2017E 2018E 29% Fixed- line Cash & Equiv alents 861,909 585,357 269,457 326,549 222,667 31% Other Current Assets 710,867 524,834 367,722 418,496 450,183 Long Term Assets 3,214,175 3,788,240 3,679,303 3,595,974 3,635,738 Total Assets 4,786,951 4,898,431 4,316,482 4,341,019 4,308,588 Ownership Structure Financial Debt 530,238 530,180 550,180 530,180 710,912 Other Liabilities 1,438,886 2,089,639 1,768,883 2,056,064 2,064,625 Universidad Total liabilities 1,969,124 2,619,819 2,319,063 2,586,244 2,775,537 Distrital Shareholder's equity 2,817,827 2,278,612 1,997,419 1,754,775 1,533,051 2% Total liabilities + Equity 4,786,951 4,898,431 4,316,482 4,341,019 4,308,588 Foreign Net Debt (331,671) (55,177) 280,723 203,631 488,245 Funds 3% Net Debt / EBITDA (0.6) (0.1) 0.7 0.4 0.9 Financial Debt / Equity 18.8% 23.3% 27.5% 30.2% 46.4% Bogotá D.C. Others ROAE -1.3% -2.8% -12.0% -13.1% -13.9% 86% 9% ROAA -0.8% -1.4% -5.6% -5.6% -5.2% Cash Flow COP mn 2014 2015 2016E 2017E 2018E Initial Cash 960,286 861,909 585,357 269,457 326,549 Management Cash from Operation 667,043 1,044,333 342,522 467,765 550,518 CEO: Jorge Catellanos CAPEX 703,267 703,267 403,363 527,238 655,625 CFO: Diana Barón Changes in Financial Debt (445) (58) 20,000 (20,000) 180,732 IR Manager: Eugenia Londoño Div idends (Paid) Receiv ed (61,709) (471,664) 0 0 0 w w w .etb.com.co Other CFI & CFF Items 0 145,896 275,059 (136,565) 179,506 Sources: Company Reports, Bloomberg and Final Cash 861,909 585,357 269,457 326,549 222,667 Credicorp Capital; E Credicorp Capital Estimates Change in Cash (98,378) (276,552) (315,900) 57,092 (103,881) 2 Investment Thesis: An opportunity for minority and strategic shareholders Sale process to drive share price. The district announced the sale process of the company during 1H16, and share price had a +19.23% rally since January 2016. In Success in the accordance to the legal process to sell a publicly owned assets, the company was valued sale process of by an investment bank ( JP Morgan) to determine its minimum sale price (for any stake ETB guarantees sold by the District). This floor was set at COP 671/share, which means the District can a minimum not sell any stocks under this price. Additionally, if the sale process goes through, minority premium of 8.2% shareholders have tag along rights1 for share transfers of +30% stake in the company, while the percentage to be sold is 86.4%. Therefore, ETB shares set an opportunity in the short term related to the transaction. Likewise, the transaction offers upside for long term investors, which could benefit from the upturn the company could have with a strategic controlling shareholder. ETB as a tactical asset. Competition in Bogota’s market has become fierce over the last years. UNE/EPM lost 1% market share over the last year in internet market in Bogota, ETB’s while DirvecTV lost as much as 3% in TV market in Bogota, probably related to high infrastructure prices and unbundled TV products (See page 8).