Stabilization, full valuation and French inroads
TI published mixed Q3 results with Italy showing further signs of revenue stabilization but little progress on cost-cutting. However, TI gave detailed cost-cutting initiatives, enabling it to credibly reiterate its guidance for stable domestic EBITDA in 2016e. After a strong performance YTD TI trades at a premium on FCF multiples (despite more
leverage) which reflects higher taxes and capex than peers. Italy is stabilizing but so are other markets. So unless Vivendi and/or Mr Niel continue to increase their stakes, we see no reason to favour TI over peers. Both investors have impressive value creation track records and may see value in different optionalities (see Telecom Italia: French inroads, Brazil option). However, as evidenced in Vivendi’s recent results, their timeframe do not always coincide with minority shareholders (see ‘Vivendi SA: Orchestral Manoeuvre in the Dark’ - Julien Roch). Our estimates and PT (€1.12 for SpA and €1.02 for RSP) are broadly unchanged. We reiterate our UW on TI and continue to prefer other revenue inflection stories (BT, ORA, DTE) to invest in the sector.
* Mixed results, new cost-cutting initiatives. Q3 2015 results were mixed with a c. -2%
miss to revenues and EBITDA expectations. Brazil was a drag whilst cost-cutting in Italy
was lower than anticipated. Positively net debt declined. Positively TI convincingly
reiterated its guidance for stable domestic EBITDA in 2016, thanks to new cost-cutting
initiatives: EUR150m reduction per year by 2019 in personnel costs that should add to
similar savings linked to lower real estate costs announced earlier.
* Brazil: Weak revenues as expected, better EBITDA. TIMP reported weak results with
service revenues down -6.5% and adj. EBITDA down -3%. On the positive side opex
were strongly down (-20%) helping margins expand 4pp and limiting the EBITDA
decline. TIMP rightly continues to invest and launched a new innovative tariff. In terms
of consolidation: TI CEO said on 12 Nov in the FT that he is open to either a merger with
Oi or a full sale. On the latter TI suggested during its call that it would be hard to get a
good price given the current Brazilian macro. In our view a merger with Oi is the most
likely scenario but not near term (see Oi, L1and TIMP: not straightforward).
* Little change to estimates and PT: We cut domestic estimates (revs flat, organic EBITDA by
-1% to -2% for 16e-18e). This is largely offset by higher estimates in Brazil (slightly better
Q3 than our expectations, favourable fx since our last update). We increased our net debt
due to changes in the leasing (net benefit though). TI is trading on a 2016e EV/EBITDA of c.
7x, EV/OpFCF 15e of 13x (in line with peers) and an EFCF of 3% vs 5% for peers.
* Risks: Downside risks include a further deterioration of the Brazilian macro. In Italy, lack
of consolidation between Hutchison and WIND is also a risk. Upside risks is that Vivendi
and Mr Niel continue to build their stake in TI, creating buying pressure.