Upside now requires optimistic outcomes
* Rebasing price target: We are cutting our price target for PT SGPS shares
to €1.36 from €3.25 in a move that reflects the significant changes in PT
SGPS’s and Oi SA’s situation over recent months, including the emergence
of PT SGPS’s €897m investment in Rioforte commercial paper. We retain a
Hold rating.
* Upside from these levels requires optimistic outcomes: We can easily
formulate a scenario for PT SGPS which results in a valuation of €2.18 per
share (incorporating fair values for Oi SA of BRL2.36 for the ONs and
BRL2.18 for the PNs). However, this requires a belief that PT SGPS can
recover at least 60% of its Rioforte investment, and a belief that Oi SA can
secure 28% of Tim Brasil at a favourable price of cBRL13.0 per share,
resulting in cBRL7bn of synergy benefits accruing to Oi SA. We doubt
either can be achieved.
* A downside case exists to €0.91: Without a synergy-releasing deal in
Brazil, and with an assumption of 15% recovery of the Rioforte investment,
our PT SGPS fair value would be €0.91, 30% downside from current levels,
based on fair values for Oi shares of BRL1.27 (ONs) and BRL1.17 (PNs). If we
simply mark to market PT SGPS’s 25.6% stake in Oi (at BRL1.37 for the ONs
and BRL1.30 for the PNs) and factor in a 15% recovery of the Rioforte
investment, then PT SGPS shares’ fair value is indicated at €0.98, 25%
downside from current levels.
* We prefer Telecom Italia (TI) as a play on Brazil consolidation: Oi SA is now
in receipt of an attractive €7.025bn offer for its Portuguese telecoms
operation (PT Portugal, which is no longer owned and controlled by PT
SGPS). There may also be interest in Oi’s Africatel asset. Both
developments take Oi SA a step closer towards a credible offer for TIM
Brasil. We do not believe Telecom Italia will accept an offer of BRL31.5bn
(BRL13.0 per share) as mooted by the local Brazilian press in recent days.
Instead, we expect BTG Pactual, Oi’s agent, will have to come up with a
structure that allows for an offer closer to BRL17.0 per share, in which case
fair value for TI Ords (which we value on the basis of our DCF/SOTP
model) would be €1.21 while fair value for the savers would be €0.96.