Hard to believe, harder to dismiss; Upgrade savers to Neutral
Can TI turn the corner? — CEO Cattaneo has managed to deliver excellent cost
cutting since taking over as progress is coming through earlier than expected. He
has signaled more ambitious targets on cost cuts to be announced in February as
part of the new three year plan (2017-19). Strong fixed KPIs and some progress in
headline top line trends may also raise hopes of a sustainable turnaround, which in
our view will be hard to dismiss while TI shows progress in the coming quarters.
Hard to believe — However we remain unsure if TI will be able to sustain this
progress. Consensus is bullish, mainly because it likely treats Iliad’s mobile launch
as a small incremental headwind; and the launch of competitive infrastructure as the
only headwind for wholesale; rather than an additional one to an already structurally
challenged business. We also note that the pace of cost cutting is bound to slow
from 2Q17 (on tougher comps), while TI continues to suffer from the worst EBITDA
to FCF conversion in the industry with hidden financial liabilities) are potentially
behind these outflows (see Cash and Carry: FCF headwinds for EM-heavy telcos).
Forecast changes — We make modest changes to our estimates. Overall, we
raise our estimates for Italian revenue/ EBITDA by 1.2%/0.5% in 2017; assuming
that the flow of other revenues remains high. We also increase our FCF estimate for
2016 by c.€500m on working capital but do not expect that to be repeated in future
years, so estimates are broadly unchanged and we expect a net outflow in 2017.
EPS, is very sensitive to small changes in EBITDA and rises by 5%/19% in 2018/19.
Caught in three minds — As highlighted above, we see long term risks prevailing
but also scope for the coming quarters to act as positive catalysts. The Italian
referendum due on December 4th is another curveball that may end up having
significant implications, with the risks largely to the downside (see Bull/ Bear
analysis inside). We believe the savers offer much better protection/upside in the
binary event and therefore upgrade our recommendation on them to Neutral with a
price target of €0.55/share (Telecom Italia SpA(savings shares) (TLITn.MI):
Upgrade the saving shares to Neutral; price target of €0.55). We reiterate our Sell
rating on the ords and €0.60/share price target.