* Event: We update TI forecasts following Q3 2015 results. We continue to
rate the stock Neutral with a target price of eu1.2.
* Investment Case: We forecast domestic revenue erosion to continue to
slow as line loss benefits from the flattenisation programme, and as mobile
continues to benefit from price stability. Cost cutting is also likely to
accelerate in FY16E as work done in FY15 on employee costs and building
and site costs bears fruit. However, because of growing competition in FTTc
from Vodafone and Fastweb, we forecast domestic EBITDA to stabilise
rather than grow.
* In contrast, we forecast TIM Brasil to continue to weigh on results, on a
combination of weaker macro trends, voice cannibalisation and flat rate
voice tariffs, similar to the European mobile sector trends over 2009-2013.
European mobile fell 20% over this period. We forecast a more modest
decline for TIM Brasil, worsening from -6.5% in Q3 to -9% y/y in Q4 and
-4.5% in FY16E, but this is still materially below consensus forecasts for
TIM Brasil and enough to lead us to be 3-7% below TI Group EBITDA
consensus (published pre Q3 results).
* Such weak Brasil trends (if our forecasts are correct) may in due course
provide TI reason to re-assess its strategy in Brasil and in particular whether
Oi presents an opportunity to sell-down rather than double up. However, for
the time being TI is most likely to stall any decisions on Oi, at least until the
Concession Agreement is renewed.
* Valuation: TI trades on 6.7x FY16E adjusted EV/EBITDA.