* Event: We raise our forecasts for TI's domestic operations.
* Investment Case: We disagree with the consensus bull case on TI – we doubt that a change of control at TI will transform the business- with no easy fixes on costs - and currently a buyers' market for Brazil assets. We think the 3-Wind deal probably gets approved but wonder if things can get any better for TIM mobile anyway, after a doubling of front-book prices.
* However, beyond this consensus bull case there is a more interesting and potentially more rewarding upside case emerging. The Italian fixed broadband market appears to be finally waking up, growing on rising data usage and rising availability of high speed broadband. Cord cutting is already slowing slightly in response. TI is particularly geared to broadband market growth, with more new customers available to replace churn. If the broadband market recovers to European norms of +3-4pp penetration growth per annum, TI line loss should slow, helping EBITDA to stabilise on a sustainable basis, and arguing for a share price of up to eu1.2.
* This improving line loss trend would emerge gradually over the next year or so. Meanwhile the stock has rallied 20% from the CMD with Vivendi increasing its stake to 23.8%. Consensus also remains too high, in our view, due to Brasil. We therefore maintain our Neutral rating on the TI ord (TLIT.MI) and look for a better entry point. We upgrade our rating on the TI saver (TLITn.MI) from Underperform (a rating we had for several years) to Neutral with the shares having returned to a typical discount following the cancellation of the conversion plan.
* Valuation: 2016E 6.2x proportionate EV/EBITDA vs 6.6x for the sector. 2.4% adjusted equity FCF yield, vs 5.9% for the sector.