Q3 review: Vivendi backs conversion, Orange watches Italy
* 15% upside for ords, 19% for savers
TI is up 32% ytd, outperforming telcos 20%. Its discount to peers has narrowed
to 7% on 2016E unlevered FCF yield and to 9% on EV/EBITDA. Q3 results were
broadly in line, back to positive territory in domestic mobile. Although most of
the positive news we expected is out (e.g. Wind/3 Italia merger probability at
75% in our SOP), with 15/19% upside to TP for ords/savers, proceeds from
savers conversion giving better negotiation power on INWIT and possible Tim
Brazil disposal, we maintain Buy. Orange’s CEO declared he needs to watch
Italy in light of potential cross-border consolidation (as reported by Il Sole).
* Solid conference call: Vivendi supports savings conversion. Main points:
1) Saving shares conversion: all of the BOD present and voted unanimously;
Vivendi confirmed it will support it (Reuters/Il Sole). 2) Sell Brazil at a good
price? Yes, all options that create value are considered. No formal approach
from LetterOne/Oi yet. If it comes, it will be taken to the BOD. 3) Domestic
mobile: not just stabilization expected but growth through reduction of below
the line offers, better 4G quality and move to bundles driving usage/ARPUs
(31% still out, with ARPU 60% below bundle avg.; avg. mobile BB usage
1.1GB/m with 1.5-1.6GB for 4G users). 4) Commercial costs scaled back in Q4:
TI now has positive mg. on handsets and subsidies fell dramatically over time,
even for business. 5) Move to integrated wholesale to treat all clients using the
same systems/processes, with the aim of improving quality for all players −
including TI retail − and reaching a peaceful environment where everybody can
eat out of a bigger pie. Litigation with Fastweb is now settled (by far the
largest) and well within provisions made in Q2. 6) Fixed: Line loss should start
falling a few thousands in Q4 (DBe 17k improvement): activations remain
strong thanks to fibre, and cancellation of voice-only clients starts fading. Price
pressure is intense in consumer/SME/soho: ADSL offered aggressively and TI
promoting fibre to move clients to it as fast as possible. 7) Metroweb a nonevent.
TI targets FTTH in 100 towns by 2018; avg. cost/home passed E200-
500/home. 8) 2016 domestic EBITDA stabilization is under way. 1-2 quarters
under pressure in Brazil following the new bundles offer portfolio launch, but
no major impact as a) SACs/ARPU still at 2.2x, b) no handset subsidies, c) offnet
impact on the postpaid bundle was already there, d) new 4G positioning.
* Estimate revision, lower Brazilian handset sales, 2015 neg. one-offs at E0.9bn
Sales are -1.6%/-1.6%/-1.9% in 2015/16/17; EBITDA -6.1%/-0.5%/-0.4%.
* SOTP-based TP E1.34 for both stocks; risk − a French telco (see page 19)
WACC 7.1%; g: +1%/0% mobile/fixed. TI is at a 9%/7% discount to peers on 2016
EV/EBITDA/unl.FCF yield. Risks: no M&A, macro. VIV/Niel at 24.3% combined postconversion.
Players interested in TI may opt to pay this stake at premium rather than
a tender offer on 100% of TI, though Niel’s derivatives maturities are post-Jun-16.