* Let’s not get ahead of ourselves – Downgrade to Neutral
The three pillars to what has been a compelling investment case remain unchanged: 1) Italian
mobile market repair, 2) the growth opportunity in broadband/pay-TV and 3) consolidation potential
in Brazil. In addition, management has taken several initiatives to reduce the domestic opex base
in the medium/long term. Expectations have risen and TI’s share price now discounts much of the
upside these factors promise to deliver.
* So far, TI has mainly benefitted from external catalysts
TI shares have risen by 33% YTD, outperforming the sector by 12%. Domestic trends have
improved a little, but we believe that most of the rerating is attributable to external factors, in
particular: the announcement of mobile consolidation in Italy, LetterOne-Oi’s agreement to pursue
a deal with TIM, and the emergence of two long-term industrial shareholders in Vivendi and Niel.
* Long term upside remains but the road is long
We still like TI’s fundamental story and our confidence in a turnaround has even increased further
with the arrival of the two media and telco-savvy shareholders; we have raised our long term
revenue and EBITDA estimates for Italy and stand-alone value subsequently. But the road to
recovery is long and likely to present some bumps (promotional activities in Italy, restructuring
costs, macro headwinds in Brazil). We have cut our revenue and EBITDA estimates for the coming
years, mostly on the back of BRL depreciation but also to reflect a more gradual recovery.
* The risk/reward has lost its shine – TP revised to EUR1.2 (from EUR1.3)
Following our estimates revisions, we have raised the stand-alone value for TI from EUR0.94 to
EUR1.10/share. But with the Brazilian business having lost about half of its value, this leaves the
domestic business implicitly trading on 7x 2016e EBITDA, largely closing the gap with other
incumbents (c.1x discount historically). The recent rally and the time needed for further upside to
emerge have taken the shine off the risk/reward for now. Even when adding EUR0.09/sh related to
a 75% chance of consolidation in Brazil, the upside remains limited. We downgrade to Neutral.