Cleaning up the base
Telecom Italia is taking the steps to clean the base, with savers share conversion, postpaid/
prepaid offers in Brazil and early retirement schemes the latest steps, and following from
earlier moves to improve fixed tariffs in Italy, boost fibre and LTE coverage and stabilise
wireless pricing. We reiterate our Outperform rating on TI ords (€1.30 PT) and TI Savers (PT
raised to €1.19 from €1.12) and TIM Brasil (US$17.00 PT from US$20).
Italy trending toward stability. Italian service revenues improved to -1.5% with underlying EBITDA
-3.1%. Management has confirmed its ambition to stabilise underlying EBITDA during 2016. TI steps to
drive stability in Italy seem rational and centred network quality and coverage are on track with >80%
LTE and 40% VDSL coverage.
Brazil macro bites, innovative portfolio announced. TIM reported Brazilian mobile service revenues
-7.1% in local FX, worse than -5.6% 2Q15. While management no longer provides an estimate of ex MTR
revenue trends we estimate that underlying performance at -1.9% 3Q15 and -1.6% 2Q15 was relatively
consistent. EBITDA trends remain relatively stable (-2.7% 3Q15, -4.4% 2Q15).
Savers conversion accretive. TI has announced the saver-ordinary conversion, expected to be
completed early in 1Q16. Saving shares can be converted into ordinary shares on a 1:1 basis with a
payment of €0.095 per saver. The upfront cash generated, c€0.6bn and an annual €0.15bn saved from
annual saver dividend premium over ordinaries.
Changes to estimates. We have cut Brazilian wireless service revenues 6% in 2016E as well as handset
revenues, with EBITDA by c6-7% over the next three years. In Italy, our revenue forecasts are unchanged.
However, we now factor an additional €400m early retirement provision in 2015E and annual €200m
one-off provisions going forward.
TIM Brasil (Outperform, PT US$17) cuts but strategic and inexpensive. Despite cutting forecasts, we
still see TIM Brasil as holding a strategic position, having a credible growth plan and trading at a wide
discount to peers on 4.5x EV/EBITDA 2016E. Our revised price target is US$17 per ADR.
Telecom Italia (Ords Outperform, PT €1.30 and Savers, PT €1.19) steps to unlock value. Telecom Italia
continues to unlock value - this quarter's moves on saving share conversion, pre- to postpaid conversion
in Brazil and planned early retirement scheme in Italy should all create value. Our Ordinary price target
(Outperform, PT €1.30 per share) remains unchanged, while we raise our Savers PT to reflect conversion
(Outperform, PT €1.19 per share).