Telecom Italia / TIM Brasil
Ready to believe?
Yesterday, Telecom Italia found investors unwilling to believe and instead focused on near
term FCF pressures as they and subsidiary TIM Brasil provided three year targets to 2018.
The plan will accelerate capex spend and mean TI is FCF negative for 2016-18E, with FCF
only >€1bn in 2019E. These plans should return TI and TIM to a competitive network footing
and reduce risk of new fibre builders. The next quarters will be key in terms of execution of
revenue recovery and whether TI's low EBITDA valuation (EV/EBITDA 5.9x 2016E) or negative
FCF should dominant sentiment. We aren't blind believers, but see value in the shares. Our
rating remains Outperform TI Ords PT €1.30, TI Savers PT €1.11 (was €1.19).
Defensive, domestic investment plans. TI has detailed a €12bn three-year capex plan for Italy to
accelerate NGN and LTE plans and make the investments to stabilise line loss, grow broadband and drive
converged subscribers. The NGN plan combined with "open broadband" (a version of VULA) should
defend TI's infrastructure share and reduce risk of government funded overbuild. TI's opex reductions
plans seem modest; "a net €400m" by 2018E with wages only falling by €200m even when adjusting
for accounting headwinds.
Brazil data centric, FCF light. TIM presented a plan to continue its evolution to a data-centric player,
leveraging the end of the community effect in voice and repositioning as a high quality, innovative
operator. With a shift to mid-, high-value customer segments, while protecting value in the prepaid
segment. Key metric going forward will be "share of mobile service revenues" which at 23% has room
to evolve.
Implications for FCF. TI's plans for Italy and Brazil mean that equity FCF will be negative for 2016 and
2017 and not exceed €1bn until 2019E on our estimates. These capex plans while extreme and driving
FCF negative are key to top line stability.
Changes to estimates and valuation. We make limited changes to revenues and EBITDA for Telecom
Italia and TIM Brasil, however accelerated capex means operating FCF falls low-teens in 2016-19E before
the benefits are seen from 2020 onwards. We revise our TIM Brasil target from US$17/ADR to US$10.25/
ADR to account for reduced medium term wireless growth and an increase in country risk premium
assessment, which resulted in a higher WACC (11% from 10%). We maintain our Outperform rating on
TIM Brasil.