With EBITDA remaining under pressure, management steps up cost-cutting efforts
Conference call on Monday 16 May at 8.30 AM UK Time. Dial-in: +39 06 33486868.
* Main surprises The group’s revenue and EBITDA remained under pressure in Q1 16, down 12.1% and 15.7 yoy respectively (-5.6% and -11.3% organically), coming in 1.9% and 4.7% below consensus estimates. In the domestic segment, revenue growth was in line with the rate recorded in Q4 15 (-2.3% yoy). Importantly, growth in service revenues deteriorated (-2.3% vs -1.1% in Q4 15), compensated for by higher growth in product sales. The deterioration was driven by fixed revenue (-4.3% yoy in Q1 16 vs -3.1% in Q4 15, negatively impacted by lines erosion), whereas in mobile TI recorded a marginal improvement (+0.6% yoy growth vs +0.1% in Q4 15). Domestic EBITDA fell 9.3% yoy (coming 2.8% below consensus). Even when adjusted for labour restructuring costs (€67m), EBITDA fell 5.2% yoy, making it a challenge to fulfil management’s EBITDA stabilisation target for 2016. The aim of stepping up cost savings is a welcome development with (new) management targeting a €0.8m run rate savings in both opex and capex in Italy by 2018 (vs €0.4m and €0.2m previously). However, as financial targets remain unchanged (with “net debt/EBITDA ratio to reduce below 3.0x”), investors may ask whether higher cost savings are earmarked to compensate for increasing top-line pressure or will be re-invested to support future revenues.
* Potential impact on SG & market forecast Neutral/Negative to market forecast.
* Potential impact on share price/recommendation Neutral/Negative to share price – Our target price of €1.10 is based on a SOTP (with a WACC of 6.0%). Risks to our TP, rating and recommendation: On the upside – 1) consolidation in domestic mobile would help the pricing environment and lift our domestic EBITDA projection (we are currently estimating flat growth during the 2016-18 period). On the downside – 1) any intensification in domestic competition, which would jeopardise the stabilisation seen in our estimates; 2) enduring weakness in Brazilian macros may impact fulfilment of management’s targets for TIM Brasil.