Author Topic: TI-A Telecom Italia  (Read 15603 times)

Packer16

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TI-A Telecom Italia
« on: July 14, 2013, 05:50:56 AM »
This appears to be the cheapest European telecom with a 8% yield.  At 3.4x EBITDA it is cheaper the Oi and has a lower debt to EBITDA of 2.4x times.  The EBITDA coverage is over 6x.  Another plus is that CFO has only declined by 0.3% since 2007/2008 compared to much large declines by other European telecoms (like KPN (-24%), Orange (-33%) and Portugal Telecom (-14%)).  There may be some disappointment with the Hutchison deal falling through and Italy falling out of the Euro.  It also sells for less than 50% of book value.  They also have a plan for the gov't to buy a portion of its network to help control access charges to that network.  They appear to offer triple/quad-play services in Italy.  In Brazil, they only provide wireless.  The saving shares are similar to the Oi preferred shares (higher dividend no vote).  Has anyone looked at this name?  I would be interested in our Italian board members impression of Telecom Italia.  Am I missing some risk?

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« Last Edit: July 14, 2013, 06:03:24 AM by Packer16 »


giofranchi

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Re: TI-A Telecom Italia
« Reply #1 on: July 14, 2013, 06:20:51 AM »
If it is selling for less than 50% of book value, it is extremely cheap… Its business seems to be very predictable, and it should be almost completely unaffected by the debt crisis in Europe… I cannot see why it should fail to earn a profit, albeit small, each year… And, if a business doesn’t record losses, why should it trade below book value? It makes no sense… Packer, have you checked its earnings history? Has it ever declared losses in the past?
If it hasn’t, like I imagine, to be paid a 8% dividend, while waiting for the price to close the gap with book value, is a good bargain imo.
A warning: if I were in the US, before investing in Italy, I would factor in a 30% forex loss. I don’t know what will happen to the Euro, but I strongly believe prices in Italy today are way too high. We need a currency that makes economic sense: either we go back to a weaker currency, or the Euro has to depreciate. So, invest in Italy only if, after factoring in a 30% forex loss, the investment still makes sense.

giofranchi
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Packer16

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Re: TI-A Telecom Italia
« Reply #2 on: July 14, 2013, 06:24:07 AM »
I think the company has said it could reduce cash flow by 110 million euro per year.  This is very small compared to 12 billion euro EBITDA that Telecom Italia generates.  The company also is planning on appealing the change the EU commission to which it has to go to for approval.  At some point the EU is going to have to realize that they can't expect continued investment in networks if they don't allow a reasonable rate of return.

Since 2008, it has generated 2 to 3 billion Euro of FCF every year except 2008 (in which irt generated 1.1 billion euro).  I think this is cheap even with a 30% haircut for currency.  My biggest concern is I might be missing something because TI is so large and I have no informational advantage over anyone.  The one positive is sentiment for TI is poor.  I don't think there are any buy recommendations (similar to Oi).

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« Last Edit: July 14, 2013, 06:38:24 AM by Packer16 »

giofranchi

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Re: TI-A Telecom Italia
« Reply #3 on: July 14, 2013, 07:08:14 AM »
My biggest concern is I might be missing something because TI is so large and I have no informational advantage over anyone. 

That’s precisely why I never invest in this kind of things… price is wonderful and the business is without any doubt profitable… But, although I live in Milan, Telecom Italia remains as far from me as it is from you!
Of course, I am sure that a widely diversified portfolio of “black boxes”, selling for less than 50% BV, and which are businesses with a long history of profitability, will never cease to perform very well. So, I guess a 3-5% investment in Telecom Italia makes a lot of sense! ;)

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locatevalue

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Re: TI-A Telecom Italia
« Reply #4 on: July 17, 2013, 08:35:52 AM »
This appears to be the cheapest European telecom with a 8% yield.  At 3.4x EBITDA it is cheaper the Oi and has a lower debt to EBITDA of 2.4x times.  The EBITDA coverage is over 6x.  Another plus is that CFO has only declined by 0.3% since 2007/2008 compared to much large declines by other European telecoms (like KPN (-24%), Orange (-33%) and Portugal Telecom (-14%)).  There may be some disappointment with the Hutchison deal falling through and Italy falling out of the Euro.  It also sells for less than 50% of book value.  They also have a plan for the gov't to buy a portion of its network to help control access charges to that network.  They appear to offer triple/quad-play services in Italy.  In Brazil, they only provide wireless.  The saving shares are similar to the Oi preferred shares (higher dividend no vote).  Has anyone looked at this name?  I would be interested in our Italian board members impression of Telecom Italia.  Am I missing some risk?

Packer


Thanks Packer for starting thread. TI is consistently showing up in my 52 week list from past few weeks and i started accumulating very slowly in telecom basket. I am planning to cap it at 3% for now unless it becomes more distressed. This sector is very cheap mainly european telecom.
1.Anyone know how the management of this company is?
2. Packer NIHD also looks very cheap from book ratio and p/s perspective but i am scared of adding this company to my bucket as its losing money consistently it will become more of speculative play and if the assets on book are not what they claim with -ve earnings might turn this stock to just vapor overnight :). Anythoughts on NIHD?

G2

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Re: TI-A Telecom Italia
« Reply #5 on: July 18, 2013, 07:41:59 AM »
Anyone holding opinions on Telecom Italia's proposed spin-off plans and how that may impact valuation?

Uncertainty related to regulatory decisions seems to be a big issue so any color on that would be appreciated as I've only just started to look at it.

hellsten

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Re: TI-A Telecom Italia
« Reply #6 on: July 22, 2013, 05:19:47 AM »
Thanks for starting the thread. TI-A looks interesting.

Banca Profilo research on TI from 2011:
http://www.bancaprofilo.it/~/media/Files/B/Banca-Profilo/pubblicazioni/r-z/telecom-italia-220911.pdf

Quote
International activities should generate 35% of Group revenues
and 25% of Group EBITDA in 2011, and their EBITDA growth (we estimate 10%
CAGR 2010-2013 for TIM Brazil and 15% for Telecom Argentina) should offset the
decline of domestic EBITDA (we estimate -4% CAGR 2010-2013), allowing TI to keep
its organic Group EBITDA stable in 2011-2013 (at € 12.3 bn).

Quote
TI’s fundamentals have improved thanks
to strong performance of TIM Brasil and Telecom Argentina, persisting deleverage and
dividends increase.

Quote
Many reasons support our positive view on the stock:
• lower risk compared to cyclical stocks in case of new economic recession
• Telecom Italia trades at unfair discount vs. its main European Telecoms peers
• Telecoms stocks tend to outperform during financial and economic crisis/uncertainty
• low risk on Telecom Italia’s Group targets in 2011
• International activities likely to offset the domestic decline
• improving fundamentals, lower gap vs. main European Telecoms peers
• Industry consolidation in Italy may create value for Telecom Italia
• attractive upside even in the worst case scenario

Does anyone here have recent data on the following, which is from 2011:
Figure 2: P/E Telecom Italia vs. Stoxx 600 Telecommunications (premium/discount)
Table 3: European Telecoms – Multiples
Table 7: Telecom Italia - contribution of international activities

In Table 3, Cable & Wireless Worldwide looked very cheap in 2011 and was bought in 2012 by Vodafone.

Quote
Telecom Italia’s leverage is still the highest among main European
Telecoms with a Net Debt/EBITDA (last 12 months EBITDA) of 2.7x (2.85x excluding
Telecom Argentina’s EBITDA attributable to minorities) at the end of June 2011, compared to
an average of ~2x for its main European Telecom peers.

I wonder if telecoms are a hedge against falling prices:
Quote
Over the past years, Telecoms stocks have outperformed during bear markets and
underperformed during bull markets as the Sector is perceived as defensive, less correlated to
the economic cycle and with high return (dividends and buy-back). In case of persisting
uncertainty over the economic recovery/recession and the financial crisis (sovereign debt),
Telecoms are likely to outperform the Cyclical Sectors and the Market on average (Stoxx Europe
600).

I think the low price of TI and OIBR is a good reason for them performing well in a declining market.

TI has fallen a lot since the report was published. I guess the value of the business has not fallen as much as the stock, so the margin of safety should be larger now.

1-year performance of telecom stocks:
BT +47%
TEF +15%
VOD +5%
PT -14%
AMX -23%
TI -25%
OIBR -62%

hellsten

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Re: TI-A Telecom Italia
« Reply #7 on: July 22, 2013, 07:10:38 AM »
Deutsche Bank research report from 11 February 2013:
http://xa.yimg.com/kq/groups/17389986/1047274066/name/Deutsche+Bank+Telecom+Italia.pdf

Quote
T.I. trades at a 29% discount to peers on 3.4x 2013E EV/EBITDA, 45% on ordinaries’
5.4x P/E, and 37% on 11.5% unlevered FCF yield. Risks include Italian/LATAM macro
and credit rating.

Quote
The key downside risks are outstanding cost cuts being insufficient to offset the prolonged
revenue fall; and Italian domestic consumer sentiment and macro/LATAM macro.
Though T.I. is issuing a hybrid in order to benefit from the credit rating, considering half of it
as equity, it has had a negative outlook on its BBB rating for several months now and the
political elections on 24 February are an area of uncertainty.


2011-2015 "Figure 24: Multiples":

Unlevered FCF yield

TI:
9.7-13.1%

European sector average:
8.5-8.9%

FCF yield

TI:
18.0-24.0%

European sector average:
11.7-12.9%

TI's discount to sector's multiples is -61 to -92%.

Deutsche Bank has had a buy rating on TI since 2010 with a target price between EUR1.46 and EUR1.24

tombgrt

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Re: TI-A Telecom Italia
« Reply #8 on: July 22, 2013, 08:37:24 AM »
Thank you hellsten.


I was just looking at some belgian stocks and mobistar is down -30% as they suspend the dividend. I know next to nothing about the company, aside from the strong concurrence in companies like Telenet and that Mobistar stopped their triple-play offering recently. It's likely TO ugly.

Packer16

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Re: TI-A Telecom Italia
« Reply #9 on: August 11, 2013, 04:47:44 AM »
It looks like with Carlos Slim's offer for KPN has put a floor valuation for these European telecoms at about 5x EBITDA.  Carlos is a pretty smart buyer so I am assuming he is expecting a pretty good return.  If TI was priced with the same multiple and a 15% discount for the savings shares yields a $12 price for TI-A.

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