TI-A Telecom Italia

[Packer16]

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

[giofranchi]

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

 

[Packer16]

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).

 

Packer

[giofranchi]

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! ;)

 

giofranchi

 

[locatevalue]

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]

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.

[Guest hellsten]

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

 

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).

 

TI’s fundamentals have improved thanks

to strong performance of TIM Brasil and Telecom Argentina, persisting deleverage and

dividends increase.

 

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.

 

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:

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%

[Guest hellsten]

Deutsche Bank research report from 11 February 2013:

http://xa.yimg.com/kq/groups/17389986/1047274066/name/Deutsche+Bank+Telecom+Italia.pdf

 

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.

 

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]

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]

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.

 

Packer

[zippy1]

http://www.bloomberg.com/news/2013-09-17/telecom-italia-investor-mediobanca-writes-down-holding-by-56-.html

Telecom Italia SpA (TIT) investor Mediobanca SpA (MB) cut the value of its holding by more than half in the carrier that is struggling to meet its debt-reduction target and facing a downgrade to junk.

 

Mediobanca, the investment bank with a 2.6 percent indirect stake through Telco SpA, wrote down its Telco holding to 53 euro cents a share from 1.2 euros, taking the losses for the year ended June 30 to 320 million euros ($427 million), it said yesterday. Unlike previous writedowns, Mediobanca did it unilaterally without agreeing with other Telco owners: Intesa Sanpaolo SpA (ISP), Assicurazioni Generali SpA (G) and Telefonica SA. (TEF)

The decision paves the way for the unraveling of a six-year pact that put a 22.4 percent blocking minority of Telecom Italia in the hands of the financial investors and Madrid-based Telefonica. They have the right this month to revoke the accord and Telefonica has been seeking to gradually boost its holding, although the stakeholders haven’t been able to agree on a price, a person familiar with the matter has said.

 

“We are rather seller of our exposure than we are ready to put additional money in Telecom Italia,” Mediobanca Chief Executive Officer Alberto Nagel said yesterday on a conference call. “Generali should leave Telco because exiting the pact would be more coherent with the company’s strategy,” he said, adding he hadn’t received any communication from the insurer.

[zippy1]

Telefonica is in talks with the Italian core shareholders in Telecom Italia to keep the same ownership structure for another six months, two sources with knowledge of the situation told Reuters.

 

That would give both the Spanish group and the Italian investors more time to study a reorganization plan for the debt-laden telecoms group.

http://www.cnbc.com/id/101050851

AT&T, America Movil, Sawiris circle Telecom Italia: source 

Paola Arosio

MILAN — Reuters

Published Thursday, Sep. 05 2013, 1:54 PM EDT

Last updated Thursday, Sep. 05 2013, 1:56 PM EDT

Egyptian tycoon Naguib Sawiris, U.S. telecoms giant AT&T and Mexico’s America Movil have contacted the core investors who want to sell their shares in Telecom Italia, a source close to the situation said.

 

The three have not expressed a formal interest in buying the stakes, said the source, who is familiar with the thinking of Telecom Italia shareholders.

http://www.theglobeandmail.com/report-on-business/international-business/att-america-movil-sawiris-circle-telecom-italia-source/article14135312/

Telecom Italia possible partner's passport not important - Intesa CEO

CERNOBBIO, Italy Sept 6 | Fri Sep 6, 2013 5:22am EDT

(Reuters) - The nationality of any future partner for Italian phone company Telecom Italia is not important, said Intesa Sanpaolo Chief Executive Enrico Cucchiani on Friday.

Intesa is one of the core investors in Telco, which controls Telecom Italia.

 

Egyptian tycoon Naguib Sawiris, AT&T and America Movil have approached the core Telecom Italia investors who want to exit their unprofitable investment in the Italian group, a source familiar with the situation said earlier this week.

[Sportgamma]

http://www.bloomberg.com/news/2013-11-27/telecom-italia-said-to-work-with-morgan-stanley-on-brazil-towers.html

[Sportgamma]

http://finance.yahoo.com/news/blackrock-doubles-telecom-italia-stake-205338665.html

[phil_Buffett]

if if sum up a Little bit,

 

TI has very big upside if it trades for 4-5 times ebitda.

 

they actual have a shareholder voting in place.

 

they want to sell assets to reduce debt.

 

but the fact that they have so much ebitda and trades so low, is very interesting.

[Packer16]

By my calculations, if you use the savings "A" share price, I get an EBITDA multiple of 4.1x.  Indeed a cheap stock now with a few catalysts.

 

Packer

[phil_Buffett]

By my calculations, if you use the savings "A" share price, I get an EBITDA multiple of 4.1x.  Indeed a cheap stock now with a few catalysts.

 

Packer

 

packer did you bought a stake in it? or do you still thinking what could be wrong with the Company.

[Packer16]

I bought a good sized stake in August (3.8x EBITDA at that time) and still hold it.  At the time there was no activism but a nice plus since that time.

 

Packer

[Sportgamma]

http://www.reuters.com/article/2014/01/14/telecomitalia-brazil-idUSL6N0KO15L20140114

 

Fossati's letter was accompanied by a study that pegged TIM Brasil's standalone value at 17 billion euros ($23 billion). But after factoring in growth prospects, cost savings and other benefits rivals would reap from a break-up sale, it said that TIM Brasil could be worth as much as 30 billion euros.

[PJM]

Packer - I'd like to know your thoughts on Turkcell. Its the largest telecom player in Turkey with 50% share of mobile subscribers and revenue. The company is cash positive and trades at EV/EBITDA of <3x. Capex spends at around 14% of revenues and 37% of EBITDA

 

Negatives: no dividend payout, weakening TRY

 

Thanks in advance

[gary17]

PJM - I did not get EV/EBITDA at 3.... see the spreadsheet attached - seems like the company is about 8.

 

Packer - for TI-A.

 

according to IR - http://www.telecomitalia.com/tit/en/investors/financials/consolidated-operating-financial-data.html

ebitda for first 9 month is about 7.9B euro or 10.53B euro

let's use 6.5 multiple EV = 68B euro

net debt = 28B euro

so value of MC should be about 40B euro if we based this on 6.5 multiple.

 

I am not sure how the ordinary and the A saving shares work when it comes to calculating the company's market cap.  I look at google finance and Ti and TI-A give different Market caps.

 

thanks

2013_Q3_financial_operational_information_final.xlsx

[PJM]

PJM - I did not get EV/EBITDA at 3.... see the spreadsheet attached - seems like the company is about 8.

 

Packer - for TI-A.

 

according to IR - http://www.telecomitalia.com/tit/en/investors/financials/consolidated-operating-financial-data.html

ebitda for first 9 month is about 7.9B euro or 10.53B euro

let's use 6.5 multiple EV = 68B euro

net debt = 28B euro

so value of MC should be about 40B euro if we based this on 6.5 multiple.

 

I am not sure how the ordinary and the A saving shares work when it comes to calculating the company's market cap.  I look at google finance and Ti and TI-A give different Market caps.

 

thanks

 

EV calculation in spreadsheet is incorrect I guess, so as per your spreadsheet the EV/EBITDA is 5.5

[gary17]

Not an accountant. Sorry. But I thought EV is market cap plus debt less cash.

 

[gary17]

You are right. I did subtraction from MC should have done addition. So yes 5.5.

 

If this is 6.5 then about 12B USD.

[Packer16]

I come with about the same market cap of $54b.  I impute the same value for the savings and non-savings shares because the savings shares have a higher dividend per share and dividend yield and as minority shareholders my ability to effect control is small with either voting or non-voting shares.

 

Packer