Telecom Italia Investment Overview

Transcription

1 Telecom Italia Investment Overview July 2018 Charlie You, CFA

2 TIM Investment Summary Potential 80%+ return in 1-2 years Cheapest incumbent telco in Europe with a 4.5X EV/EBITDA multiple Owns Italy s largest telecom network, which enables the company to offer differentiated services and bundling deals Has a proven management team with incentives aligned with investors Operates in a market that has a much longer runway than that of other developed countries

3 Italian Telecom Market - Long Runway No cable company in Italy, less competition in broadband and content Significant room for growth of fixed-line broadband Significant room for growth of mobile broadband Customer ARPU very low, but steadily increasing due to more data consumption European Telecom M&A still in early stages

4 Telecom Italia- Market Leader Owns the most extensive and important telecom network in Italy Pricing power due to differentiated services and bundling offers Able to earn economic profits in a competitive market due to scale Significant cost cutting opportunities to further boost profit margin Brazil business has turned around and becoming a growth engine

5 New Management TIM board becomes more independent and balanced since Elliott took control Current CEO (since 9/2017) has an outstanding track record and is supported both by Vivendi and Elliott Has a clear strategy in place TIM Brazil business turning around is proof of strong execution capability Management s long term incentives are based on TIM share performance and free cash flow generation, aligned with shareholder

6 New Strategy- DigiTIM Key pillars

7 Numbers are Improving- 2017

8 Numbers are Improving- Q1/2018

9 Why TIM is So Cheap? Current valuation (EV/EBITDA= 4.5) very depressed due to: Entry of France s Iliad may cause pricing war Turmoil in Italian government Competition from Open Fiber Disputes between major shareholder Vivendi and Elliott Foreign exchange headwind

10 Iliad Entry Not as Impactful Italian telecom market very different from French market. Customer ARPU already very low due to years of pricing war. Low price plan already exist in the market. TIM s Kena special plan of 5/Month is lower than Iliad s 5.99/Month No existing infrastructure or customer base to cross sell No brand name, no physical office to check customer ID and provide services The Wind Tre network Iliad uses is the weakest network in Italy in terms of speed, coverage and latency.

11 Open Fiber Threat Not Real Poor IRR for Open Fiber to build up network and compete with TIM Resellers have no incentive to switch due to regulated wholesale pricing Need to negotiate with different municipalities, additional cost and time

12 Insulated from Political and Market Headwinds Not a government-related entity, Italian government owns less than 5% of TIM TIM has an independent board Telecom industry is non-cyclical, insulated from macroeconomic cycles

13 Fair Valuation = 1.12/Share Estimated 2018 adjusted EBITDA of 9 billion (4% growth over 2017), 5.5x multiple, and 25 billion net debt, stock price = 1.17/share 4.5 billion FCF projected by management in X multiple (TIM 5-year P/FCF average), stock price = 1.07/share Assign weight of 50% to EV/EBITDA and 50% to P/FCF, stock price = 1.12/share

14 Catalysts Completion of separation of Netco Deleverage leads to debt upgrade to investment grade Resume dividends payout to ordinary shares Fears of Iliad and Open Fiber competition subside TIM reports healthy financials for 2018

15 Risks Iliad entry more damaging then expected Open Fiber continue to aggressively build up network regardless of poor IRR Management 2018 to 2020 projection approves to be too optimistic Disputes between Elliott and Vivendi cause management instability