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OTE | First thoughts: 3% beat driven by Romania; Greece resilient

Roaming drag offset; small upgrades to FY20e EBITDAaL expected – OTE has released Q3’20 operating results c3% ahead of our expectations, managing to grow EBITDAaL (after leases) by 0.9% yoy (vs our -2.4% estimate) as the roaming drag (€13-14m, 3.5% of group EBITDAaL) was more than offset by cost containment and a very strong performance in Romania (EBITDAaL €14m higher yoy, +40% or c30% excl. one-offs). Overall, group revenues suffered a -0.8% drop yoy (Greece -1.1%) driven by roaming. Adj. net profit shaped at €149m, +19% yoy, with reported numbers dragged down by VES and a €111m impairment in Romania. Cash flow generation was healthy, with adj. FCF shaping at €130m (EEe €128m), +7% yoy. Mgt has reiterated the target for adj. FCF of €610m in the full year. In sync with our estimate, financial net debt shaped near €654m in Q3 from €459m in Q2, as the underlying FCF was absorbed by the payment of the dividend (€258m) and buybacks (€41m). Of note is that deferred taxation related to the TR sale agreement is poised to curtail tax payment outlays in 2022.

Disposal of Romania Fixed to help crystallise value – OTE sealed an agreement with Orange for the sale of Telekom Romania Fixed (TKR) to the latter. The agreed consideration is €268m for OTE’s 54% stake (the business ought to be debt-free currently), corresponding to a multiple near 4.1-4.2x EBITDA on our calculation (adjusting for FMC). This is quite decent valuation and certainly higher than most market estimates we believe (we valued the total Romanian operations at €0.20 per share) corresponding to our estimate of the value of the remaining Romanian mobile operations. Similar to the case of Albania, the net cash proceeds from the sale (following restructuring needed for the separation of mobile/fixed operations, fees to advisors etc.) will be distributed to OTE’s shareholders in the form of a special dividend, translating to an extra 3-4% yield, we estimate.

Q3 in more detail: resilient domestic fixed, weak mobile, strong Romania – Greek fixed trends stayed resilient with healthy BB take-up (net adds of 24K vs 44K in Q2) and strong VDSL adoption (46K vs 53K in Q2). Pay TV subs were flat. In GR mobile, besides the roaming headwind (c5-6% on service revenues), performance continues to be affected by offloading to wifi and lower out-of-bundle consumption, thereby driving an 8% decline in service revenues, just mild sequential improvement vs -9% in Q2. Overall, Greek revenues dropped -1.1% (-3.8% in Q2) and EBITDAaL fell -3.3% (-1.7% in Q2), little changed excluding the roaming effect. In Romania, revenues rose 0.2% lapping a tough comp while EBITDAaL was up an impressive 40% or c30% excl. one-offs.

Valuation – We base our valuation on a blended methodology effectively valuing OTE at c5.6x 2021e EV/EBITDA, small discount to the EU sector. We reiterate that we view OTE as an attractive defensive exposure against the background of fragile risk appetite as COVID-19 continues to sweep across the world. We stress that shareholder returns in 2021 are poised to exceed 10% (including ordinary dividend, buyback, special dividend related to Romania) and shape near a compelling 7-8% post 2022. We reiterate OTE as one of our top picks.