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OTE | First thoughts on Q3’19: a good quarter on solid Greek mobile and signs of stabilization in Romania

Results a bit ahead of consensus, FCF solid – OTE reported Q3’19 results a bit ahead of consensus, with adj. EBITDA (pre IFRS 16) coming in at €375.7m, +3.8% yoy. This was sequentially stronger than Q2’19 (+1.7%), largely underpinned by very solid Greek numbers (EBITDA +6%, stronger than +4.7% in Q2). Romania remained a drag on group performance (EBITDA -12%), albeit showing some signs of bottoming out while being slightly up yoy excluding one-offs. Reported net profit increased c20% yoy or c17% on an adjusted basis. On the cash flow front, adj. FCF in Q3 amounted to €121m vs. €129m in the same period last year, as WC outlays were offset by higher profitability and lower capex. FCF was absorbed by €38m of buybacks and the dividend payment (€249m), thereby leading to an increase of financial net debt (excl. leases) to €779m from €608m in Q2’19. Mgt reiterated the FCF guidance for FY19 (adj. FCF €450m, reported FCF €350m) noting this does not take “into account the likely deferral into next year of mobile spectrum auctions”, effectively implying that the spectrum payment will be a drag on next year’s reported FCF instead of that of FY19. Healthy Greece with EBITDA +5.9% yoy underpinned by rising fiber adoption – Greece revenues were up 2.2% yoy following a 1.2% increase in Q2. Of note is that core fixed retail revenues increased 1.7%, remaining on an upward trajectory for 8th straight quarter. This has been underpinned by a healthy KPI momentum: 1) BB net adds decelerated sequentially but stayed healthy at +18K (+30K in Q2); 2) VDSL uptake continues unfettered with OTE setting a new record in terms of high-speed subs (now at 695K, +49K vs. Q2). High-speed lines are still no more than c35% of OTE’s BB subs, implying there is plenty of room for growth; 3) Pay TV saw a 5K increase in subscribers, following +3K in Q2 and a 1.6K decline in Q1. In mobile, service revenue growth was quite impressive, accelerating to 3% from +2% in Q2 and +1.2% in Q1 underpinned by pricing in pre-paid. Data revenues continue to showcase growth rates in excess of 20%. Romania: weak but “scratching the bottom” – In Romania there was stabilization in fixed dynamics, with retail revenues -6%, namely similar to the -5.3% registered in Q2, as opposed to the double-digit declines in previous quarters. In mobile, service revenues improved sequentially dropping -2.7% following -4.4% in Q2. Most importantly, EBITDA in total Romanian operations fell -12% yoy, but on an underlying basis (excl. one-offs) adj. EBITDA was slightly up yoy. Valuation – Our PT values OTE at c5.3x 2019 EV/EBITDA, c10-15% discount vs. the EU comparable peers due to the limited visibility associated with the Romanian business, both in terms of performance and potential disposal price.