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OTE (Hellenic Telecoms) | First thoughts: Cost discipline leads to 0.8% yoy growth in EBITDAL, fully underpinning our FY20e

Resilient quarter on cost control; FY targets reiterated – OTE has released Q2’20 operating results c3% ahead of our expectations, managing to deliver EBITDAaL (after leases) +0.8% higher yoy (vs our -2.5% estimate) as the roaming drag (€9-10m) was more than offset by cost containment and a strong performance in Romania (€7m higher yoy). Revenues suffered a -3% drop yoy (Greece -3.8%) largely driven by roaming and domestic mobile, but were in line with our estimate. Adj. net profit shaped at €118m, +20% yoy, also boosted by lower depreciation. Cash flow generation was healthy, with adj. FCF shaping at €185m (EEe €148m), +7% yoy on lower capex, with OTE on track to deliver its FY20 target (adj. FCF €610m). In sync with our estimate, financial net debt was reduced to €459m as of end June (from €546m in end Q1), as the strong underlying FCF was only partly diluted by VES payments (€50m) and buybacks (€39m).
… underpinning FY20 EBITDAaL at this stage – With roaming being even more important in Q3 from a seasonality perspective, the FY20 performance largely hinges on the % of the c€25-30m roaming revenues (normally generated in the third quarter) that OTE will be able to recover. Our estimates currently assume a 55% decline in Q3 roaming but with risk on the downside given the incoming tourism trends so far (July passenger traffic in AIA down c70%). That said, we believe there can be an offset from data growth, VDSL upselling and cost savings, with the H1 performance (Greece flat EBITDAaL yoy) providing a significant cushion for the full year. As a result, we do not feel there is such downside risk to our FY20 EBITDAL of €1,347m (c€6m lower yoy) as to compromise the thesis. More colour on the latest trends (especially the extent of the bounce-back for Greek mobile) will be offered at the conference call at 15:00 UK time (Dial-in: 0, 3, +44 (0) 203 059 5872, ).
Q2 in more detail: resilient domestic fixed, weak mobile, good Romania – Greek fixed trends stayed resilient with solid BB take-up (net adds of 44K vs 30K in Q1) and strong VDSL adoption (53K vs 45K in Q1). Pay TV was affected by the pandemic (positive net adds but pressure on revenues), but this was largely anticipated. In mobile, besides the roaming headwind, performance was weighed down by promotions, offloading to wifi and lower out-of-bundle consumption, thereby driving an 8.8% decline in mobile service revenues, reversing the +3.3% increase in Q1. Overall, Greek revenues dropped -3.8% but EBITDAaL fell just 1.7% on cost containment. In Romania, despite the 1% revenue decline, EBITDAaL was up 26%, on easy comps and a more limited COVID-19 impact.
Valuation – We base our valuation on a blended methodology effectively valuing OTE at c5.7x 2020e 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 on concerns over the duration of the COVID-19 induced crisis. We also stress that shareholder returns this year will be c€400m (with limited downside risk), translating to a compelling c7% yield. Assuming conditions normalize in 2021, we see no reason why adj. FCF will not exceed €600m, thereby expecting shareholder returns of >€500m, translating to a yield near 8-9%. We reiterate OTE as one of our top picks.