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OTE (Hellenic Telecoms) | First thoughts: FY’22 results in line, but lower shareholder remuneration disappointing

Q4 EBITDAaL flat yoy, in line with expectations; persisting fixed headwinds offset by strong mobile – OTE has reported Q4 results in sync with our expectations on an underlying basis, with persisting headwinds for GR fixed (retail revenues -5.5%) and weak Romania offset by an ongoing robust performance by Greek mobile (service revenues +3%). Coupled with strong ICT, these resulted in +1% revenue growth for Q4 and 3.6% in FY22. Q4 adj. EBITDAaL was flat yoy at €332m, with the full year figure shaping at €1,348m. Due to a €116m impairment relating to Romania, bottom line was negative in Q4 and -7% on an adjusted basis (reflecting higher financial expense). Cash flow generation was healthy in line with guidance (€597m FCF for the full year) despite the slightly elevated capex envelope vs the initially guided figure. As a result, net debt fell to €469m from €520m in December 2021 (excl. leases).

Lower than we expected total remuneration in 2023 at €425m vs €502m in 2022 – Following €502m paid to shareholders out of FY22 cash flow, OTE mgt announced a lower figure for 2023, comprising a €175m buyback and a €0.58 DPS (+3% yoy). The reduction in remuneration is mainly due to a c€120-140m tax headwind in 2023 (2022 cash tax was lower due to Romania DTA), which will be only partly offset by the lower capex and higher operating profits, thus leading to €500m FCF in 2023. OTE seems to have taken a prudent approach due to the volatility of the tax bill, effectively deciding to retain a similar FCF payout in 2023, trimming the amount devoted to the buyback. That said, the signalling is clearly negative and likely to disappoint investors, especially given the low leverage and the further reduction of net debt in 2022.

2023 profit moving parts – For 2023 there are several moving parts to profitability. Roaming ought to have provided a c1% boost to 2022 FY EBITDA given the very strong performance (ahead of 2019 levels), so clearly this could only be a marginal swing factor at best. ICT revenues (a >€250m revenue base with c10% margin on our estimates) could add c0.4pps to EBITDA growth (c€5m), we believe. On the expense side, energy costs are likely to be flattish yoy given OTE’s hedges, payroll inflation depends on the result of the negotiation with the union but could be offset by a new potential VES (normally €13-15m annual savings), with further cost mitigation set to stem from relocation of several employees to the main headquarters (€10m saving annualized). Overall, we believe OTE could deliver a €15-25m yoy EBITDAaL growth, corresponding to c1.2-1.9% EBITDAaL growth on a yoy basis (we are currently at the low end of this).

Valuation: derating largely following EU sector but case suffering from lack of catalysts – OTE has returned -15% in the last 12 months, underperforming the drop suffered by EU telcos (-3%). Besides the sector’s decline in the face of rising yields, company-specific drivers have been the tepid operating momentum in H2’22 along with signs of intensifying competition. The valuation remains subdued at c10-15% discount vs the EU sector, but in the absence of significant catalysts to drive the stock higher in the valuation spectrum, we retain our Hold rating.