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OTE (Hellenic Telecoms) | First thoughts: Q1 as expected, with EBITDAaL -1% yoy

GR fixed remaining under pressure; EBITDAaL -1% yoy in line with EEe – OTE has released Q1 results in line with expectations, with EBITDAaL -1% yoy as ongoing softness in Greek fixed (intense competition driving a c4.3% decline in fixed retail revenues, in symphony with H2’22) and a weak Romania (removal of cap on energy prices, termination of MVNO offering) more than offset solid underlying trends in mobile (service revenues +2.7% yoy). Top line was also affected by lower wholesale revenues (-13% in Greece) leading group revenues -2% yoy. We reiterate that OTE was lapping a tough comp in Q1 (EBITDAaL 11% above the respective 2019 mark) and thus base effects have weighed on the optics. In the absence of material one-offs, net profit settled at €135m, +5% yoy. Cash generation was very strong, with adj. FCF at €229m (flattish yoy, partly flattered by tax returns and lower capex due to seasonality; mgt reiterates guidance) and net debt falling to just €262m (from €469m in Q4’22).

Solid volume KPIs offset by ARPU dilution in fixed – Q1 KPIs look quite robust, with: 1) BB momentum healthy at 15K adds (20.2K in Q4’22, 11K in Q3’22), as OTE has opted to defend its share staving off competition with compelling offers; 2) Fiber subs ramping up further to 41K from 15-18K in H2’22. As a reminder OTE’s BB subscriber base remains underpenetrated, with fiber accounting for just 64% of BB lines. Within these, FTTH are just 166K, i.e. 7% of BB); 3) The only black spot – but well telegraphed, we reckon – is the ARPU dilution from OTE’s response to very aggressive offers by competitors, as indicated by the 4.3% yoy decline in fixed revenues; 4) Pay TV subs increased 5.8K qoq following 18.5K net adds in FY22; 5) In Greek wireless, more-for-more has become “much more for little more” but OTE has been defending its subscriber base well (contract subs +47K) and enjoyed 2.7% growth in service revenues.

2023 profit moving parts – Despite the slow start to the year, we reckon that there is limited downside risk to our 2023 projections, with OTE being less exposed than most of its EU peers to energy and wage inflation, while enjoying a far stronger balance sheet, thus being relatively immune to interest rate increases. We are eyeing c1% EBITDAaL growth in 2023 followed by 1.9% in 2024. As far as the main pillars of EBITDAaL growth for 2023 are concerned, we expect roaming to add c0.3pps to EBITDA growth and ICT to contribute another 0.4pps. On the expense side, energy costs look set to be flattish yoy given OTE’s hedges, payroll inflation is likely to be manageable (with ΟΤΕ’s one-off support shaving c0.5% off EBITDA growth) and largely offset by the new VES and other cost saves (e.g. relocation to main headquarters).

Valuation: derating looking overly punitive – The shares have de-rated to just c4.5x EV/EBITDA, a c10% discount relative to OTE’s own history and c20% discount vs the EU sector. Despite the lack of catalysts in the near-term, we feel that the risk-reward skew is on the upside, especially as, on our estimate, the current share level prices in just c2.4% return on capital in perpetuity or, alternatively, capex/sales near 26% compared with the current industry average of c19% (and signs this level may indicate the peak).