EUR 300.00 For Business Accounts Only

OTE (Hellenic Telecoms) | First thoughts: Q2 results sequentially better, in line with our estimate

Solid Greece, soft Romania, 1.7% adj. EBITDA growth, impairment in Romania, solid FCF generation – OTE has reported Q2’19 results in line with our (and we believe consensus) numbers, with adj. EBITDA (pre IFRS 16) coming in at €322m, +1.7% yoy, reversing the -0.9% decline registered in Q1. Performance was driven as usually by solid Greek numbers (EBITDA +4.7%) underpinned by accelerating high-speed adoption, with Romania remaining a persistent drag (EBITDA -20% yoy). Reported numbers were diluted by the new VES costs (€53m) and a €69m goodwill impairment related to the Romanian business. As a result net profit was down 35% yoy but was up 54% on an adjusted basis. On the cash flow front, adj. FCF in Q2 was impressive at €173m vs. €92m in the same period last year on the back of working capital release. As a result, net debt excl. leases retreated to €608m from €738m in Q1’19. Given the H1 performance, we see upside risk to the FY19 adj. FCF guidance of €450m.

Greece KPIs remain robust – Greece revenues were up 1.2% yoy, following +1.7% increase in Q1. In fixed, the KPI momentum looks quite solid with: 1) traditional voice registering net adds; 2) BB net adds accelerating to 30K from 25K in Q1’19 and 39K in Q4’18; 3) a record number of VDSL adoption (60K net adds), with high-speed lines now at c33% of BB subs; 4) Pay TV seeing a 3K increase in subscribers, reversing the c1.6K decline in net adds in Q1. In mobile, service revenue growth accelerated to 2% following +1.2% in Q1 underpinned by pricing in pre-paid (where we saw an effective “clean-up” of the subscriber base in the previous 2 quarters). Data revenues also provided an underpinning, growing 22% yoy.

Romania: no respite – In Romania there was a sequential improvement in fixed dynamics, with retail revenues down 5.3% in Q2 following double digit drop in previous quarters. In mobile, service revenues stayed weak dropping -4.4% following a -6.6% drop in Q1. EBITDA margins in Romania contracted another 2.8 pps yoy settling at 12.9%, translating into a 20% decline in EBITDA yoy (at €29.8m).

Valuation – The key tenet of our thesis has been that OTE merits a valuation not too far from the EU sector, as the lower EBITDA growth vs. EU peers and the limited visibility in Romania are balanced by the stronger balance sheet and rising cash returns. With the EV/EBITDA discount vs. peers at c10%, we believe the shares have largely priced-in the near-term prospects. Our blended valuation methodology values OTE at c5.5x 2019e EV/EBITDA, small discount to the EU sector due to the fairly limited visibility associated with the Romanian business.