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OTE (Hellenic Telecoms) | First thoughts: Results in line, fixed retail softer, mobile strong

Mixed results with fixed weaker but mobile stronger; Q3 EBITDAaL 1.6% yoy – OTE has announced Q3 in line with our expectations, but with results being mixed characterized by solid mobile (service revenues +5.2%) and headwinds arising for the fixed business (retail revenues -4.6% yoy). Group sales increased >5% yoy (following +2.7% in Q2), coming in at €905m (a bit ahea of our estimate). On the profit front, adj. EBITDAaL increased 1.6% yoy to €358m, sequentially decelerated from +7% in Q2’22 in sync with our number (€355m). On its turn, this filtered through to little-changed net income yoy (at €162m vs EEe €156m). On the cash flow front, FCF was absorbed by the dividend payment (€250m) and €65m of quarterly buybacks thereby leading to a >€240m increase in net debt qoq (to €531m as of end Sep’22). Mgt has reiterated FCF guidance despite slightly lifting capex expectations for 2022 due to different phasing.

Tougher environment in fixed, roaming bounce, some cost inflation filtering through – Retail fixed revenues fell 4.6% yoy following a flattish performance in Q2 and +2.8% in Q1, and were the major negative from the results. As we have cautioned in earlier research, the competition in fixed seems to have intensified somewhat lately, with quite increased promotional activity. OTE and the merged Nova/Wind look better-placed than Vodafone, given their converged offering, but the effort to protect their customer base does come at a cost. The lower out-of-bundle turnover (as revenues become increasingly “bundled”) along with the free doubling of speeds have been additional drivers. These factors seem to be temporary though, so we would expect improvement in 2023. In mobile, trends stayed quite robust, with non-roaming revenues still >2% higher, roaming income bouncing above pre-COVID levels and service revenues +5.2% in total following +4.5-4.7% in the first 2 quarters of 2022.

EBITDAaL growth c4% in 2022e but more tepid rates in 2023-24e – The strong H1 (EBITDA +7.6% yoy) paves the way for a robust FY22 performance, notwithstanding the sequential slowdown in H2. Our FY22e imply -1.8% decline in Q4 EBITDAaL, partly due to our assumption for increased staff costs diluting the benefit from VES savings. For 2023 we envisage 1.6% growth in adj. EBITDAaL, but we caveat there is minor downside risk due to potentially higher payroll inflation and persistently high energy costs.

Valuation de-rating in sync with EU sector; 7-8% cash yield, limited cash flow risk – Despite its defensive characteristics, EU telcos have de-rated by c0.5x in terms of 12m fwd EV/EBITDA since the summer (to c6x) due to concerns about pricing power in the light of rampant inflation and staff opex inflation following labour negotiations. OTE has outperformed having returned c1% since July vs a c12% drop for the EU sector, thus narrowing the relative discount to c10%, justified in our view by the smaller size. Our PT stays at €17.1 based on a blended methodology where we apply a 50% weight attached to our DCF-based SOTP and a 50% weight to an exit EV/EBITDA of 5.9x. At the current juncture we see the equity story as balanced, with limited downside cash flow risk (cash yield 7-8%) but rather scarce catalysts for re-rating.