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OTE (Hellenic Telecoms) | Heads up: Q2’23 likely to be unexciting; move back to a Hold on valuation

Q2’2023e: back to positive revenue growth but Romania remaining a drag – OTE is due to release its Q2 results on 3rd August (pre-market), with quarterly trends set to stay mixed, characterised by ongoing softness in Greek fixed and in Romania offset by solid domestic mobile and stronger wholesale revenues. As such, group revenues look poised to improve sequentially (to +0.6% yoy from -2% in Q1) although the likely >-3% drop in domestic retail fixed will leave little scope for excitement, in our view. With Romania weighing on profitability (MTR impact, energy costs, termination of the MVNO offering), we expect group adj. EBITDAaL to shape near €325m, -2.2% yoy vs -1% in Q1. Reported numbers will be weighed down by >€30m VES costs leading reported net profit to c€109m, +2% yoy due to lower financial expenses (with similar VES amount booked in Q2’22). We expect cash generation to normalize as capex ticks higher qoq, but with OTE still delivering >€100m FCF thereby managing to bring net debt further down to €211m. We anticipate net debt to increase in H2 given seasonality (lower FCF in H2) and cash returns to shareholders (€250m dividend plus continuing buybacks).

Healthy volume KPIs offset by ARPU dilution in fixed – We expect KPIs momentum to remain healthy in terms of volumes but we envisage ongoing ARPU pressures in fixed. In particular: 1) BB momentum is likely to stay positive (15K in Q1’23, 20.2K in Q4’22), as OTE has opted to defend its share staving off competition with compelling offers; 2) Fiber subs are likely to stay strong (41K in Q1’23, 15-18K in H2’22); we remind that FTTH is still just 166K, i.e. 7% of BB; 3) Fixed line ARPU run-rates are likely to remain weak, down in the mid single-digits, given OTE’s response to competitor activity; 4) In Greek wireless, more-for-more has become “much more for little more” but OTE is likely to continue defending its subscriber base well – particularly higher ARPU contract subs; we thus expect c2% growth in service revenues vs +2.7% in Q1.

Valuation: moving to Hold on valuation; ARPU inflation the main catalyst – Ahead of Q2 we have recalibrated our assumptions, making limited changes to our forecasts. We reiterate that H1 was lapping a tough comp and that trends ought to accelerate in H2. Key for a sustainable inflection in revenue trends will be the end of ARPU deflation in fixed, with the main catalysts for this being the potential automatic indexation of tarriffs (under public consultation) and the new state-subsidized voucher scheme for FTTH (likely in Q4’23). On that basis, it seems that Q2’23 will mark the trough in terms of run rates (operationally). From a valuation perspective, although the shares remain cheap trading at just