EUR 300.00 For Business Accounts Only

OTE (Hellenic Telecoms) | On sure footing with yield support; upgrade to Buy

OTE’s FY19 results reaffirmed once again the solid operating momentum in Greece, with OTE growing domestic revenues and EBITDA 1.9% and 3.4% respectively. We expect domestic revenues to continue growing c1.5-2% in 2020-21 aided by the cyclical acceleration – albeit anticipating somewhat intensifying competition – with domestic EBITDA rising 1.4-3.5% respectively. At group level, we estimate this will translate to 1.6% EBITDA growth in 2020, assuming Romania remains in recovery mode (EBITDA +3.1%).

In the light of rising profitability, falling financial costs, normalizing capex and a lower Greek corporate tax rate, we expect group adj. FCF to remain above €600m in the coming years, pointing to distributable FCF >€500m after 2021 from c€400m in 2020, namely a total shareholder return of c9% post 2021 from c7% in 2020.

Given the dilutive nature of the Romanian operations (to FCF), a potential disposal of the latter would add further visibility on cash flow generation, thereby underpinning a further stock rerating. We caveat though that a complete disengagement from the country is a relatively complex task and as a result, the process might be subject to further timeline slippage.

Following on from the FY19 results, we have recalibrated our model lifting our 2020-21 EBITDA by c2% now forecasting group 3-year EBITDA CAGR of 2.5 %, still somewhat lower than the growth envisaged for the broad EU telecom sector. We reiterate though that the lower growth profile is balanced by the stronger balance sheet and rising cash returns, arguing that OTE merits a valuation not too far from that of EU telcos. Our estimate upgrades drive an increase in our PT to €14.8 (based on a SOTP), which effectively values OTE at c5.7x 2020 EV/EBITDA, small discount vs. the sector due to the limited visibility associated with the Romanian business. We upgrade our rating to Buy following the recent share price correction, as we view OTE as an attractive defensive exposure against the background of deteriorating risk appetite on mounting concerns over the economic fallout from Covid-19.