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OTE (Hellenic Telecoms) | Solid as a rock, but what to look forward to?

Robust execution, but largely priced in – OTE continues to outperform both Greek non-financials and the broad EU telecom sector standing c2% higher year-to-date (EU telcos -1%). Quite interestingly, this has been achieved in a period when expectations for shareholder returns have been revised slightly downwards (given the €100m annual uptick in capex to finance the upgraded FTTH roll-out plan). Besides the solid operating performance and the robust FY21 results, the share price ought to have been supported by the extra buyback related to Telecom Romania’s sale. OTE has thus managed to close the EV/EBITDA valuation gap vs EU telcos in the last few months (although it has moved to a slight discount again in the last few days), while offering similar FCF yield. At the current juncture we see limited fundamental catalysts for further re-rating, thus keeping our Hold but we caveat that OTE is likely to outperform other Greek stocks in a scenario of escalation of the geopolitical conflict.

What could drive the shares higher? With discussion around Telco consolidation becoming increasingly vibrant in recent months (e.g. Vodafone Italy) and talks about the value creation from the monetization of infrastructure assets ramping up (e.g. Vantage Towers, DT), we have examined potential sources of value creation other than pure operating fundamentals. In this note we have looked at the scenario of OTE monetizing its towers portfolio, against the background of several past transactions in other countries. On our estimates, given the low profitability of Towers in the context of the group (26%) to justify the ramping of the fiber upgrade. Besides being a necessity to a great extent, the broader fiber roll-out will help OTE sustain a more attractive growth profile by containing churn and by upselling while improving the EBITDA mix (fiber c20% of EBITDA by 2027e).

Raising EBITDAaL 2-3%; eyeing €500-560m returns to shareholders (7-8% yield) – We have raised our EBITDAaL by 2-3% over 2022-24, filtering through the 2021 beat while modelling 2-2.5% annual growth throughout 2022-26 (with roaming contributing c0.4% growth in 2022e). We lift our PT (SOTP-based) to €17.1 effectively valuing OTE at c6x 2022 adj. EV/EBITDA, in line with the EU sector. Our numbers incorporate shareholder returns of €500-560m in the coming years, translating to a yield of 7-8%.