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OTE (Hellenic Telecoms) | Solid rather than exciting

Mixed results with fixed headwinds arising; looking for c1% growth in EBITDA yoy – OTE will release Q3’22 numbers on 10th November pre market open. We expect mixed results marked by a bounce of roaming revenues above their respective 2019 level but with headwinds arising for the fixed business (retail revenues down yoy). On the other hand, solid mobile, healthy Pay TV KPIs and robust ICT will provide an underpinning, leading group sales +2.5% yoy (vs +2.7% in Q2). The sequential slowdown in retail fixed trends and the slightly weaker Romania will translate into a c1% yoy growth in adj. group EBITDAaL from +7% in Q2’22. On its turn, this will filter through to a small yoy decline in net income to €156m on our estimates (vs €160m in Q3’21). On the cash flow front, we expect healthy FCF to be absorbed by the dividend payment and €67m of buybacks in Q3 thereby leading to a >€230m increase in net debt qoq (to €522m as of end Sep’22).

Tougher environment in fixed, roaming bounce, some cost inflation filtering through – Retail fixed revenues look set for a low single-digit decline yoy, following a 2.8% yoy increase in Q1 and a flattish performance in Q2. The sequential deterioration is the result of lower out-of-bundle turnover (as revenues become increasingly “bundled”), the free doubling of speeds (concerning c700K subs, namely c31% of OTE’s BB subs) and somewhat intensifying competition, especially as Wind seems to be pushing aggressively its fully convergent offering. In response OTE appears keen to stave off competition by protecting its customer base, with both players looking better placed than Vodafone though, due to their TV content. In mobile, trends remain quite healthy, with non-roaming revenues still +2% and roaming bouncing above pre-COVID levels, outperforming the tourism volume dynamic.

Raising EBITDAaL c1% for this year; trivial changes post 2023 – The very strong H1 (H1’22 EBITDA +7.6% yoy) paves the way for a robust FY22 performance, notwithstanding the sequential slowdown in H2. Factoring in +1% EBITDAaL in Q3 and -1% EBITDAaL decline in Q4 (the latter partly due to our assumption for one-off staff costs diluting the benefit from VES savings), we reprofile our forecasts for 2022 raising our group adj. EBITDAaL by c€15m (c1%). For 2023 we make minor changes, envisaging 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). Reasons for the downward movement have been concerns about the sector’s pricing power in the light of rampant inflation (partly manifested in the guise of elevated effective energy costs given the 2023 hedges) and staff opex inflation following labour negotiations. OTE has outperformed being little changed since July (vs c14% 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 as the increase in our estimates is offset by the uplift in our WACC (8.7%, to reflect tighter monetary settings). 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.