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OTE (Hellenic Telecoms) | Telling it like it is

Firstly, the positives – After a weak period with declines in GR retail fixed, the segment seems to have finally inflected in Q4’23 (+1.2%) as easy comps kicked in. KPIs in general are healthy (rising BB/fiber/TV subs) while domestic wireless continues to display robust trends thanks to better mix (contract sub adds) which is accretive to ARPU. ICT is also set to ramp up further, as project implementation accelerates. Meanwhile, fibre deployment by competitors is progressing slowly, which, in its turn, means lower headwinds for OTE’s wholesale business. Cash flow wise, mgt accuracy in predicting FCF has been impressive, partly thanks to tight WC monitoring.

Secondly, the negatives – In Q3’23 OTE capped 4 quarters of underperformance in terms of organic revenue dynamics vs EU telcos. 2024 looks set to be a year of fixed ARPU stabilization, but we caveat that GR wireline lacks structural pricing power due to the absence of CPI-indexation, contrary to other markets. Our tariff data suggests that there have been just mild increases by operators in headline prices for their core 100 Mbps bundle (except for VOD), which get diluted by discounts offered to churning customers. In fact, the more premium fiber plans (200-300 Mbps) seem to be little-changed vs 2023, which, in our view, indicates that fibre revenue monetization is still work in progress. Meanwhile, in 2024 OTE will need to navigate several headwinds (energy, wholesale drag) which will partly offset the benefit from pricing initiatives.

Thirdly, the cash returns – The FY24 €450m cash return did not bring about much enthusiasm, as it was up just 6% yoy, although it did correspond to a (generous?) 95% payout. We reiterate that the cash return policy looks overly conservative to us, especially considering that net debt has fallen by €131m over 21-23. It also seems that the distribution of previous years’ surpluses is not on the agenda currently (this was mentioned 2 years ago, albeit without a timeline), with mgt keen to retain the underleveraged position. As such, for shareholders to see higher cash returns, there must either be an increase in Operating CF or a drop in capex. Our understanding is that cash returns will be propelled in 2025 by a c€100m tax break eyed from the potential sale of Romania, but for a sustainable step-up we think profitability will need to post meaningful growth. Our numbers pencil in distributable FCF of c€500m-520m (and 97-100% distribution) over 2025-26 following €470m in 2024 (95% distribution).

Valuation: It is all relative… – Following the de-rating in the last year, OTE trades at c8% 2024e FCF yield, which by itself is quite attractive. That said, the case is somewhat more nuanced, as: 1) other EU telcos offer similar yields on greater EBITDA growth, coupled with abating capital intensity; 2) other GR non-financials offer more compelling yields coupled with superior growth (e.g. OPAP, Jumbo). At c4.6x 2024e EV/EBITDA, a >20% discount vs the EU sector, OTE shares largely reflect the inferior growth profile in our view, but they also look largely de-risked at these levels. On the other hand, we struggle to see catalysts other than the potential sale of Romania in 2024. Effectively the key issue is the extent to which there can be meaningful EBITDA growth in the business in the coming years (we model