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OTE (Hellenic Telecoms) | Time for a breather; moving to Hold on valuation

Discount vs EU sector closes following significant relative outperformance – OTE is up c25% year-to-date (31% total return) having outperformed the ASE (+14%), Greek non-financials (+15%) and the EU telecom sector (+17%). OTE’s outperformance has become more pronounced in the last 3 months (+14% return vs -2% for EU Telcos), partly underpinned by the solid Q2 results and the visibility around FCF generation and shareholder returns. As a result, OTE’s share price has narrowed the valuation gap vis-à-vis EU telcos and now the stock is trading broadly at par with the EU sector. We thus see limited further re-rating triggers, framing a balanced risk/reward profile. On that basis, we lower our rating to Hold on valuation grounds, lifting just slightly our PT as we roll over our valuation to Sep 2022.

A robust Q2 fuelling a strong share price performance… – OTE’s Q2 was quite robust, with revenues +8% and adj. EBITDAaL +6.9%. Results were underpinned by a very strong performance in Greece (EBITDAaL +6.5%) driven by ongoing solid fixed KPIs and significant improvement in mobile (service revenues +7%). Cashflow-wise the quarter was also solid, with OTE generating adj. FCF of €163m vs €179m in Q2’20. Net debt was thus reduced to €451m, €133m lower qoq, as FCF was only partly absorbed by buybacks (€44m). Mgt reiterated FCF related guidance (adj. FCF of €575m, capex €550m, reported FCF €480m) while noting that post the normalization of the operating environment it is likely to proceed to the proposal for the distribution of an excess €80m amount accumulated over 2018-2020 (€0.17 per share).

Outlook remains firm; heading for EBITDAaL >€1,270m, €45-50m higher yoy (c4% growth) – As we have been flagging, the main concern going into 2021 was the % of retracement of roaming profitability (€40m EBITDA normally on an annual basis, with 2020 suffering >50% decline) and the duration of pressures on mobile. With OTE having managed to grow EBITDAaL €25m yoy in H1, the group is clearly primed to deliver FY21 EBITDAaL >€1,270m, namely c€45m higher yoy (c4% growth). This will be quite a solid performance and assumes OTE will recover just 50% of 2019 roaming revenues, which we believe is by no means aggressive, especially given the accelerating tourism trends in July and August (arrivals at c70-75% of 2019 levels), which make the target of 50% retracement of tourism-related revenues (vs 2019 levels) look more than feasible (and the new baseline as per industry experts). On the cash flow front, we see adj. FCF exceeding €600m in the coming years on account of higher profitability and lower finance costs and anticipate increasing remuneration to shareholders (8-9% yield including dividend and buyback).

Valuation – We have not made any changes to our operating assumptions at this stage. We still eye 2.5% revenue growth and 3.9% EBITDAaL growth in 2021, assuming 0.7% growth in Greek EBITDAaL ex-roaming in H2. For 2022, we model 1.9% growth in group EBITDAaL. Rolling forward our valuation to Sep 2022, we have lifted slightly our PT to €16.0. The latter continues to be based on a SOTP, effectively valuing OTE at c6x 2022 adj. EV/EBITDA, broadly at par with the EU sector.