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OTE (Hellenic Telecoms) | Valuation de-rating overly punitive; upgrade to Buy

Stalled operating momentum restraining share performance – OTE shares are down c20% in the last 12 months, underperforming vs a c2% drop for the EU telecom index over the same period. The broad EU sector has been affected by the rising yields over the course of 2022 and concerns about the impact of cost inflation, with OTE shares also dragged down by idiosyncratic factors including the tepid operating momentum in H2’22 along with signs of intensifying competition. Telcos that have outperformed in the last 6 months include names underpinned by M&A activity (e.g. DT, TI), pricing (e.g. BT) and upside surprises to cash returns (e.g. KPN). The latter actually turned into a headwind for OTE recently, with 2023 cash returns coming in below expectations (at €425m), indicating a total cash yield of c8%, which does not screen out any more as more compelling vs the sector.

… but shares largely de-risked now; upgrade to Buy – We reiterate our view that the investment case suffers, in the short-term, from the lack of catalysts. However, with the shares down another c16% since the Q4 results and trading at 15%).

2023 profit moving parts – We have not made significant changes to our numbers, still eyeing 1% EBITDAaL growth in 2023 followed by 1.9% in 2024. As far as the main pillars of EBITDAaL growth for 2023 are concerned, we expect roaming to add c0.3pps to EBITDA growth and ICT to contribute another 0.4pps. On the expense side, energy costs look set to be flattish yoy given OTE’s hedges, payroll inflation is likely to be manageable (with ΟΤΕ’s one-off support shaving c0.5% off EBITDA growth) and largely offset by a new potential VES (c0.5pps in 2023), with further cost mitigation set to stem from relocation of several employees to the main headquarters (0.4pps in 2023).

Valuation: derating now looking overly punitive – The shares have de-rated to 15% discount vs the sector, just fractionally higher than the historic average discount. In our view, the better financial position and FCF cover of the dividend ought to be seen as key merits in an uncertain market while tilting the risk-reward skew to the upside. Indicatively, on our estimate the current share level seems to price in c2.2% return on capital in perpetuity or, alternatively, capex/sales near 26% compared with the current industry average of c19% (and signs this level may indicate the peak).