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OTE | Let the free cash flow

Healthy underlying momentum sustained in 2020… – FY20 results reaffirmed once again the solid operating momentum, with OTE managing to contain the adj. EBITDAaL decline to 0.5% yoy notwithstanding a nearly c2% drag stemming from roaming. Most importantly, the impact on cash flow generation was more than offset by mitigating actions (cost savings, working capital management), with OTE comfortably exceeding the adj. FCF target set for the year.

Looking ahead; 2-3% EBITDAaL growth in 2021-22e – Following the transitory COVID-19 shock, 2021 looks brighter as roaming revenues are likely to bounce back (+21% yoy on our estimates, albeit remaining c40% below pre-COVID levels) and will be coupled with structural market drivers including VDSL take-up (VDSL still 44% of OTE’s BB subscriber base) and rising BB penetration (BB subs still 80% of OTE’s fixed-line subs). With household high-speed penetration still c35% vs. c50% in the EU, the Greek telecom market offers a great upselling opportunity as the economy exits the COVID-19 induced recession. In mobile, service revenues are likely to be held back this year too (pre-paid pressure, wi-fi offloading, lower migration to post-paid), but we expect rising data usage and more-for-more to underpin an upselling dynamic from end 2021 onwards. Overall, we expect domestic revenue growth of 1.6% in both 2021 and 2022, with growth skewed to ICT in the short-term before a bounce-back of retail revenues in 2022. At group operating profit level, we estimate this will translate to adj. EBITDAaL growth of 3% in 2021 (trending down to c2.4% in 2022e) as cost savings kick in (€40m) and the effect from Romania one-offs wanes.

8% yield in 2021, further augmented by Romania net proceeds – OTE paid out c€400m to shareholders in 2020 (dividend and buyback), with distributable FCF poised to be 20% higher this year (at €480m), comprising a €0.68 DPS (€313m) and €167m of buybacks. Looking ahead, we expect adj. FCF to increase again above €600m (after €575m in 2021e), mostly as a result of lower financing costs, lower tax (related to the Romania disposal) and higher operating profitability. This translates into a very compelling double-digit adj. FCF yield, and potentially high single-digit distributable FCF given abating dilution from one-offs (in the absence of spectrum outlays). The 8% yield in 2021 will be further augmented by net proceeds from the Romanian sale, translating to an extra 3-3.5% yield on our estimates.

Valuation: attractive risk reward; drag in the short-term from the rotation into re-opening beneficiaries – Following the FY20 results, we have made limited changes to our operating estimates. Our PT remains based on a SOTP, effectively valuing OTE at c6x 2021 adj. EV/EBITDA, small discount vs the EU sector. Although the fundamental case is quite solid, the short-term thesis is weighed down to an extent by the broad market rotation into cyclicals and sectors geared into the re-opening theme. That being said, with OTE offering a c8% cash return in 2021 and shareholder remuneration poised to increase further in the future, we find the current entry point quite compelling.