EUR 508.94 For Business Accounts Only

Riding on the need for speed

FTTC deployment in full speed… – OTE has completed the FTTC upgrade of 13K cabinets making VDSL available to 2.5m households. It has also secured the approval for the deployment of another 3K cabinets, which will give it access to another 400K households and bring total NGA coverage close to 60%. Vodafone and Wind Hellas have secured 2.7K and c3K cabinets respectively for FTTC deployment by 2019. Overall, out of the 35K total cabinets in Greece (c24-25K of which are commercially viable for fibre upgrade we believe), OTE is set to roll out FTTC at c16K, with competitors securing c6K. On that basis, we expect OTE to be the main provider of high speed broadband accounting for >70% of the addressable market in 2020e.

 … as OTE seeks to capitalise on ramping demand for speed – We believe there is a clear case for monetization of OTE’s technology investments in Greece underpinned by the pent-up demand for data usage and for faster speed. Although the degree of adoption of vectoring is yet to be seen, we believe demand for data/speed will see significant uplift once the economy recovers. In that regard, OTE’s investment push leaves it well placed to benefit from the retail ARPU uplift as a result of the upselling to faster speeds. We assume VDSL subs will account for c34% of OTE’s BB subs in 2020 (18% now), but estimate >€20m profit uplift if high-speed adoption reaches 50% of OTE’s BB lines.

Fibre roll-out coming at the cost of a higher capex budget in 2017-18 – OTE’s large scale FTTC deployment over 2016-17 has been reflected in the guise of elevated capex diluting FCF generation and leading to the downward revision to the initially provided 2017 FCF guidance. The step-up in capital intensity should not be extrapolated into the future, though. Although capex will stay elevated in 2018 (€700m), it ought to trend down towards more normal levels in 2019 (€650m) as the bulk of the FTTC deployment will have been concluded. Although we do see some risk to medium-term capex as vectoring may not be seen by the regulator as the best path forward for future-proof broadband access, we do not envisage any large scale FTTH deployment anytime soon as this would be well ahead of the demand curve. By implication, we see OTE’s adj. FCF recovering to c€440m in 2019e. 

… pushing back hopes for a dividend inflection after 2019 – The aforementioned infrastructure upgrade has effectively pushed back the discussion for a potential change in the dividend policy to 2019. On that regard, a near-term releverage does not seem to be on the table, but we continue to argue that the disposal of the state’s 5% stake – which looks set to take place within the next 12 months – is likely to catalyse the recalibration of the dividend policy.

Valuation – OTE’s discount vs. EU peers remains at >30% (on EV/EBITDA), but as we have repeatedly flagged the dividend remains an overriding factor for a re-rating. Following Q3 and the downgrades to our short-term FCF projections, we have trimmed our PT, valuing OTE at c5.3x 2018e EV/EBITDA, c15% discount to EU peers.