Morningstar | Telecom Italia Reported Roughly in Line 3Q Results; Even With EUR 2 Billion Write-Off, FVE Unchanged
Telecom Italia reported third-quarter results that were roughly in line with our expectations, and we plan to maintain our EUR 0.89 local share fair value estimate and narrow moat rating. While we believe the shares are undervalued, we think there are better opportunities in European telecom namely Telefonica, Vodafone, and BT Group.The firm reported revenue fell 4.1% year over year but is only down 3.1% for the nine-month period versus our full-year projection of a 3.4% decline. We were impressed that the company successfully added 365,000 wireless subscribers in Italy during the quarter despite the recent entrance of Iliad. However, Iliad’s aggressive pricing is pushing average revenue per user, or ARPU, down, which we expect to continue. On the fixed-line side, traditional customers declined more than the firm added in broadband subscribers. However, its broadband ARPU increased 11.8% to EUR 27.40, which kept service revenue to a decline of just 0.2%. That said, the Italian broadband market is becoming increasingly competitive, and we doubt such ARPU growth is sustainable.
In Brazil, Telecom Italia’s operations performed well with revenue growth of 5% in local currency terms, but a drop of 15.9% when converted into euros, due to the depreciation of the Brazilian real versus the euro. For more on the Brazilian operation, please see our previously published note on TIM Brasil. Between pressure on the real and pricing pressure from Iliad, we anticipate fourth-quarter revenue will decline more than 3.4% bringing the full-year result toward our estimate.
Telecom Italia had a good quarter on the cost side and generated an EBITDA margin of 44.9%. However, the fourth quarter historically has much lower margins, thus we still expect the full-year result will be near our full-year projection of 42.9%. The firm also wrote off EUR 2 billion of goodwill during the quarter, but this doesn’t impact our valuation.
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