EUR 850.00 For Business Accounts Only

Morningstar | TIM Brasil Delivers Solid Results Amid Executive Shift; Shares Fairly Valued. See Updated Analyst Note from 23 Jul 2018

TIM Brasil delivered a second-quarter that was relatively in line with our expectations. Though management continues to execute its strategy as the company seeks to benefit from secular trends such as convergence and postpaid mobile, our fundamental view of the competitive landscape is unchanged. However, we are increasing our fair value estimate to $15.50 per ADR from $15, owing to recent strengthening in the Brazilian real versus the dollar. Our no-moat rating is intact, and we view the shares as fairly valued.

Revenue grew 5.8% year over year versus our 5% full-year forecast. TIM reported strong wireless results with service revenue growing 5.7% year over year, but with mixed results on the subscriber front. TIM’s postpaid subscriber base increased by 609,000 to over 19 million, now representing 33.7% of its wireless customers. Smartphone penetration within the wireless base also increased to 83.9%. The wireless segment saw negative net adds, however, with a 1.9 million decrease in prepaid subscribers causing a 7% decline in the cumulative wireless base. Despite the higher churn, the postpaid base and smartphone penetration (which drives data usage) led to a higher consolidated average revenue per user, or ARPU, of BRL 21.90 per month, a 12.9% increase. We still view increased data usage and pre-to-postpaid shifts as the main growth drivers over the long run. TIM also saw strong fixed-line results with revenues and subscribers increasing by 5.7% and 6%, respectively. However, fixed-line services still constitute only 5% of consolidated sales.

Consistent with his expatriate agreement, CEO Stefano De Angelis will leave his post as CEO. The board’s replacement, Sami Foguel, is a former airline executive and will take the helm immediately. To ensure a seamless transition, De Angelis will remain a board member. We do not anticipate any disruption in the firm’s strategic or operational execution, and will therefore maintain our Standard stewardship rating.

The company continued to control costs well, as efficiency initiatives, centered around digitalization, bore fruit. The EBITDA margin was 36.5%, an increase of 130 basis points year over year. However, capital expenditures picked up this quarter to BRL 1.02 billion, a 25.8% increase year over year. While management attributes most of this increase to timing, with some first-quarter investment spilling over into the second quarter, we view this development as consistent with our long-term thesis on TIM’s competitive disadvantage. Boasting an inferior wireless network in comparison to Vivo and Claro, combined with limited fixed-line assets, TIM will need to continue investing maintenance capital at a greater percentage of sales than its peers. This structural disadvantage will continue to be exacerbated by increased data usage.

We saw signs of management trying to address this structural issue during the quarter, as it entered a new infrastructure sharing plain with Oi that will encompass both mobile and wireline facilities. This should enhance TIM’s fixed-line capacity, and management indicated that it plans to extend TIM Live, the firm’s fixed broadband service, further into the northeastern area of the country. In our view, however, this does not represent a structural shift, and does not materially affect TIM’s ability to offer competitive converged services. We still view the company’s fixed-line business as competitively disadvantaged.