EUR 850.00 For Business Accounts Only

Morningstar | TIM Brasil Reported Weak First-Quarter Revenue Growth; Shares Fairly Valued

Tim Brasil reported weak first-quarter revenue, but we don’t expect to make any significant changes to our $16 per ADR fair value estimate beyond adjusting for the decline of the Brazilian real versus the dollar. We continue to think the company has no economic moat and the shares are fairly valued.

The firm reported revenue only grew 1.7% year over year versus our full-year projection of 4.5%. Brazil’s economy continues to struggle, and competition has increased. While Tim grew its postpaid wireless subscriber base 11.4% from the year-ago period to 20.6 million, that was more than offset by the 12.5% drop in its prepaid wireless base to 34.5 million. This led to total wireless revenue growth of just 0.4%. On the call, management discussed one operator that has been particularly aggressive with prepaid offers recently. We assume this aggressive operator is Oi, which is trying to emerge from bankruptcy. However, Oi's network is significantly worse than the other three operators. Thus, we expect customers that want a higher quality network will choose one of the other operators. However, in the short term Tim is the most exposed as it has the largest prepaid customer base and more price-sensitive customers to lose. Longer term, though, we are pleased with its increasing focus on growing its postpaid base, which is less susceptible to low-priced prepaid offers.

Tim is also making progress on its fixed-line business. Its TIM Live, fiber broadband business, increased revenue 34.9%. TIM Live now accounts for almost half of the firm’s fixed-line revenue, which in total gained 11.6% year over year. It remains a small part of the business but has good growth potential as its fiber-to-the-home network now passes 1.3 million premises, and its fiber-to-the-curb network passes an additional 3.5 million.

While revenue was light, the firm continues to be on track for cost-cutting, with its EBITDA margin for the quarter reaching 35.7%, up 1.2 percentage points from the year-ago period. This improvement is in line with our full-year expectation of 38.9%. The first quarter’s EBITDA margin historically is lower than the rest of the year.