EUR 850.00 For Business Accounts Only

Morningstar | TIM Brasil Reports Generally In-Line 3Q Results; Maintaining FVE; Shares Fairly Valued

TIM Brasil reported third-quarter results that were generally in line with our expectations, and we expect to maintain our $15.50 per ADR fair value estimate and no-moat rating. We believe the shares are fairly valued. The firm reported year-over-year revenue growth of 4.4% in the quarter, but for the nine-month period, revenue growth is spot on with our full-year projection of 5%.

The firm continues to follow Telefonica Brasil's lead in pushing subscribers toward postpaid plans, leading to 17.1% growth in TIM’s postpaid base at 19.6 million, which now accounts for 34.9% of its total wireless base. However, this still trails Telefonica’s more than 50%. That said, due to its later move to postpaid, it is generating higher revenue growth in 2018 as postpaid subscribers generate a higher average revenue per user, or ARPU. In total its ARPU grew 10.2%, which also benefited from increased data usage as customers moved onto smartphones and upgraded to TIM’s 4G network. We expect this trend to continue with growth in its postpaid base but declines in its prepaid base.

TIM’s Live fiber-to-the-home base continues to do well, increasing 19.5%, but off of a fairly small base. It now has 449,000 customers. We are pleased to see this growth, as one of our biggest concerns with TIM is its limited fixed-line telecom exposure, while Telefonica and America Movil have strong fixed-line networks and are increasingly pushing a converged product, where TIM is limited.

TIM is also doing a nice job of controlling costs. It generated an adjusted EBITDA margin in the quarter of 38.9% and 37.4% for the nine-month period versus our full-year projection of 37.2%. Unlike many of the telecom firms we cover that have weaker margins in the fourth quarter, TIM historically has had a strong margin in the fourth quarter. Thus, our estimate will likely be light for the full year, but with the economic uncertainty after the recent presidential election, we are maintaining our estimates for now.