Wind Tre : Unsettled weather with changing winds

>Decent EBITDA in 2017 but higher pressure at year-end - Wind Tre posted decent results in 2017 at the adjusted EBITDA level (+1.2% to € 2.21bn) while the top line contracted by -4.5% to € 6.18bn as a result of fiercer competition, ahead of Iliad’s entry into the Italian mobile market, likely in March or April. The competitive intensity, resulted in material mobile customer losses (c. -4% yoy excluding the harmonization of customer reporting rules between Wind and Tre) and intensified towards the end of the year, leading to weak results in Q3 and Q4. In the last quarter, the sales decline deepened to -11% (after -6% in Q3) while adjusted EBITDA dropped by -3.6%, albeit at a slower pace compared with Q3 (-4.9%).2018 should be a transitional year with low odds of inflexion - Wind Tre seeks to focus on value, quality and convergence to differentiate from Iliad, retain its higher value customers (i.e. in particular 23% of the customer base that generates over 50% of group revenues) and better address the B2B market, which is largely untapped. The integration of Wind and Tre is progressing well: more than half of the expected opex synergies from the Wind – Tre merger have been extracted at year-end 2017 (€ 260m p.a. on a run rate basis out of € 490m p.a.) and synergy targets have been reconfirmed. While we welcome these efforts, we believe that they will take time to materialize and 2018 will be a transitional year with low odds of inflexion (gradual modernisation of the network, no relief on the competitive front with Iliad’s entry). Our model assumes a -7% revenue decline and a -4.6% drop in adjusted EBITDA in 2018. This, combined with a potential cash outflow linked to the planned 5G spectrum auction, should lead to a re-leveraging in 2018.We revise our recommendation to Neutral (vs. Buy) owing to limited positive catalysts in coming months - The key driver will be to what extent Iliad will disrupt the Italian market and there is no clarity yet on this factor. So far, we foresee that the retail revenue decline will be offset to some extent at the EBITDA level by additional synergies and that FCF will improve from 2019 onwards and support a leverage stabilization that year.We believe that much downside is already factored in at current yields. Indeed, Wind Tre bonds have significantly repriced since the new issue at end-October and now yield 4.7% for the 2023 secured notes (z+424 bp) and 4.9% for the 2025 secured notes (z+421 bp). In the telecom space, their spreads are already much wider compared with Matterhorn’s 2027 secured notes (B, ytw of 4.2%, z+322 bp) and VodafoneZiggo’s 2025 secured notes (B1/BB- neg, Ytw of 3.3%, z+290 bp). The spread of the 2023 secured notes is similar with the average z-spread (434 bp) of bonds with similar workout dates and B/B+ ratings, i.e. 1 notch below their current levels.