Telecom Italia, per Morningstar il titolo è “overvalued”

di Allan Nichols, senior equity analyst di Morningstar

Telecom Italia reported weak first-quarter results, but we are maintaining our fair value estimate and moat rating for now. Reported revenue fell 2.6% year over year versus our full-year projection of a decline of 2%. Without the positive currency contribution, the decline would have been 3.1%. Telecom Italia’s domestic wireless base continued its steady decline of 2.8% on an annual basis to 30.15 million. However, wireless average revenue per user only declined 1.7%, which continues the large improvement starting in the second half of 2014. We expect this trend to continue and think a stabilization of ARPU is critical for the firm’s turnaround. The fixed-line side is also showing improvement, with revenue falling only 1.4%. While traditional fixed-line subscribers continue to leave, down 5.7% to 12.3 million, this is largely offset by broadband growth. The broadband base increased only slightly to 6.9 million, but its ARPU gained 6%.

Telecom Italia’s Brazilian operation also struggled, with revenue falling 3.3%, as mobile ARPU dropped 7.2% due to substantial mobile termination rate cuts. The company received no offset this quarter from subscriber growth, as the wireless base was basically flat. That said, we expect the improving ARPU trends in Italian wireless and broadband along with a recovery in Brazil to allow Telecom Italia to return to revenue growth in 2017.

More concerning to us than the weak top-line result was the substantial margin decline, with Telecom Italia’s EBITDA margin dropping to 40.2% from 42.4% in the year-ago period, versus our full-year projection of 41.5%. We will be watching this closely, and if it doesn’t improve, we could lower our fair value estimate. Even now, we think the shares are a bit overvalued.

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