OTE: Don't underestimate the “sleeping giant”!

Written by Demosthenes Triga

And although many pixels have been used to write articles in favor of a catalyst that can change the European telecommunications industry, experts do not give much chances for implementation in the near future. OTE stock underperformed significantly compared to GDT on the Athens Stock Exchange. Over the past 52 weeks, its performance was -14%, while its ROI was +29%! Can OTE stock come out of hibernation? What catalyst could change the pan-European image of the industry?

The company reports its 12Q2023 financial results on February 22, with market estimates (as shown in the table) of essentially unchanged turnover, a slight increase in both operating profits and net earnings, with net borrowing contracting.

The incentive is a fair share. More specifically, exploiting both sides of the market is a common practice on the Internet. For example, some platforms (Netflix, etc.) charge their users through subscription and advertiser fees per ad, which is not the case with telecom operators, at least not yet.

Telecom operators only charge for use of networks by end customers and not through platforms. The fair share, as it is called, aims to create an obligation on these platforms, that is, those who use the bulk of the data, to pay some of the costs.

Telecom operators face a paradox. Data traffic is growing rapidly (CAGR of 35% in 2011-2022 and more than 50% for mobile data), while operator revenues are declining (CAGR of -3%). According to a study by Axon Partners Group, in 2021 alone, 57% of global traffic came from just six digital platforms: Alphabet, Apple, Amazon, Meta, Microsoft, and Netflix.

It is clear that despite the negotiating power of service providers, it is difficult to find a single solution. This is why the telecommunications sector is demanding that the European Union create a regulatory mechanism that obliges the platforms to sit down and reach an agreement. Such an approach would close a €174 billion infrastructure investment gap, according to the EU.

On the other hand, in terms of OTE's valuation, it appears to be trading at a discount versus Deutsche Telekom (DT), Telecom Italia (Italy) and Telefonica (Spain), but at a marginal premium versus Telekom Austria (Austria). More specifically, OTE Group's P/E for 2024 is 10.5, while its EV to EBITDA ratio is only 4.3 times.

Accordingly, Deutsche Telekom shares trade at 6.4 times EV/EBITDA ratio, while its P/E ratio stands at 12.3 times. Telecom Italia and Telefonica are trading, on an EV/EBITDA basis, at 6 and 5 times 2024 operating earnings, much higher than OTE. Telekom Austria is the only company in Europe that trades at 4.2 EV/EBITDA, which is marginally lower than OTE. Therefore, on a P/E basis, Telecom Italia appears to be loss-making, while Telefonica shares trade at 11 times 2024 net earnings.

In conclusion, if we examine the balance sheet more comprehensively, we find that OTE's net borrowing (borrowings minus cash) is only 0.4 times operating earnings (EBITDA) for 2023. That is, the net borrowing/operating earnings ratio is only 0.4 times, compared to 3 Times on average where the three mentioned telecom companies trade! This result gives us some information about whether the company is able to pleasantly surprise the investment community in terms of dividends without hurting its balance sheet significantly. here we are!

There are no additions/deletions to the MSCI Quarterly Review

On February 12, changes to the restructuring of MSCI indices for the quarterly review were announced. It is noteworthy that there are 10 stocks participating in the index, with the banking sector covering about 50% of the index, while NBG and Eurobank have the largest weight. In detail the current composition: 1) NGE 16.6%, 2) Eurobank 14.1%, 3) Mytileneus 11.6%, 4) Alpha 11.2%, 5) Jumbo 9.1%, 6) OPAP 9%, 7) Piraeus 7.9%, 8) PPC 7.8%, 9) OTE 7.5% and 10) Engine Oil 5.1%.

The capitalization criterion for inclusion in the MSCI Emerging Markets Index in the previous review was $2.18 billion (2 billion euros), while for the weighted index it is about 1 billion euros. It should be noted that the markets since the last ten days of October 2023, which were taken into account in the previous review, have witnessed a significant rise, as a result of which the above-mentioned parameters have risen significantly.

Hellenic Petroleum, based on its capital (2.34 billion euros), could have a place in the index, however, the small free dispersion, according to MSCI, negates this inclusion. The same seems to be true for Eleftherios Venizelos Airport (with a capitalization of EUR 2.75 billion), as it does not seem to meet the weighted capitalization criterion of around EUR 1 billion (which it was in the previous quarter) with a free distribution of 18.5%. review).

Any changes will be implemented on March 1, 2024. Based on the MSCI index, the P/E for the 10-company index is 7.3 times trailing 12-month earnings, while the dividend yield is 2.6%, with the emerging market indices involved. P/E multiple of 11.3x and dividend yield of 3.0%. Figures are based on prices as of January 31, 2024.

With a PE ratio greater than 20 times three industries and the S&P 500 Index

The P/E ratio for trailing 12-month earnings was 20.3 on February 8, higher than 5-year (18.9), 10-year (17.7), 15-year (16.1), 20-year (15.6), and 25-year (16.4). In fact, before last week, the last time the P/E was higher than 20x was on February 9, 2022 at 20.2x.

It is worth noting that the highest number recorded in the last 25 years for the 12-month P/E multiple was on July 16, 1999, when it reached 24.4 times.

At the sector level, eight sectors posted Earnings (12-month trailing) as of February 8 that exceeded their 25-year averages, as shown in the table, with the largest difference being Technology (28.6 vs. 21.1), and Raw Materials (28.6 vs. 21.1). 19.3 versus 14.7) and consumer goods (24.8 versus 19.9).

On the other hand, only two sectors are below the 25-year average, energy (11.7 vs. 14.5) and utilities (14.9 vs. 15.1). The 25-year average P/E ratio is not available for property management.

Digging a little deeper into what drives the P/E ratio so high, we find that it is price (P), the numerator, that has pushed the fraction so high. More specifically, on October 27, the P/E reached 17.0 times, while the index price reached a local low of 4,117.37 points. Since then, the S&P 500 has risen about 21.4%, while its estimated earnings growth over the next 12 months has increased by just 2.0%.

Finally, market estimates have S&P 500 earnings per share at $243.41 in 2024 and $275.34 in 2025, numbers that are all-time highs for S&P estimated earnings.

Agenda (20 – 25/2/2024)

All eyes are on OTE's financial results

today, On Tuesday, Entersoft called an extraordinary general meeting. The main topic is the approval of the company’s share acquisition program and the Bank of Greece’s announcement of the balance of payments for December 2023.

The Bank of Greece is expected to announce on Wednesday developments in the balance of travel payments for December 2023.

On Thursday before the start of the meeting, OTE is expected to announce financial results for the fourth quarter/12 months of 2023.

Elstat announces today, Friday, the building materials price index for new residential buildings for the month of January.

Fourth quarter financial results in focus

Financial results will be published on Wednesday overseas by Marathon Oil and HSBC.

Thursday morning sees the German February Manufacturing PMI and January inflation in the Eurozone at 12.00, while in the afternoon it is the US's turn to release the January Manufacturing PMI and Existing Home Sales. In terms of financial results, Moderna, Hochtief, Iberdrola, Lloyds Banking Group, Mercedes-Benz and Telefonica publish.

On Friday morning, revised fourth-quarter GDP figures are expected to be announced in Germany, while Deutsche Telekom and Allianz announce financial results for the fourth quarter/12 months of 2023. Finally, the Japanese market will remain closed on Friday due to the Emperor's Day celebration.

* Demosthenes Trigas is a certified equity and markets analyst BETA Securities – [email protected]

** Copied from Kivalio newspaper