UBS takes dim view of OTE revenues, downgrades stock

Swiss bank UBS yesterday lowered both its rating and target price of OTE Telecom shares due to the firm’s poor financial prospects. UBS lowered its rating to «Reduce 1» from «Neutral 1» and the share’s target price to nine euros from 10 previously. As a direct result of the report, OTE shares lost 2.56 percent yesterday to close at 9.88 euros. UBS comments that, among «incumbent» European telecoms firms, that is, those with a dominant position in their markets, OTE has been the worst performer «on the back of the poor operating performance of its wire-line (standard, or fixed-line telephony) business and the lack of FCF (free cash flow) generation.» «The Greek wire-line business is probably one of the most difficult markets in Europe,» admits the report, remarking that OTE’s competitors have managed to grab a significant share of the market and that many customers also use their mobile phones to make phone calls instead, a process UBS calls «cannibalization.» This does not permit OTE to raise its monthly fee. «The only alternative seems to be restructuring, but up to now delivery on that front has been scarce,» the report says. Revenues from fixed-line telephony will decline by an average of 3.3 percent annually during the period 2002-2005, the report estimates. By contrast, revenues of OTE’s mobile subsidiary, CosmOTE, will rise by an average of 6.6 percent. Besides the factors outlined above, which hinder wire-line revenue, there is also the problem of low Internet penetration. The report believes that any rise in Internet usage will be accompanied by a big substitution of high-speed ADSL for ISDN services, also affecting revenue negatively. This means that low-speed (PSTN) subscribers will not switch to higher-speed connections. In any case, ADSL services in other European countries, where they were introduced earlier, did not prove to be the big revenue boosters hoped for. OTE’s decision to continue to offer shareholders a relatively high dividend (representing in 2003 a yield of 7.1 percent) has forced it to borrow to pay the 2002 dividend. This is not sustainable. Given the state of its finances, OTE must either reduce its capital expenditure and restructure aggressively or cut the dividend. «At this point, it is unclear what decision will be made, so we see some risk to the dividend,» UBS warns.