OTE, known as defensive stock, must plan ahead
Greece’s dominant telecommunications operator OTE is known to foreign institutional investors as a defensive stock, offering limited growth potential in the foreseeable future. This combination may play well at a time when a number of other telecom firms are being penalized with credit downgrades by international credit agencies as they try to reduce their huge piles of debt, but it should not be expected to sit well with investors forever. Sooner or later, growth characteristics will come back with vengeance and command some stock premium. The strategy of acquiring and developing wireless assets in the Balkans may provide the right answer to OTE’s growth question. It will not, however, be as effective as it ought to be if OTE’s top management chooses to get more engaged in risky fixed-line Balkan projects, requiring fresh cash injections in exchange for questionable returns. OTE’s decision on whether or not to bid for a majority stake in Bulgarian incumbent BTC will be indicative. With a healthy balance sheet, demonstrated by a projected net debt-to- equity ratio of about 0.60 this year versus an average of 1.1 for the European telecoms sector and an EBITDA- (earnings before interest, tax, depreciation and amortization) -to-interest coverage of 13, OTE seems to have the right stuff at a time the telecoms sector has fallen out of favor with the international investor community. Its relatively high dividend yield, currently around 4 percent, adds to its defensive characteristics. On the other hand, the stock has closed a good deal of its valuation gap with its European peers based on the forecast EV- (Enterprise Value) -over-EBITDA ratio, trading at a much smaller discount, ranging from 3 to 10 percent. OTE shares used to trade at a 30- to 40-percent discount vis-a-vis its other European peers in the not-so-distant past. Although international investors seem to value defensive telecom stocks at present, this will not last forever. It is inevitable that some European incumbents will manage to put their house in order, arrest the spiraling debt dynamics and move on to the next cycle, where growth characteristics will be valued more than the defensive ones. This may be one or two years away but one thing is sure. OTE, which has little to show on the growth front, is bound to lose out unless it addresses the growth question forcibly. Indeed, OTE’s domestic growth prospects do not look promising. In fixed-line operations, consensus estimates put revenue and EBITDA growth rates in the low single digits as competition increases in the wake of market liberalization. Although no analyst expects OTE to lose significant market share to newcomers such as Forthnet this year and next, most expect competition to heat up when the joint venture of Public Power Corporation and Italy’s Wind starts offering fixed-line services. Domestic long-distance and international calls are expected to be the most contested areas. CosmOTE, the growth driver for the Group in the last few years, is also expected to slow down as the domestic mobile phone market reaches maturity, with nominal penetration levels currently exceeding 70 percent of the population. OTE’s international investments have, by and large, proved a disaster, with wireless assets offering a glimpse of hope. OTE has invested a total of about $1.3 billion to acquire fixed-line assets in Armenia, Romania and Serbia and wireless assets in Albania, Armenia, Bulgaria, Romania, FYROM and a 45.86 percent stake in a Jordanian company building and operating card phones. It has also spent an additional $200 million to finance investment plans. Although estimates vary, most analysts seem to value these assets at no more than 35 percent of their acquisition price, namely $460 million, without including the extra cash for implementing investment plans. This figure, by itself, shows the magnitude of past miscalculations and poor investment choices in international investments. OTE’s new CEO, Lefteris Antonakopoulos, seems to understand that international wireless rather than wireline businesses can make the difference in growth, and reportedly told foreign investors in a recent roadshow that OTE will focus on international mobile rather than fixed line operations and improve existing wireline businesses abroad rather than engaging in new acquisitions. However, he has left the door open to bidding for a majority stake in Bulgaria’s BTC, along with a third mobile GSM license, in order to «protect our mobile interests.» OTE already owns Bulgaria’s Globul GSM mobile operator, which has plans to spend about 100 million euros to expand its network this year and another 80 million euros next year. The deadline for submitting non-binding bids for BTC expires today. Faced with a slowly growing and more competitive domestic telecoms market, OTE has no option but to seek growth in new, underdeveloped areas at home and wireless businesses abroad. Given the constraints on debt levels and investment spending due to its high credit rating, OTE has no option but to be selective and avoid the past mistake of pouring money into fixed-line operations abroad. Failure to do so will undermine future growth.
