2023-11-14 11:10:55 ET
Summary
- TIM reported strong Q3 results, including robust revenue and EBITDA growth.
- Concerns linger about TIM's current unattractive valuation despite positive earnings.
- The strategic move to increase future payouts reflects confidence in sustained dividends.
- The sale of TIM Group's Italian infrastructure aligns with restructuring efforts.
- TIM's overall performance is promising, but cautious investment is advised due to valuation concerns.
Brazilian telecom company TIM S.A. ( TIMB ) reported an excellent third quarter, reinforcing its superior performance with growth in all key areas and efficiency improvements.
The standout feature was the robust growth in Adjusted EBITDA and margins. The company made significant progress in enhancing mobile services, primarily attributed to opTIMization and synergies resulting from the acquisition of Oi Mobile.
In a previous article, I highlighted TIM S.A. as a cash cow poised to become a strong income stock, which proved true in the latest quarter. Following the earnings report, the company announced an increase in its future payout, projecting a yield above 5%.
However, my primary concern with the investment thesis lies in the company's unattractive valuation, potentially already factoring in the anticipated improvement in dividends for the near future. While the third quarter provides compelling reasons to consider TIM S.A. for a dividend portfolio, I prefer to wait for a potential dip before considering a purchase, setting a target price of $16.25 per share.
TIM's Q3 Results
TIM reported robust revenues, experiencing a year-over-year growth of 7.9%, surpassing inflation and reaching R$6.1 billion. This growth was primarily propelled by the mobile service line, showcasing the strong performance of postpaid services, which grew by 9.5% yearly. This increase was attributed to the expansion of plans in the second quarter and effective customer base management, including reducing churn and implementing upselling strategies.
The company demonstrated a solid performance in the fixed services segment, reporting a year-over-year growth of 4.5% and a quarter-over-quarter growth of 0.5%. Particularly noteworthy was the outstanding performance of TIM UltraFibra, which achieved a growth of 9.7% year over year. This growth in TIM UltraFibra was driven by a 34.6% year-over-year increase in the Fiber-to-the-Home (FTTH) base and higher adoption of value-added plans.
Within the handset segment, the company also exhibited positive performance, generating revenues of R$181 million, reflecting a 7.6% year-over-year increase and a remarkable growth of 23.5% year-over-year. This growth was attributed to iPhone and Father's Day promotional campaigns.
The company also announced achieving the highest Average Revenue Per User (ARPU) level at R$30.2, signifying a significant growth of 21.1% yearly.
Noteworthy EBITDA Growth Highlights TIM's Strong Performance
TIM had a robust quarter in terms of costs, achieving an EBITDA of R$3.0 billion, representing a year-over-year growth of 11.6% and a quarter-over-quarter growth of 3.3%. The EBITDA margin remained high, reaching 49.7%, reflecting an increase of 1.65 percentage points year-over-year and 0.02 percentage points quarter-over-quarter.
The positive results were primarily driven by an effective cost management strategy, allowing the company to grow operating expenses (Opex) below inflation in the quarter.
Normalized General and Administrative Expenses decreased by 3.3% year-over-year and increased by 7.2% quarter-over-quarter, while the Cost of Goods Sold increased by 27.1% year-over-year and 6.8% quarter-over-quarter. Provisions for Doubtful Accounts decreased by 6.8% year-over-year and increased by 10.5% quarter-over-quarter, reflecting an improvement in the quality of customer acquisition.
Despite acquiring Oi's mobile base, TIM faced higher operating costs due to the Transition Service Agreement ((TSA)). The end of this agreement contributed to a 7.9% year-over-year cost reduction and a slight 3.9% year-over-year increase in the Commercialization and Advertising line in this quarter.
Overall, TIM's performance indicates effective cost control, substantial revenue growth, and a 6.8% decrease in bad debt year-over-year.
Furthermore, TIM recorded a substantial profit of R$724 million, showing robust growth of 13.4% quarter-over-quarter and 52.9% year-over-year. This positive performance was driven by a reduction in depreciation, attributed to lower software amortization, a review of the valuable service life of Oi's ( OTC:OIBRQ ) assets, and a decrease in the depreciation of rights of use from IFRS 16 leases, resulting in a 4.3% quarter-over-quarter and 6.5% year-over-year fall. The increase in Income Tax in the quarter is mainly due to significantly higher pre-tax profit and a slight reduction in the distribution of Interest on Shareholder's Capital (JCP) compared to the previous year.
Capex reached R$998 million, reflecting a 2.1% year-over-year increase. This increase is primarily due to higher investments IT & Other categories related to the company's infrastructure projects. Consequently, the proportion of Capex concerning Normalized Net Revenue was 16.5%, compared to 17.4% in 3Q22, representing a reduction of 0.9 percentage points year-over-year.
Despite this, cash generation remained robust, with TIM generating $3.48 billion in Q3, nearly in line with last year's period. This consistency has allowed the company to repay its debts consistently over the last few years without the need to issue new debt (the previous issuance was in Q4 of last year).
The most damaging aspect was a 10% annual decline in TIM's operating cash flow, which continues to be impacted by temporary elements in working capital. These elements returned to the positive side this quarter, including those related to the decommissioning of sites and impacts linked to balance sheet adjustments, which do not affect the total cash flow. The company anticipates that, as these effects dissipate, the operating cash flow will expand once again.
Overall, Q3 demonstrated that TIM is on track with its short-term guidance, and there are optimistic expectations that the mid-term goals can also be achieved.
Positive Developments Regarding TIM's Parent Company in Italy
TIM S.A Brazil's controller Telecom Italia S.p.A ( OTCPK:TIIAY ) (TIM Group) has announced the sale of its fixed network infrastructure in Italy for €19 billion, with the potential to increase to €22 billion under specific conditions. The group's largest shareholder, Vivendi, is contesting the decision, alleging that the transaction is illegal.
The sale was anticipated and is part of the group's restructuring plan to address financial challenges in Italy. In the statement regarding the sale, the group emphasized its commitment to retaining its operations in Brazil, dispelling earlier speculations during the restructuring process.
The transaction is not expected to impact operations in Brazil. However, it is crucial to note that the Italian parent company has utilized the Brazilian holding company to fund its operations in Italy. If the sale is successfully concluded, the likelihood of the parent company undertaking further similar interventions, though low, is reduced.
Dividend Prospects Brighten as TIM Signals Positive Shifts
The recent positive third-quarter results announced by TIM have brought encouraging news for investors focusing on dividend income strategies.
The company has revealed its intention to increase payouts to shareholders, not through extraordinary dividends but by revising the distribution projection over the next few years. With TIM delivering notable profits and achieving successful deleveraging, the 2023-2025 Strategic Plan now includes an additional remuneration of R$600 million this year, from R$2.3 billion to R$2.9 billion. This decision reflects a sustainable approach by the company to distribute dividends in the coming years consistently.
A structural improvement likely influences this strategic move in the telecommunications sector, which is experiencing enhanced cash generation following the conclusion of the 5G spectrum auction. Additionally, a more favorable competitive environment in mobile telephony emerged due to the segment's consolidation after Oi Móvel's departure. With over 95% of its revenue from mobile telephony, TIM is well-positioned to benefit from these industry dynamics.
While TIM does not have a defined dividend policy, the projection suggests that the company may yield around 5.5% this year with the newly disclosed remuneration. Considering TIM's quarterly dividend distribution practice, assuming a distribution of R$2.9 billion ($590 million in U.S. dollars) would result in an annual dividend per share of $0.98. Based on the share price on November 10th at $17.66 per share and a 6% return on investment ((ROI)), the implied share price should be approximately $16.25. This means an overvaluation of around 8%.
Conclusion
TIM reported robust third-quarter results, showcasing growth across all areas and enhanced efficiency. Significant growth in net revenue was propelled by the industry-leading position in mobile Average Revenue Per User (ARPU), the expansion of the post-paid customer base, and continuous growth in fixed services.
EBITDA also demonstrated a noteworthy advance, reflecting improvements in mobile services, optimization, and synergies resulting from the acquisition of Oi Móvel. I remain highly confident in the company's future, anticipating positive results and efficiency improvements.
In my opinion, the standout was the announcement of a R$2.9 billion dividend distribution, reinforcing the stability trend in returning value to shareholders. However, valuation remains my primary concern regarding the bullish thesis. With an estimated share price of $16.25 for TIM, I prefer to wait for a better opportunity to add it to a dividend-focused portfolio.
For further details see:
TIM S.A. Q3 Earnings: Attractive Developments In Dividend Payouts