Analysis: KKR's Telecom Italia approach may call time on Italy discount
01/12/2021 06:00
(Repeats from NOV 30 with no changes to text)
By Joice Alves
LONDON, Nov 30 (Reuters) - A $12 billion takeover proposal
for Telecom Italia by private equity giant KKR has highlighted
an 'Italian discount', which a surge in investor interest and a
European fund aimed at supporting its struggling economy could
help narrow.
At a 36% discount to world stocks, based on 12-month forward
earnings, Italian equities .dMIIT00000PUS trade at the widest
discount in nine years and at more than twice their own 20-year
average of 16%.
Meanwhile, the broader euro zone equity market
.dMIEM00000PUS trades at a 13.8% discount to world indices and
only 1.2 times the discount to its own 20-year average.
Explanations for this disparity include Italy's index
composition, which is heavy in "old economy" energy and banking
stocks with nearly two-thirds of Italian blue chips .FTMIB
made up of financial firms, utilities, telecom, oil and gas
companies, while only around 20% of the 50 largest companies in
the euro zone .STOXX50E operate in those sectors.
But above all, two decades of near-zero economic growth, an
ageing population and Italy's high debt levels have dragged down
equity prices in the country.
"Italian equity markets are cheap in a global context and
this has given us the opportunity to own some great companies
that would trade on much higher valuations if they were to be
listed in other countries like the U.S.," said James Matthews,
European equities fund manager at Invesco, citing small
appliances maker De' Longhi DLG.MI as an example.
Although De' Longhi shares rose from 11 euros in March 2020
to a price of 29 euros now, after touching record high of 40
euros in September 2021, their price-to-earnings (PE) ratio of
13.5 times is lower than French competitor Seb's SEBF.PA 15.6
and below the average of 17 for the STOXX 600 .STOXX .
ITALIAN DISCOUNT
In the case of Telecom Italia TLIT.MI , even after a 50%
share price jump following KKR's proposal it remains among the
cheapest in its sector with the offer implying an enterprise
value below 6 times core earnings against a sector average of 7
times, according to BofA Global Research. urn:newsml:reuters.com:*:nL1N2SH0V4
But those who are more sceptical on Italian equities say
that they can find better returns elsewhere.
"There are some good companies in Italy but on a global
basis the same types of businesses in other parts of the world
are more profitable and can generate higher returns on capital,"
Peter Rutter, head of equities at Royal London Asset Management,
said.
Even though Telecom Italia has a higher operating profit
margin than rivals Telefonica TEF.MC and BT Group BT.L , it
has a lower return on equity, according to Refinitiv data.
Meanwhile, investors have started to take a shine to Italy's
mid-cap segment with the FTSE Italia Star index .FTSTAR , an
index of 75 small and mid-sized companies, soaring 165% since
the start of the pandemic to a record high in November.
Alberto Chiandetti, a portfolio manager at Fidelity
International has increased allocations to Italy, arguing such a
hefty price discount is not justified for many companies as
Italy stands to be the biggest beneficiary of the European
Union's 750 billion euro recovery fund. urn:newsml:reuters.com:*:nL8N2QP465
An iShares MSCI Italy ETF EWI has around 18.7 million
shares outstanding, up almost 180% from November last year, far
outstripping inflows into an MSCI euro zone ETF EZU , while UBS
is advising higher allocations to Italy and Amundi said it is
selectively repositioning in Milan-listed stocks.
As Italy plans to use some of the EU cash to upgrade its
internet infrastructure, technology enabling companies have been
obvious beneficiaries with shares of technology service company
Reply REY.MI climbing 300% since the beginning of the pandemic
to reach a market capitalisation of 6.3 billion euros.
"If you think about where the discount is today, I don't
think it is in small caps anymore. The discount today is more in
mid, big caps or in single stock names that are still maybe
undiscovered," Chiandetti said.
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Italian discount https://tmsnrt.rs/3D76iEC
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(Reporting by Joice Alves; Additional reporting by Danilo
Masoni; Editing by Saikat Chatterjee and Alexander Smith)
((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713;
Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))