Analysis: KKR’s Telecom Italia approach could call for a discount on Italy

LONDON, Nov. 30 (Reuters) – A proposed $ 12 billion takeover of Telecom Italia by private equity giant KKR has highlighted an “Italian haircut”, renewed investor interest and a fund European aim to support its struggling economy could help cut back.

At a 36% discount to global stocks, based on 12-month forward earnings, Italian stocks (.dMIIT00000PUS) are trading at the widest discount in nine years and more than double their own average over 20 years by 16%.

Meanwhile, the broader Eurozone stock market (.dMIEM00000PUS) is trading at a 13.8% discount to global indices and only 1.2 times the discount to its own 20-year average. .

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The explanations for this disparity include the composition of Italy’s index, which is heavy in energy and banking stocks of the “old economy” with almost two-thirds of Italian blue chips (.FTMIB) made up of financial companies, utilities, telecommunications, oil and gas companies, while only around 20% of the 50 largest companies in the euro area (.STOXX50E) operate in these sectors.

Most importantly, two decades of near-zero economic growth, an aging population and Italy’s high debt level have caused stock prices in the country to plummet.

“The Italian stock markets are cheap in a global context and this has given us the opportunity to own great companies that would trade at much higher valuations if they were to be listed in other countries like the United States. Said James Matthews, European equity fund. director of Invesco, citing small appliance maker De ‘Longhi (DLG.MI) as an example.

Although De ‘Longhi’s share has gone from 11 euros in March 2020 to a price of 29 euros today, after hitting a record 40 euros in September 2021, their price-to-earnings (PE) ratio of 13.5 times is lower than that of its French competitor Seb. (SEBF.PA) 15.6 and below the average of 17 for the STOXX 600 (.STOXX).


In the case of Telecom Italia (TLIT.MI), even after a 50% jump in the share price following KKR’s proposal, it remains among the cheapest in its industry, with the offer implying a value of company below 6 times baseline earnings versus an industry average of 7 times, according to BofA Global Research. Read more

But those who are more skeptical of Italian stocks say they can find better returns elsewhere.

“There are good companies in Italy, but globally the same types of companies in other parts of the world are more profitable and can generate higher returns on capital,” said Peter Rutter, Head of shares at Royal London Asset Management.

Even though Telecom Italia has a higher operating profit margin than its competitors Telefonica (TEF.MC) and BT Group (BT.L), it has a lower return on equity, according to data from Refinitiv.

Meanwhile, investors have started to shine in the Italian mid-cap segment with the FTSE Italia Star Index (.FTSTAR), an index of 75 small and mid-sized companies, up 165% since the start of the pandemic in a record level in November.

Alberto Chiandetti, portfolio manager at Fidelity International, increased allocations to Italy, arguing that such a large price discount is not warranted for many companies, as Italy is the main beneficiary of the stimulus fund of 750 billion euros from the European Union. Read more

An iShares MSCI Italy ETF has around 18.7 million shares outstanding, up almost 180% from November last year, far outpacing entries in an MSCI Eurozone ETF, while UBS advises increasing allocations to Italy and Amundi has said it is selectively repositioning itself on the Milan rating. actions.

While Italy plans to use some of the EU’s money to upgrade its internet infrastructure, tech companies have been obvious beneficiaries with shares of technology services company Reply (REY.MI) climbing 300% since the start of the pandemic to reach a market capitalization of 6.3 billion euros.

“If you think about where the discount is today, I don’t think it’s in small caps anymore. The discount today is more for mid-caps, large caps or single stocks that don’t. may not yet be discovered, ”Chiandetti said.

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Reporting by Joice Alves; Additional reporting by Danilo Masoni; Editing by Saikat Chatterjee and Alexander Smith

Our Standards: Thomson Reuters Trust Principles.

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