Retelit. New Coverage HOLD (n.a.) Target: 0.68 (n.a.) Risk: High. ITALY / Telecommunications CATERING FOR THE FIBRE ULTRA BROADBAND NEED. Price 0.

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1 Retelit ITALY / Telecommunications New Coverage HOLD (n.a.) Target: 0.68 (n.a.) Risk: High STOCK DATA PRICE ORD LAST 365 DAYS ANALYSTS Stefano Lustig s.lustig@equitasim.it Ord. Price 0.56 Bloomberg code LIT IM Market Cap. ( mn) 91 Free Float 58% Shares Out. (mn) week range Daily Volumes (mn) 0.83 PERFORMANCE 1M 3M 12M Absolute 14.0% 18.6% 10.1% Rel. to FTSE all shares 7.0% 5.2% -7.3% MAIN METRICS E 2015E Revenues Adjusted EBITDA Net income Adj. EPS - cents DPS ord - cents MULTIPLES E 2015E P/E adj n.m. n.m x P/CF 7.8 x 6.7 x 6.0 x EV/EBITDA 8.2 x 7.1 x 5.7 x REMUNERATION E 2015E Div. Yield ord 0.0% 0.0% 0.0% FCF yield -0.5% 2.1% 6.6% INDEBTEDNESS E 2015E NFP Debt/EBITDA Adj. n.m. n.m. n.m. Interests cov n.m. n.m. n.m. October 4, 2013 # 319 CATERING FOR THE FIBRE ULTRA BROADBAND NEED Data demand is growing exponentially. Retelit is one of the leading providers of wholesale data services in Italy. It reached the first positive FCF in 2011 and now is ready to exploit all opportunities the market will offer to expand the business Leading provider of wholesale data services At the end of the 90s some TLC operators built optical fibre infrastructure betting on the potential boom of data traffic. The result was an oversupply and many of those operators no longer exist. However, in the last few years data demand has grown exponentially and it is expected to multiply by 3x in in Italy. Retelit has achieved its first positive FCF in 2011 and it is ready to exploit all opportunities that the market will bring its way. Retelit is one of the leading Italian providers of wholesale data services and infrastructure for the telecommunications market. Retelit s clients include for instance AT&T, Verizon, BT, Orange and others. Services currently consist of broadband connectivity mainly and they are being provided through its proprietary fibre optic network of >7600 km and 18 data centers. A new board with a new expansion plan In October 2012 its main shareholder, Libyan Post, Telecommunications and IT company (LIPTC), coordinated a group of shareholders to promote a new board and launch an aggressive expansion plan aimed at potentially double the company s sales by The strategy consists in better exploiting network opportunities by extending business lines to include more customer-oriented service for networks (for example, VPN and fibre backhauling for mobile radio base stations) and Data Centres (from housing to hosting and more). The plan also envisages the acquisition of targeted corporate final clients, both private and from the Public Administration. Another opportunity is the expansion of operations abroad sometimes in partnership with LIPTC, its shareholder. Since most of the growth planned by the management will be ensuing from relatively new clients and services, for caution s sake we have opted for more conservative estimates. They envisage Sales and EBITDA CAGR of 12% and 14% Appealing option in terms of risk reward We appreciate: the extremely supportive general context for an infrastructure-based company. Over the last 5 years, in spite of a falling TLC market in Italy (-12%) (source: Agcom), Retelit has been able to enjoy moderate revenues growth. For ex., according to Cisco the Internet business traffic in Italy is set to increase by 3x within 2017 the management s discipline, which enabled it to patiently achieve bottom line improvement and a positive FCF generation the ambition to better exploit the network and know how thus increasing the number of clients and services a base-case valuation of a supportive worst case. Deducted of its current mkt cap, net cash and the Wi-Max put option ( 27.5 mn), the stock s valuation would be 5.8x EBITDA even in case of no improvement in the results. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 1

2 MAIN FIGURES mn E 2014E 2015E 2016E Revenues Growth 5% 6% 4% 16% 14% 9% EBITDA Growth 14% -10% 4% 13% 16% 17% Adjusted EBITDA Growth 14% -10% 4% 13% 16% 17% EBIT Growth 36% -25% 34% 32% 57% 213% Profit before tax Growth 47% -3% 53% 106% 1333% 150% Net income Growth 47% -6% 52% 98% -3625% 168% Adj. net income Growth 47% -6% 52% 98% -3625% 168% MARGIN E 2014E 2015E 2016E Ebitda Margin 30.4% 25.9% 26.0% 25.2% 25.7% 27.6% Ebitda adj Margin 30.4% 25.9% 26.0% 25.2% 25.7% 27.6% Ebit margin -11.6% -13.7% -8.7% -5.1% -1.9% 2.0% Pbt margin -9.8% -9.5% -4.3% 0.2% 2.8% 6.5% Ni rep margin -9.8% -9.8% -4.6% -0.1% 2.4% 5.9% Ni adj margin -9.8% -9.8% -4.6% -0.1% 2.4% 5.9% SHARE DATA E 2014E 2015E 2016E EPS - cents Growth n.m nm 53% 98% -3625% 168% Adj. EPS - cents Growth n.m nm 53% 98% -3625% 168% DPS ord - cents VARIOUS - mn E 2015E 2016E Capital employed FCF Capex Operating Working capital INDEBTNESS - mn E 2015E 2016E NFP D/E 0.03 x n.m. n.m. n.m. n.m. n.m. Debt/EBITDA Adj. n.m. n.m. n.m. n.m. n.m. n.m. Interests cov n.m. n.m. n.m. n.m. n.m. n.m. MARKET RATIOS E 2015E 2016E P/E nm nm nm nm 73.9 x 27.6 x P/E adj nm nm nm nm 73.9 x 27.6 x PBV 0.4 x 0.6 x 0.7 x 0.7 x 0.7 x 0.7 x P/CF 4.7 x 6.9 x 7.8 x 6.7 x 6.0 x 5.2 x EV FIGURES E 2015E 2016E EV/Sales 1.4 x 1.8 x 2.1 x 1.8 x 1.5 x 1.2 x EV/EBITDA 4.6 x 7.1 x 8.2 x 7.1 x 5.7 x 4.4 x EV/EBIT n.m n.m n.m n.m n.m 60.7 x EV/CE 0.4 x 0.5 x 0.7 x 0.7 x 0.6 x 0.6 x REMUNERATION E 2015E 2016E Div. Yield ord 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% FCF yield 5.1% 4.0% -0.5% 2.1% 6.6% 7.8% ROCE nm n.m. nm 0.3% 1.1% 2.4% ROE nm nm nm nm 0.6% 1.6% Source: Equita SIM estimates & company data IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 2

3 SALES BY PRODUCT TLC Services 82% SALES BY AREA Free Float 57.8% Bousval Sa 14.8% Right of use and manteinance 10% Sirti SpA 9.8% HBC SpA 4.6% Pretto Alberto 4.4% Cable ducts and fibres 5% Others 3% Selin SpA 8.6% BUSINESS DESCRIPTION Retelit is one of the leading Italian providers of wholesale data services and infrastructure for the telecommunications market. TLC operators (both domestic and international) and ISPs approach Retelit to lease segments of optical fibre network and transmission capacity they need to complete their proprietary network and connect their customers, as well as to be provided security and Data Centre services. Retelit s revenues mostly come from connectivity: when a TLC operator needs to connect the headquarters of a corporate client (or a mobile antenna) to its own network, it turns to Retelit because: 1) Its network s pervasiveness reduces the cost to connect the two points; 2) Retelit is an independent wholesale operator and it does not aim at stealing the final customer from the carrier. In most cases Retelit implements the connection, it leases it to the TLC operator and the lease fee is therefore a source of recurring revenues. Retelit s core asset is its optical fibre tlc network made up of >7600 km of network, some 2000 km of which located in 8 Metropolitan Area Networks. Retelit also owns 18 Data Centres with >6000mq available surface for housing and (future) hosting. The long distance network was built along the main state, provincial and municipal roads, reaching not only the largest Italian cities but crossing also several medium size towns and covering all main business areas. The network s book value is > 200 mn but it can be calculated that well in excess of 400 mn were invested over the years in order to set up the network; this amount represent a significant entry barrier for anyone wishing to replicate the business model of this independent wholesale operator. Retelit s main independent competitors are: Interoute (international operator), Infracom (domestic) and Colt (International), Metroweb (domestic and only dark fibre). Other competitors include Fastweb and Telecom Italia, although these are integrated operators serving the residential market as well. Over the last 5 years, in spite of a falling TLC market in Italy (-12%) (source: Agcom), Retelit has been able to enjoy moderate revenues growth with stable operating profitability and improving bottom line. Operating net cash generation has gone back into positive territory since YEARS HISTORICAL RESULTS RETELIT Total Sales EBITDA Net Income (9.3) (6.5) (3.4) (3.6) Net Financial Position 10.6 (0.3) The management has indicated ambitious objectives in its plan to 2017 (revenues >70 mn and EBITDA 26 mn). Growth drivers are: 1) accommodating the demand for band by TLC operators and the market in general, expanding the portfolio of product/services on offer, addressing selected corporations and public administrations, developing international projects also in partnership with the leading shareholder LPTIC Strenghts/Opportunities Booming data traffic growth State of the art technology and network capillarity Pure wholesale player. No exposure the residential market Possible international expansion Option to sell Wi-Max network Weaknesses/Threats Bottom line still negative but improving Telecom Italia possible network separation can affect the competitive arena By expanding the service business new competence are needed IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 3

4 CATERING FOR THE FIBRE ULTRA BROADBAND NEED Retelit is one of the leading TLC operators in Italy. The company owns a proprietary optical fibre network covering over kilometres and it connects 8 Metropolitan Area Networks and 18 Data Centres all over Italy. This infrastructure enables it to provide broadband and ultra-broadband data transmission services as well as Internet connection. Retelit makes most of its revenues with TLC and ISP operators and as a result it is a wholesale business (Carrier-to- Carrier). Retelit is the holding company of E-Via that is the operating company. Historical background: GROUP STRUCTURE Source: Company presentation Retelit was set up in 2003 as a result of two independent TLC operators - E-Via and E-Planet becoming one single group when Retelit (former E-Planet) took control of E-Via. At the end of the 90s, E-Via started building a long distance TLC network in Italy along the Anas (Italian Government Agency for the management and development of road network) road network. A rewarding feature of this network is that many of its sections pass through (or touch upon) urban areas, whereas many Retelit competitors built their network along the railway or motorway network and are therefore often less close to final users. E-Planet used to be a landline TLC operator that had built Metropolitan Area Networks in 8 Italian cities. E-Via and E-Planet were faced with a financial crisis that prompted both companies to merge and undergo a thorough restructuring process. In 2003 it was decided that E-Planet s retail business was to be disposed of in order to focus on E-Via s wholesale activity. Back in those years, following an agreement among creditors, some creditors/suppliers of Retelit also became its shareholders, such as Sirti and HBC. MILESTONE Source: Company presentation IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 4

5 In 2008 Retelit obtained the license to develop a broadband wireless network in Wi-Max technology. Investments in licence and capex were planned in 90 mn, partially covered by a capital increase that was supposed to amount to 50 mn maximum. When the capital increase was performed, Bousval representing Libyan Post Telecommunication and IT Company (LPTIC) also became a shareholder in the company. In 2011 Retelit decided to lease the Wi-Max business to Linkem. As a result, the network s lease fee ( 1.6 mn in 2012) appears in Retelit s P&L as a financial interest. Retelit holds a put option to sell the Wi-Max network to Linkem for an equivalent that can currently be assumed to be approximately 27.5 mn. RETELIT NETWORK An infrastructure that is difficult to replicate Retelit infrastructure is the Group's most valuable asset. With its coverage of more than 7,600 kilometres, 8 metropolitan networks (MANs) in the largest Italian cities and over 200 town centres, Retelit's proprietary network flows along the main state, provincial and municipal highways, reaching the largest Italian cities and covering all main national user catchment areas both in terms of number of inhabitants and volume of economic activity. The ring structures characterising the network distribution guarantee multiple and differentiated routes and therefore redundancy and secure transmissions. In addition, Retelit's network is connected to the main national and international interchange nodes towards France, Switzerland and Austria - to major producers and distributors of video content, and to all telecommunication operators. Source: Company presentation Retelit has implemented optical fibre metropolitan area networks (MANs) in Milan, Rome, Turin, Padua, Bologna, Reggio Emilia, Bari and Naples. Along their route, the MANs also connect some of the most important technological and industrial hubs as well as the headquarters of telecommunication operators. Retelit's network infrastructure is integrated with 18 Data Centres, whose aim is to provide new generation ICT services. Data Centres are highly customisable in terms of space and housing and co-location services, and they offer leading-edge technology. All structures are equipped with double optical fibre access and redundant air conditioning and electrical protection systems, so as to guarantee service continuity even in the event of breakdown or natural disasters. According to our estimates, Retelit s network building has required investments well in excess of 400 mn over the years: this represents a significant entry barrier. Following some write-downs (during the 2003 financial restructuring) the gross value reported in the balance sheet amounts to 215 mn or 105 mn net of amortization. In the last few years capex has amounted to some 5-8 mn per annum, roughly including network expansions to connect new clients. In the next few years a more substantial capex cycle is expected ( 10 mn per annum) in order to implement a network upgrade (equipment and SW) that will enable Retelit to deliver more advanced services than the current ones on offer. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 5

6 Wholesale operator to cater for broadband needs: Retelit is positioned as an Infrastructure Service Provider focused on data transmission and housing wholesale services; it also offers infrastructure to international and domestic Telcos, ISP and ICT service providers. Both revenues and customer mix are strongly Telco oriented The increasing number of Data Centre service contracts awarded in the ICT market during the past two years position Retelit as a cloud enabler. The aggregated IP bandwidth currently delivered positions Retelit as a high quality Internet Service Provider Retelit s offering is therefore targeted to: Carriers: National and International, fixed and mobile International defence and aerospace operators: DISA/DITCO, NATO TLC Service Providers: ISP, Resellers ICT Service Providers: System integrators, software houses, IT vendors.. Broadcasters: TV/Satellite, Over the top Based upon our estimates, most revenues (around 80% give or take) are currently generated by the first two client categories (Carrier and International Defence and Aerospace). SOME OF THE MAIN CLIENTS Source: Company presentation TLC Services 82% RETELIT BREAKDOWN OF SALES (2012) Right of use and manteinance 10% Cable ducts and fibres 5% Others 3% The main services provided by the Group are the following: Broadband transport services: C-Link (SDH connections ranging from 2Mbps to 40Gbps), E-Link (Ethernet connections ranging from 10Mbps to 10Gbps). We believe that these services account for approximately 75% of group sales Network managed services: IP Link (Internet transit and access ranging from 10Mbps to 10Gbps), M-Link (IP-MPLS virtual private networks ranging from 2 Mbps to 10 Gbps) (roughly representing 5-10% of group sales) VAS and Security services (Managed Firewall, Antivirus, Log Management) and Data Centre services: co-location and housing, managed services, Back Up and Storage services (some 10% of group sales) Lease and sale of rights of use (IRU) for connecting infrastructure: dark optical fibre, cables (5-10% of group sales) Source: Company presentation Most revenues come from the service provision to clients against the payment of a lease fee (for connections, networks segments ). As a consequence, revenues are recurring and offer good visibility. For example, if an international carrier leases a segment of Retelit s network to subsequently connect one of its clients, it is highly likely that this business relation will last for several years. Any relocation / closing down of connected facilities can obviously result in the contract being discontinued. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 6

7 Solid top line and first FCF in 2011: Over the last 5 years, in spite of a falling TLC market in Italy (-12%) (source: Agcom), Retelit has been able to enjoy moderate revenues growth with stable operating profitability and improving bottom line. Since 2011 Retelit has been renting out its business branch represented by the Wi-Max network. The ensuing proceedings are reported as financial income. This is one of the reasons why the company s bottom line is improving in spite of EBITDA s relative stability. Operating net cash generation has gone back into positive territory since As a matter of fact, P&L has closed with a loss also due to high depreciation (some 13 mn), which however does not represent an operating cost. 5 YEARS HISTORICAL RESULTS RETELIT Total Sales EBITDA Net Income (9.3) (6.5) (3.4) (3.6) Net Financial Position 10.6 (0.3) Source: Company data Libyan PTT is the leading shareholder: Retelit s Main shareholder is the Libyan Post Telecommunication and IT company (LPTIC). LPTIC has become a shareholder by acquiring Retelit shares during its capital increase through public offering in In September 2012 LPTIC drew up an agreement with 11 other shareholders and in October 2012 they appointed a new Board of Directors to drive Retelit s expansion. The new board of directors has outlined a rather aggressive business plan that envisages company revenues nearly doubling (see below) by LPTIC controls several Libyan TLC companies with operations in several African countries and this might translate into international development opportunities for Retelit to channel the growing TLC traffic between Europe and Africa. Hereby we are however hinting at potential developments that our current estimates do not yet factor in. 4.60% 4.42% SHAREHOLDERS STRUCTURE 9.80% 8.59% 14.80% 57.80% MARKET BOUSVAL SIIT - Sirti SELIN HBC PRETTO ALBERTO Source: Company presentation IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 7

8 Pretto Alberto is an investor who, together with other minority investors, has signed a Shareholder s Pact with LPTIC Sirti and HBC have held a stake in the company since 2003 when they capitalised part of their receivables vs. Retelit (as its suppliers). Selin has been a long-standing shareholder, having held a stake since e-planet s listing in BOARD OF DIRECTORS Source: Company presentation Wi-Max and the 27.5 mn put option In 2008 Retelit built a wireless TLC network in Wi-Max technology. In 2011 it reached an agreement with Linkem, a broadband wireless operator. The agreement sets forth the following: Retelit currently leases its Wi-Max network to Linkem for an annual fee that has amounted to 2.3 mn in 2011, 1.6 mn in 2012 and 2013 and which is set to return to 2.3 mn per annum as of 2014 Retelit holds a put option whereby from July 2013 it is entitled to sell the network for an equivalent of 33 mn cash (deducted of the lease fees that will have already been paid). The value of this put option currently amounts to some 27.5 mn that can be paid through 5 annual instalments (each of the same amounts), if the case may be. Retelit s business plan envisages the exercise of the put option. We therefore took into consideration this event in the valuation base case scenario. Business Plan for It is well known that the data traffic is growing rapidly worldwide. New devices stimulate new ways to communicate and create bandwidth requirements at all levels, both retail and corporate and public administration. As a way of an example Cisco estimates that nearly half of all IP traffic will originate with non-pc devices by It also forecast that every second, nearly a million minutes of video content will cross the network (global) by It would take an individual more than 5 million years to watch the amont of video that will cross global IP network by IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 8

9 Below is a list of few examples referred specifically to the Italian market. ITALY DATA DEMAND Population Number of users Total Devices 2012: 65 M 2012: 37 M 2012: 172 M 2017: 66 M 2017: 43 M 2017: 267 M In Italy, IP traffic will grow 3-fold from 2012 to 2017, a compound annual growth rate of 21%. In Italy, the average broadband speed will grow 3.3-fold from 2012 to 2017, from 4.8 Mbps to 16 Mbps. (fixed and wi-fi) In Italy, there will be 267 million networked devices in 2017, up from 172 million in In Italy, mobile data traffic will grow 9-fold from 2012 to 2017, a compound annual growth rate of 54%. In Italy, Business mobile data traffic will grow 8-fold from 2012 to 2017, a compound annual growth rate of 51%. "Source: Cisco Visual Networking Index [or VNI] Global IP Traffic Forecast, " In this context, TLC operators which are Retelit customers, will need continuous upgrade of bandwidth delivered to corporate clients Mobile operators will need to connect the antennas to an optical fiber network Retelit itself will have the opportunity to capture the selected corporate clients or the public administration. The management has put together a business plan for that estimates its revenues nearly doubling to reach 73.9 mn with EBITDA at 26 mn (+260%) supported by 75 mn capex. The new business plan has been drafted taking into account the following factors: a growing demand for broadband connectivity Retelit s business expansion: from being a connectivity provider (equipped fibre connection or dark fibre) it will shift towards the provision of services to connected customers (ex. Virtual Private Network); as far as data centres are concerned, it will shift from its role of housing provider to the provision of more wide-ranging services (back up, disaster recovery..) finally, the client base is expected to include a limited number of final customers in the corporate and Public Administration (Educations, Health, Defence..) segments. The development guidelines for the next few years are listed here below: IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 9

10 BUSINESS PLAN STRATEGIC GUIDELINES BUSINESS PLAN STRATEGIC GUIDELINES Source: Company presentation Grow without changing the Company s DNA The plan states that Retelit is expected to evolve to become a provider of more articulated services than the ones currently representing its core business (network connectivity and housing). Whilst moving towards the bottom of the supply chain, Retelit will however keep playing its role as a mainly wholesale operator and it will expand its business only to include a selected number of corporate and PA clients. Strengthen positioning in Telcos wholesale. In order to accommodate a growing demand for increasingly wider broadband and in order to enable the network to provide more advanced services, Retelit has planned a more robust investment cycle, around 14 mn per year, compared to the recent past when they were around 7 mn per year. Actually we estimate that only some 20%-30% of the capex are needed to upgrade the network while the vast majority of the capex will be related to clients connection and therefore driven by the top line success. Consolidate positioning in ICT and new media market. Beside TLC operators, the acquisition of ITC and system integrator clients will be enhanced. They will be offered Retelit s facilities consisting of 18 Data Centres with the additional target of accommodating a growing market for cloud computing Address Selected corporations and public administrations: Retelit s network was built along Anas road network and it crosses many urban areas. On the other hand, most networks owned by competitors follow the motorway network (and thus they are far from urban areas). The management has identified some 4000 middle-sized companies ( employees), both private and public, located close to its network and potentially connectable through minor dedicated investment. Retelit will present itself as a provider of value-added services (non-voice) such as high quality broadband and disaster recovery. With the aim of acquiring corporate and PA clients, Retelit will also develop network connections in business districts. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 10

11 This is the case of the investment to connect Tecnopolo Tiburtino, an area that was developed in Rome to attract business establishment (there are some 80 companies headquartered here at the moment). The marketing approach to capture this client segment is very different to the one adopted by Retelit so far in the Carrier2Carrier business. In fact the company is started a plan of recruitment of new professional profiles to develop and market the new services. We calculate that today around 15% of the workforce is dedicated to sales activities but that the percentage is going to increase in the coming years. Focus on high quality broadband services developing Internet value added services and Virtual Private Networks. Bandwith requirements is growing fast and Retelit has promptly invested in state of the art technologies to ensure adequate capacity across its network as well as low latency, strongly requested particularly by the Finance sector. The recent new 100Gbps platform provided by Ciena to Retelit includes these features. A VPN is the extension of a corporate local private network to include sites belonging to the company itself but located over a wide area by exploiting a public IP network for transport and then implementing a LAN network, which is the reason why it is called both virtual and private. Thanks to its technological upgrade, Retelit is currently able to present itself as a builder of Virtual Private Networks. A twofold business opportunity ensues from this: 1. extension of services offered to international telephone carriers, who previously turned to Retelit only for the point-to-point connection from their POP and the headquarters (or branch) of the client to be connected. The VPN finalisation was then entrusted to other operators. 2. implementation of VPN solutions for corporate clients Extend network reach leveraging fiber backhauling projects for mobile operators The development of LTE technology enables mobile operators to provide their clients with increasingly powerful performance in terms of available band (theoretically, up to 50/100mbps). However, the mobile network performance requires the enhancement and update of the so-called backhauling, i.e. the connection of radio-based stations to the transport network of the TLC operators. Most of these connections are still made by point to point microwave radio links and sometimes of copper nowadays, but they need to be progressively converted into optical fibre starting from the most congested ones. One of the critical success factors for implementing this upgrade is a shorter distance from the closest optical fibre network. Retelit has already signed an agreement to connect an initial batch of some dozens of antennas for a mobile operator. In Italy there are several thousand antennas (around 55000) and it is easy to envisage that a high percentage is progressively bound to upgrade its connection in the next few years. As a consequence, a potential market of some 1000 antennas located in proximity of its infrastructure could be opening for Retelit. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 11

12 Expand backbone cross-border and open new European Points of Presence Retelit has recently announced the opening of a new international Point Of Presence in Frankfurt (Equinix) that will act as a new access node for the provision of transmission services. Retelit s transmission for Italian destinations will be available therefore to International customers still not served by Retelit (e.g Chinese TLC operator connected to Europe in Frankfurt). Equinix is currently one of the largest interchange points for European data traffic and the adjacent DE-CIX is the most important Internet Exchange in Europe. Retelit foresees a presence in other major international interchange points in the near future. Develop International projects, some in participations with LPTIC. The Europa / Africa telephone traffic is expected to grow exponentially in the next few years. Libya is a natural catchment area for traffic generated in Sub-Saharan countries. In the meantime, Italy could play a relevant role in the sector as a bridge between Europe and Africa. Retelit could take part in international projects aimed at collecting and routing this traffic. RETELIT S PLANS FEATURING IN OUR ESTIMATES We have drawn up more conservative estimates than those included in the business plan both for the sake of caution and also because some business lines are rather new for Retelit. They imply a quite high execution risks since they assume the acquisition of thirdparty know-how as well as the use of new technologies. Our assumptions prompt us to express the following estimates for the period: Revenues growth of 9% CAGR up to 59mn EBITDA increasing by 11% CAGR almost doubling up to 17 mn Cumulative cash generation amounting to 23 mn. By factoring in 27.5 mn for the Wi-Max put option the cash generation will be around 50 mn VALUE OF PRODUCTION ( mn) 2012 % 2013E % 2014E % 2015E % 2016E % 2017E % Total sales % % 44 16% 50 14% 55 9% 59 8% TLC Services 31 7% 33 7% 37 12% 42 15% 46 10% 50 8% Right of use and maintenance 4 11% 3.9 0% 6 43% 6 10% 7 8% 7 9% Others Source: Company data and EQUITA SIM estimates Our estimates are based upon the following assumptions: Revenues growth from TLC services of 10% CAGR This forecast is based on the assumption that revenues generated by traditional services keep growing by some 6% per annum. This should be supported by an increasing demand for band in the TLC market. This would be a similar or a conservatively more moderate performance compared to the development recorded in the (+6.7%) period. Below we list some of the forecasts on the Italian market provided by Cisco making clear that the band demand will remain at least robust in the coming years. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 12

13 TLC SERVICES BREAKDOWN TLC Services 2013E % 2014E % 2015E % 2016E % 2017E % TLC services traditional 33 7% 35 6% 37 6% 39 5% 40 4% TLC New VPN Corporate Clients Public Administration Total Source: EQUITA SIM estimates In addition to this, we have assumed a contribution from innovative services for technology or final destination up to 10 mn when the system will be fully operational (VPN for wholesale and corporate clients, other services to corporate and PA clients) We estimate a robust growth for revenues ensuing from Rights of use linked to the backhauling project of mobile operators radio base stations. As a matter of fact, by contract these activities can be considered Indefeasible Rights of Use, pursuant to which some 1/3 of the contract value is reported in the P&L as revenues in the first year and the remaining portion is spread in multi-year lease fees (up to 15). We find relevant to stress that, while the value of the contract is split in the P&L like above mentioned, the cash payment by the clients and the recording of it is anticipated the first year for the whole of the period. Margins stable in the first years. Than growing We have assumed that in the first three years of the plan margins are likely to be approximately flat against 2012 level, given that the higher turnover implies some new costs to be borne by the company, both on the technological front and in terms of sales and marketing. We forecast the first bottom line break even in 2014 and first positive profit in The majority of the capex are covered by client s orders Cash generation, following a couple of flat years (due to higher capex than the historical average), is expected to return to positive territory and then to enjoy growth starting from In our estimates model we did not consider the cash in for the Wi-Max option put option ( 27.5 mn) which is a relevant cash in source. As for cash flow generation it is relevant to underline that the vast majority of Retelit capex are business driven. In fact we estimate that only 20% to 30% of the capex ( 3 to 4 mn yearly) are dedicated to the technological upgrade of the network. A remaining 20% (around 3 mn) can be considered manteinance costs. Because of that it is estimated that around 50% of the capex are fully dedicated to building (including antennas) connections. We can assume that around 6 mn capex (as the historical average) is the base case for Retelit in case of moderate business expansion. Higher capex are needed only in case of strong expansion of the business (clients ordering new connections). IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 13

14 We can conclude therefore that the profile of the capex needed by Retelit to explore new business is very limited and that higher amounts would be possible (and welcome) only when covered by clients orders. The strategy provides for greater internationalization of Retelit. We have outlined some of the first steps that Retelit made to capture customers outside the Italian territory. It is the case of connection to Equinix Frankfurt. We also consider the likely expansion of operations abroad sometimes, if it is the case, in partnership with LIPTC, its main shareholder. These expansion plans abroad were not included in our estimates. VALUATION 0.68 PER SHARE Retelit s income statement still displays a negative bottom line currently, also as a result of high network depreciation, among other things. The operating management has however been generating cash since 2011, following on-going slight improvements. For the purpose of valuation, we think that it is more advisable to resort to a DCF model. Based upon our base assumptions, Retelit s valuation turns out to be 0.68 per share. BASE CASE - DCF ( mn) Assumptions 2013E 2014E 2015E 2016E 2017E Beyond g 2.00% Sales WACC 7.98% Change % 3.7% 15.9% 13.7% 9.0% 7.9% 2.0% Adj. EBITDA Change % 10.2% 42.0% -5.3% 13.8% 8.6% -0.5% Margin 27.6% 33.8% 28.1% 29.4% 29.5% 28.8% D&A EBIT Valuation ( mn) Change % -34.1% -31.6% -57.3% % 136.3% 192.2% NPV of Free Cash Flows 7.2 Margin -8.7% -5.1% -1.9% 2.0% 4.4% 12.5% NPV of Terminal Value 72 Taxes Estimated Enterprise Value 79 Cash Flow Net Financial Position 10 Change % 26.0% 13.4% 16.1% 17.6% 11.0% -4.0% Wi-Max Put Option 23 Capex (increase) decrease in WC Retelit Equity 112 Free Cash Flow before minorities Adj. # of shares 164 Target Price 0.68 Discount Factor Upside/Downsize 24% PV of FCF Source: Equita SIM estimates DCF VALUATION IMPLIED MULTIPLES 2013E 2014E 2015E 2016E EV / Ebitda P/E FCF yield -0.5% 1.7% 5.5% 6.6% Source: Equita SIM estimates SENSITIVITY WACC LONG-TERM GROWTH % 2.00% 2.50% 8.5% % % IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 14

15 Please note that: the model of evaluation involves the collection of approximately 27.5 mn for the exercise of the Put Option vs. Linkem relative to the Wi-Max network. As the payment of the put option is divided into 5 annual installments, we calculate the net present value of the option at about 23 mn. It is intention of Retelit to exercise the option in the planned period The Adj. EBITDA, must be understood as "cash EBITDA." It differs from EBITDA reported because, as explained above, the accounting of "indefeasible rights of use" relating to the work of backhaul for LTE mobile networks, should provide, when it comes to P&L recording, the "spreading" of a substantial (2/3) portion of sales to a long number of years (15). However, when it comes to cash flow, the collection is made in the first year In the next couple of years Retelit will be involved in many projects, but our estimates factor in only part of them and assume only partial success. We therefore also wanted to take into account the following: a more aggressive scenario, whereby the revenues boost expected in the two-year period is just the beginning of further full double-digit growth in Such scenario is closer to the company s business plan, despite keeping a more conservative revenue curve and margins. a worst case scenario where, in spite of investments made, in the long term Retelit displays revenue trends and margins in line with recent historical trend VALUATION SUMMARY Worst case Valuation per share ( Sales CAGR 5%, EBITDA margin 25%) 0.45 Base case ( Sales CAGR 8%, EBITDA margin 29.5%) 0.68 Best Case ( Sales CAGR 15%, EBITDA margin 30%) 0.87 Source: Equita SIM estimates The downside risk is quite limited. When deducting from the current market capitalisation the net cash and the net present value of the put option on Wi-Fi, it results that the current EV of Retelit is just 58 mn. The implied 2013 EV/EBTDA is 5.8x. When assuming only a minor growth (like the one included in 2014) the implied EV/EBITDA is only 4.4x. IMPLIED EV/EBITDA AFTER WI-FI OPTION ( mn) Current Mkt cap Net Financial Position Net present value cash in from Wi-Fi Implied EV EBITDA EV/EBITDA Source: Equita SIM estimates IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 15

16 The table below shows the multiples at which some TLC operators are traded. Most of them are trading at low multiples because of declining results often coupled by high leverage. Colt, Jazztel and Telenet trade at higher multiple in light of an offer focused on corporate and/or ultra-broadband services. PEERS COMPARISON - TELECOM OPERATORS Company Mkt Cap EV / EBITDA P/E Adj EBITDA Margin Net Debt / EBITDA Sales CAGR EPS ADJ (, mn) Orange 24, % 30.2% 29.8% % -1.0% Deutsche Telekom 47, % 29.4% 29.9% % 7.8% Telefonica 54, % 33.9% 34.1% % 5.7% KPN 10, % 33.1% 34.0% % -9.8% British Telecom (BT) 32, % 33.4% 34.4% % 6.1% Vodafone 127, % 29.3% 29.8% % -2.0% Telecom Italia 11, % 40.2% 39.9% % -2.5% Colt 1, % 21.1% 21.6% % 25.8% JazzTel 4, n.m % 26.8% 28.1% % -2.0% Telenet 4, % 49.8% 50.0% % 16.9% Avg. TLC integrated operators % 31% 31% % 3.1% Telecom Italia Media n.m % 42% 41% % n.m. EI Tower % 46% 48% % 12.4% Avg. Infrastructured media operators % 43.8% 44.5% % 12.4% Cogent Communications 1, n.m % 36.5% 36.6% % 106.4% Level 3 4, n.m % 26.8% 28.1% % n.m Avg. BB and data services operators n.m % 31.7% 32.4% % 106.4% Retelit nm nm % 25.2% 25.7% n.m. 14.8% n.m Source: EQUITA SIM estimates and Bloomberg consensus We also show the multiples of a couple of Italian operators that despite operating a different business than Retelit s, are based on the lease of their network infrastructure (EiTower and TI Media). These multiples are higher than the TLC ones because these companies are active in industries offering a competitive environment that is more protected. Finally we present the multiple at which are trading Congent and Level 3, two leading US operators in the high speed and data services provision. Their business model is closer to the one of Retelit although of much bigger size. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 16

17 P&L E 2014E 2015E 2016E Revenues Growth 5% 6% 4% 16% 14% 9% Total opex Growth 2% 13% 4% 17% 13% 6% Margin -70% -74% -74% -75% -74% -72% EBITDA Growth 14% -10% 4% 13% 16% 17% Margin 30% 26% 26% 25% 26% 28% Depreciation& amortization Other Depreciation&provistion EBIT Growth 36% -25% 34% 32% 57% 213% Margin -12% -14% -9% -5% -2% 2% Net financial profit Net Financial expenses Other financial profit/exp n.a. n.a. n.a. n.a. n.a. n.a. Total financial expenses Non recurring pre tax n.a. n.a. n.a. n.a. n.a. n.a. Profit before tax Growth 47% -3% 53% 106% 1333% 150% Taxes Tax rate 0% 0% 5% -135% -14% -8% Minoritiy interests Non recurring post tax na na na na na na Net income Growth 47% -6% 52% 98% -3625% 168% Margin -10% -10% -5% 0% 2% 6% Adj. net income Growth 47% -6% 52% 98% -3625% 168% Margin -10% -10% -5% 0% 2% 6% CF Statement E 2014E 2015E 2016E Net Income (Increase) decrease in OWC d&a (Purchase of fixed assets) Other FCF (Distribution of dividends) Rights issue Source: Equita SIM estimates & company data IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 17

18 INFORMATION PURSUANT TO ARTICLE 69 ET SEQ. OF CONSOB (Italian securities & exchange commission) REGULATION no /1999 This publication has been prepared by Stefano Lustig on behalf of EQUITA SIM SpA (licensed to practice by CONSOB resolution no of December 22nd 1998 and registered as no. 67 in the Italian central register of investment service companies and financial intermediaries) In the past EQUITA SIM has not published studies on Retelit EQUITA SIM is distributing this publication via to more than 700 qualified operators from October 7, 2013 The prices of the financial instruments shown in the report are the reference prices posted on the day prior to the date indicated on cover page. EQUITA SIM intends to provide continuous coverage of the financial instrument forming the subject of the present publication, with a semi-annual frequency and, in any case, with a frequency consistent with the timing of the issuer s periodical financial reporting and of any exceptional event occurring in the issuer s sphere of activity. The information contained in this publication is based on sources believed to be reliable. Although EQUITA SIM makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information. If there are doubts in this respect, EQUITA SIM clearly highlights this circumstance. The most important sources of information used are the issuer s public corporate documentation (such as, for example, annual and interim reports, press releases, and presentations) besides information made available by financial service companies (such as, for example, Bloomberg and Reuters) and domestic and international business publications. It is EQUITA SIM s practice to submit a pre-publication draft of its reports for review to the Investor Relations Department of the issuer forming the subject of the report, solely for the purpose of correcting any inadvertent material inaccuracies. This note has been submitted to the issuer. EQUITA SIM has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules of conduct for them. Furthermore, it is pointed out that EQUITA SIM SpA is an intermediary licensed to provide all investment services as per Italian Legislative Decree no. 58/1998. Given this, EQUITA SIM might hold positions in and execute transactions concerning the financial instruments covered by the present publication, or could provide, or wish to provide, investment and/or related services to the issuers of the financial instruments covered by this publication. Consequently, it might have a potential conflict of interest concerning the issuers, financial issuers and transactions forming the subject of the present publication. Equita SIM S.p.A. provides, or has provided in the last 12 months investment banking services for Retelit S.p.A. Equita SIM S.p.A. performs, or has performed in the last 12 months, the role of specialist for financial instruments issued by Retelit S.p.A. In addition, it is also pointed out that, within the constraints of current internal procedures, EQUITA SIM s directors, employees and/or outside professionals might hold long or short positions in the financial instruments covered by this publication and buy or sell them at any time, both on their own account and that of third parties. The remuneration of the financial analysts who have produced the publication is not directly linked to corporate finance transactions undertaken by EQUITA SIM. The recommendations to BUY, HOLD and REDUCE are based on Expected Total Return (ETR expected absolute performance in the next 12 months inclusive of the dividend paid out by the stock s issuer) and on the degree of risk associated with the stock, as per the matrix shown in the table. The level of risk is based on the stock s liquidity and volatility and on the analyst s opinion of the business model of the company being analysed. Due to fluctuations of the stock, the ETR might temporarily fall outside the ranges shown in the table. EXPECTED TOTAL RETURN FOR THE VARIOUS CATEGORIES OF RECOMMENDATION AND RISK PROFILE RECOMMENDATION/RATING Low Risk Medium Risk High Risk BUY ETR >= 10% ETR >= 15% ETR >= 20% HOLD -5% <ETR< 10% -5% <ETR< 15% 0% <ETR< 20% REDUCE ETR <= -5% ETR <= -5% ETR <= 0% The methods preferred by EQUITA SIM to evaluate and set a value on the stocks forming the subject of the publication, and therefore the Expected Total Return in 12 months, are those most commonly used in market practice, i.e. multiples comparison (comparison with market ratios, e.g. P/E, EV/EBITDA, and others, expressed by stocks belonging to the same or similar sectors), or classical financial methods such as discounted cash flow (DCF) models, or others based on similar concepts. For financial stocks, EQUITA SIM also uses valuation methods based on comparison of ROE (ROEV return on embedded value in the case of insurance companies), cost of capital and P/BV (P/EV ratio of price to embedded value in the case of insurance companies). MOST RECENT CHANGES IN RECOMMENDATION AND/OR IN TARGET PRICE (OLD ONES IN BRACKETS): Date Rec. Target Price ( ) Risk Comment nil DISCLAIMER The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. EQUITA SIM does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. Each and every investment/divestiture decision is the sole responsibility of the party receiving the advice and recommendations, who is free to decide whether or not to implement them. Therefore, EQUITA SIM and/or the author of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the party using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The estimates and opinions expressed in the publication may be subject to change without notice. EQUITY RATING DISPERSION AS OF SEPTEMBER 30, 2013 (art. 69-quinquies c. 2 lett. B e c. 3 reg. Consob 11971/99) COMPANIES COVERED COMPANIES COVERED WITH BANKING RELATIONSHIP BUY 44.9% 50.0% HOLD 46.0% 44.2% REDUCE 8.5% 5.8% NOT RATED 0.6% 0.0% IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 18