Analysis: KKR’s Telecom Italia approach could take time for Italy discount


LONDON, Nov. 30 (Reuters) – A $ 12 billion takeover bid for Telecom Italia

At 36% discount to world stocks based on 12-month forward earnings, Italian stocks (.dMIIT00000PUS) are trading at their highest discount in nine years and more than double their own 20-year average of 16%.

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

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One of the explanations for this inequality is the index composition of Italy, which has a high proportion of energy and banking stocks from the “old economy”, with almost two-thirds of Italy’s blue chips (.FTMIB) being made up of financial, utilities, telecommunications, oil and Gas companies exist, while only around 20% of the 50 largest Eurozone companies (.STOXX50E) operate in these sectors.

Most importantly, two decades of near-zero economic growth, an aging population and Italy’s high debt have depressed share prices in the country.

“Italian stock markets are cheap in a global context and this has given us the opportunity to own some great companies that would trade at much higher valuations if they were listed in other countries like the US,” said James Matthews, European Equities Fund Manager at Invesco using the example of the small appliance manufacturer De ‘Longhi (DLG.MI).

Although De’Longhi stock rose from € 11 in March 2020 to € 29 now, after hitting a record high of € 40 in September 2021, its price-to-earnings ratio (PE) is 13.5 times lower than that of 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 share price jump of 50%, it remains among the cheapest in its industry according to KKR’s proposal, with the offer implying an enterprise value below six times the core profit compared to an industry average of seven times , according to BofA Global Research. Continue reading

But those more skeptical about Italian stocks say they can get better returns elsewhere.

“There are some good companies in Italy, but on a global scale, the same types of companies in other parts of the world are more profitable and can generate higher returns on investments,” said Peter Rutter, Head of Equities, Royal London Asset Management.

Although 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 Refinitiv data.

Meanwhile, investors have started to shine Italy’s mid-cap segment with the FTSE Italia Star Index (.FTSTAR), an index of 75 small and medium-sized companies, which has risen 165% to a record high since the pandemic began in November.

Alberto Chiandetti, a portfolio manager at Fidelity International, has increased the allocation in Italy, arguing that such a large discount is not justified for many companies, given that Italy is the biggest beneficiary of the European Union’s € 750 billion reconstruction fund. Continue reading

An iShares MSCI Italy ETF has around 18.7 million shares outstanding, nearly 180% more than last November, far outperforming inflows into an MSCI Eurozone ETF, while UBS advises higher allocations in Italy, and Amundi said that it selectively repositions itself shares in the company listed in Milan.

With Italy planning to use some of the EU funds to modernize its internet infrastructure, tech companies have been obvious beneficiaries, whose shares in tech services company Reply (REY.MI) have risen 300% since the pandemic began, to a market cap of. to reach 6.3 billion euros.

“If you think about where the discount is today, I think that it is no longer with small caps. Today the discount is more with mid, big caps or individual stocks that may still be undiscovered,” said Chiandetti.

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

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