蒂姆巴西电信

TIM grew service revenue 5.7% year over year in the second quarter, aided by an acquisition and lumpy sales to business customers. Core wireless service revenue growth slowed to 3% from 5% in the prior quarter. The EBITDA margin expanded less than 1 percentage point from a year ago to 51.5%.

Why it matters: TIM's struggles in an increasingly competitive wireless market have grown. The firm lost 108,000 net wireless customers during the quarter while its two main rivals each added more than 1.4 million. The prepaid business, historically a source of strength for TIM, has been hit especially hard. America Movil has been very aggressive at the lower end of the market via its partnership with Nubank, while Vivo has targeted similar customers by marketing its Lite plans more aggressively recently. TIM launched a similar plan called Fit earlier this month. TIM also launched a broadband and wireless bundle offering recently, but its addressable market is smaller than its rivals', relying on a small owned broadband network and wholesale agreements in other areas. Vivo and Movil both serve nearly 10 times as many broadband customers as TIM.

The bottom line: We reduce our fair value estimate on TIM's ADRs to $22 from $24, reflecting lower assumed market share pricing in the coming years, and we maintain our no-moat Rating. We prefer Vivo for direct exposure to Brazil's telecom market, but we don't view current valuations as particularly attractive. TIM closed the buyout of its partner I-Systems, the firm that holds its fiber network assets. Its balance sheet remains very strong, and it could pursue additional acquisitions to expand its broadband footprint, but this market is highly fragmented and very unattractive, in our view. While we don't think TIM has any obvious solutions in the broadband market, it could move to aggressively arm the dozens of broadband providers in Brazil with access to its wireless network, opening up new distribution capabilities.

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Our $22 fair value estimate per ADR is based on an exchange rate of BRL 5.1 to the US dollar, up from BRL 4.9 previously. We continue to assume that TIM will remain in a disadvantaged competitive position and that the firm will gradually lose market share in the coming years as its rivals push service bundles across their far larger fixed-line service territories and smaller upstarts take share regionally.

We expect TIM to continue increasing wireless services revenue as average revenue per customer rises, reflecting a continued shift toward the postpaid market and price increases. TIM aims to grow wireless service revenue faster than inflation over its current three-year planning period (through 2027), a sign the firm will remain disciplined in its pricing, but it has fallen short of this mark recently as Vivo and America Movil have grown increasingly aggressive. In total, we expect TIM's revenue to increase a bit less than 4% annually through 2030, with a modest contribution from its broadband offering.

TIM has driven solid margin gains recently, and we expect it to maintain these improvements as efficiency efforts and pricing discipline offset margin dilution from growth in the fixed-line business, which often leases network access from the firm’s infrastructure partners. However, TIM has few options to respond to increased competitive intensity, and we expect efforts to reignite customer growth will hurt profitability. We forecast that the EBITDA margin will expand to 53% in 2030, up from 48% in 2021 (prior to the Oi transaction) and 51% in 2025. But this forecast is down from our prior 54% expectation for 2030.

TIM expects to hold capital spending at about BRL 4.5 billion annually through 2027, or less than 18% of revenue, well below prior levels. We believe this goal could be challenging to meet as TIM invests in its networks over the next few years to keep pace with its larger rivals. We also expect direct investment to expand its fiber network to push capital spending higher. We assume spending returns to 20% of revenue over the next several years, following a dip to 17%-18% in 2026.

We don’t believe TIM has an economic moat, despite its large wireless subscriber base in Brazil. Recent consolidation in the wireless industry should allow profitability to improve and push returns on capital above the firm’s cost of capital over the next couple of years. However, the firm’s relatively small size and strategic disadvantage resulting from its small fixed-line footprint diminish our confidence in returns over the long run, especially in inflation-adjusted terms.

The Brazilian wireless market has three primary players. TIM is the third largest, with 22% customer share, trailing Vivo (38%) and America Movil (33%). TIM has lost significant customer share in recent years. It held a 24% share at the end of 2018, but this metric drifted to 20% immediately prior to the 2022 Oi acquisition. Its share has continued to trend downward since. On the positive side, however, TIM has held its revenue share versus its two primary competitors fairly steady over the past year, as it has tried to hold the line on pricing and promotion.

The Brazilian wireless market has a long history of fragmentation and stiff price competition, initially as carriers scrambled to gain share in a growing market and, often, as carriers fought to keep customers in a tough economic environment. The gap in revenue per customer in Brazil and Mexico, a three-player market, illustrates the challenges in Brazil. The typical Mexican wireless customer spends more than $9 per month versus $6 for the typical Brazilian, a gap only partially explained by differences in penetration rates and incomes.

The agreement to carve up Oi significantly improved the structure of the Brazilian wireless market, leaving the three large players to emphasize differentiated offerings over price to attract customers, which has allowed average revenue per customer across the industry to rise. However, given the historical competitiveness in Brazil, we believe TIM and its peers still derive only a modest benefit from efficient scale in this market. While profitable, these firms simply do not generate enough revenue to earn strong returns on capital. Without a scale advantage versus Vivo or Movil, we also can’t conclude that TIM has a cost advantage.

While we expect TIM to benefit as the Brazilian wireless business improves, we believe its minimal fixed-line network assets leave it at a disadvantage to Vivo and Movil. Movil owns the largest cable network in Brazil, reaching around half of the country. Vivo is the incumbent phone company in Sao Paulo, and it has built fiber extensively throughout Brazil.

TIM’s I-Systems venture is building fixed-line infrastructure, but it can currently reach only about 8 million households, or less than 15% of the country. We expect dense fixed-line networks to provide an advantage in deploying new generations of wireless technology. Also, owning both types of networks should allow Vivo and Movil to effectively bundle mobile and internet services to attract customers.

With TIM buying the portion of I-Systems it doesn't already own, we suspect the firm will pursue additional fiber acquisitions. However, the firm recently lost out to America Movil in pursuit of Desktop, a firm that holds 2% nationwide broadband market share. Desktop only operates in Sao Paulo state, where it has a 7% share, including a dominant position in certain areas. While the acquisition price was high, TIM's balance sheet could have easily absorbed this purchase. However, even if TIM had succeeded in winning Desktop, it would have faced competition from Vivo and Movil in many areas Desktop reaches. Operating as a subscale third player in the broadband market would likely be very difficult as well. This situation demonstrates the tough position TIM faces.

TIM claims roughly 22% of the Brazilian wireless market, which should give it plenty of scale to generate strong cash flows.

The company has a strong balance sheet to weather economic downturns and enough dry powder to take advantage of consolidation opportunities.

As the Brazilian economy recovers and grows, TIM should be a prime beneficiary as customers increasingly demand wireless data services.

TIM’s minimal fixed-line presence prevents it from offering bundled wireless and fixed-line services on a meaningful scale. Limited fixed-line infrastructure will also hurt the firm as it rolls out 5G wireless technology.

The firm is controlled by Telecom Italia, whose objectives may not align with those of minority shareholders.

The economy and political landscape in Brazil are notoriously volatile. Currency weakness over the past several years has severely hurt ADR holders.