Tim a Stock Bargain as Fee-Cut Concern Seen Overdone

Tim Participacoes SA is holding on to its title as analysts’ favorite Brazilian telecommunications stock, with Banco Santander SA and Concordia SA Cvmcc arguing that concern about government-mandated fee cuts is overblown.

Tim has dropped 16 percent over the past 12 months in Sao Paulo and is trading at nine times earnings, compared with the average of 18 times for the Ibovespa index. That makes Rio de Janeiro-based Tim the cheapest Brazilian phone stock. The shares dropped last year after an industry crackdown by regulators, who pressed for better quality and lower prices.

By enticing users to make calls within its network, Tim will be able to offset revenue lost to mobile-phone connection fees, said Valder Nogueira, an analyst at Santander in Sao Paulo. He rates the stock a buy, as he has since 2010, because Tim is setting the pace in the industry with first-of-their-kind offers like unlimited phone calls between Tim users for 25 centavos (12 cents) apiece, along with one-day data plans.

“When Tim started Tim-to-Tim calls at 25 centavos, it knew that it would create a revenue structure that would sooner or later depend less on interconnection,” said Nogueira. “The growth in revenue recently was because of this plan, where interconnection rates weren’t the big impacting factor.”

Revenue Gain

Tim, the nation’s second-biggest wireless carrier after Telefonica Brasil SA, reported a 5.4 percent increase in revenue last quarter to 4.71 billion reais. Sales at Telefonica Brasil, which uses the Vivo brand, rose 2.9 percent, and Oi SA’s rose 3.5 percent.

Tim, a unit of Milan-based Telecom Italia SpA, added 1.1 million subscribers in the first four months of this year, the most in the industry, according to data from regulator Anatel. Its subscriber base is up 5 percent from a year earlier, outpacing the industry’s 4.6 percent expansion.

In addition to promoting packages for in-network calling, Tim is banking on a new fiber-optic network to offer high-speed Internet service. Lower mobile fees are also encouraging more consumers to shut off their landlines, hurting the competition and aiding Tim by driving more phone traffic to wireless devices. The company gets more than 80 percent of gross revenue from mobile-phone service.

Tim’s stock slump in the past 12 months compares with a 49 percent drop for Oi and a 13 percent increase for Telefonica Brasil. Oi is trading at 9.2 times earnings for the past 12 months, compared with Vivo’s 14, according to data compiled by Bloomberg. Tim slid 1 percent to 8.15 reais at the close today in Sao Paulo.

Analyst Favorite

Thirteen analysts advise buying Tim shares, with five saying hold and one recommending selling it. That means 68 percent of analysts covering the company recommend buying it, the highest since June 2012, according to data compiled by Bloomberg. At least half of analysts have favored buying Tim since May 2010. Sixty percent of analysts recommend buying Vivo, compared with 27 percent for Oi.

While Tim gets 14 percent of gross sales from interconnection fees, the tariffs also make up part of its expenses, said Karina Freitas, an analyst at Concordia, in a telephone interview from Sao Paulo. Since she upgraded the stock to a buy rating in October, it has climbed 14 percent.

“If Tim can continue having the same success of adding lines within its network, the company can benefit from reducing costs and can neutralize this question of interconnection loss,” she said.

Tim said in an e-mail it wouldn’t comment on interconnection costs and the impact on the business. Press officials from Vivo and Oi didn’t respond to e-mail messages seeking comment.

Fee Reductions

Customers paid 38.70 centavos a minute to call operators other than their own in 2012, a rate that will decrease to 16.70 centavos by 2015, according to estimates from Robin Bienenstock, a London-based analyst at Sanford C. Bernstein & Co. Anatel may expand the cuts, she said.

The steep interconnection rates, among the most expensive in the region, have forced people to carry lines from various operators, said Richard Dineen, an analyst at HSBC Holdings Plc who rates Tim neutral. They’ll get rid of some of those as rates fall, and that will hurt Tim, he said.

“The most exposed is Tim, we believe, because it derives the largest portion of its revenue from mobile,” he said in a telephone interview from New York. “All other companies have sizable fixed-line businesses that will incur lower costs.”

Tim’s in-network calling plan was devised exactly to create a revenue structure that would not depend on those rates, Nogueira said. Its low-cost plans force customers to recharge more and not just receive calls, he said.

“The company’s doing the right thing,” he said.

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