We are changing our current recommendation on TIM Participações S.A. (TSU) from Hold to Sell. First quarter 2008 results were lower than expected, including higher operating expenses, weak cash flow, and a considerable net loss. The competitive environment for the Brazilian wireless sector remains a problem, and it is the main reason why the company has been unable to translate competitive advantages into profits.
Finally, a less benign monetary policy in Brazil is also a short-term concern. Presently, TIM Participações S.A. is trading at an enterprise value to EBITDA (a common valuation metric for the wireless industry) of 5.3x the 2008 estimated EBITDA. We believe the company does not deserve such a high valuation. It has been posting weak results, mainly considering the still competitive business environment in the Brazilian wireless sector and the recent 3G licenses auction result.
In our opinion, the current valuation seems to be excessive compared to other Brazilian telecom operators, particularly Vivo (VIV), that has been posting improving results and much better operating and EBITDA margins. Additionally, after the weak performance during the first quarter 2008 the current P/E also seems excessive.
We believe the current valuation of TSU is not attractive at all, mainly if compared to other international wireless operators. All considered, we are changing our recommendation on TSU from Hold to Sell. Our target price is US$28, which is based on an EV/20007 estimated EBITDA multiple around 4.7x, in-line with the industry median.
Read the full analyst report on TSU.
Read the full analyst report on VIV.
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