Rating Update: Stock Rating F-Lowest (9/9/19)-Tim Participacoes SA (TSU).

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BUSINESS

TIM Participacoes S.A. provides telecommunication services in Brazil. The company offers mobile voice and data, broadband Internet access, value-added, and other telecommunications services and products. It provides prepaid and postpaid services; value-added services, including short message services or text messaging, and multimedia messaging services; and insurance services. The company also sells various mobile handsets and accessories through its dealer network, which includes its own stores, exclusive franchises, and authorized dealers; and offers co-billing services to other telecommunication service providers.
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INVESTMENT RATING

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TSU’s future returns on capital are forecasted to be below the cost of capital. Accordingly, the company is expected to continue to be a Value Eraser.

Tim Participacoes has a current Value Trend Rating of F (Lowest Rating).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Tim Participacoes has a neutral Power Rating of 46 but a poor Appreciation Score of 15, leading to the Lowest Value Trend Rating.

Tim Participacoes’ stock is selling significantly above targeted value. The current stock price of $14.04 compares to targeted value 12 months forward of $8.
Tim Participacoes’ low appreciation potential results in an appreciation score of 15 (85% of the universe has greater appreciation potential.)
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Tim Participacoes has a Power Rating of 46. (This neutral Power Rating indicates that TSU’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: is in a slightly weakened position current; and recent price action has been slightly unfavorable. An offsetting factor is the recent trend in TSU’s earnings estimates has been extremely favorable.

INVESTMENT PROFILE

TSU’s financial strength is high. Financial strength rating is 73.
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Relative to the S&P 500 Composite, Tim Participacoes SA has significant Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that TSU is normal risk. Low financial leverage is a positive for TSU. Relative weaknesses include: low forecasted profitability, low historical profitability, low expected growth, low historical growth, and high earnings variability. TSU’s valuation is moderate: moderate dividend yield, high P/E ratio, and low price/book ratio. TSU has unusually low market capitalization.

CURRENT SIGNALS

Tim Participacoes’ current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.

Tim Participacoes’ current technical position is mixed. The stock price is in a 2.1 month up move. The stock has appreciated 26.2% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Significant negative changes in fundamentals have recently occurred for Tim Participacoes SA (NYSE: TSU). Negative developments: significant quarterly sales deceleration occurred, the consensus estimate for December, 2019 decreased significantly, and the consensus estimate for December, 2020 decreased significantly. Positive development: significant quarterly earnings acceleration occurred.
The stock is currently rated F.
Tim Participacoes SA (NYSE: TSU) stock suffered a major decline of -11.3% on 9/9/19. The shares closed at $0.55. However, below average trading volume at 78% of normal accompanied the decline. The stock has declined -3.8% during the last week and has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, Tim Participacoes experienced a very significant reduction in cash of -$645 million (-57%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$1,678 million. Non-operating uses consumed -$31 million (-2% of EBITDA). Cash taxes contributed +$141 million (+8% of EBITDA). Re-investment in the business amounted to -$244 million (-15% of EBITDA). On a net basis, debt investors withdrew -$1,164 million (-69% of EBITDA) while equity investors pulled out -$1,024 million (-61% of EBITDA).
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Tim Participacoes’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Tim Participacoes Sa Peer Group as well. (Since 2015 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, Tim Participacoes was in the top quartile and second quartile. Currently, Tim Participacoes is slightly above median at -2% of EBITDA (-$31 million).

Tim Participacoes’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Tim Participacoes Sa Peer Group as well. (Since 2015 Cash Taxes, %EBITDA has experienced very sharp improvement.) In most years, Tim Participacoes was in the top quartile. Currently, Tim Participacoes is upper quartile at +8% of EBITDA (+$141 million).

Tim Participacoes’ Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Tim Participacoes Sa Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Tim Participacoes was in the third quartile and second quartile. Currently, Tim Participacoes is slightly below median at -15% of EBITDA (-$244 million).

Tim Participacoes’ Debt Investors, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Tim Participacoes Sa Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Tim Participacoes was in the second quartile and top quartile. Currently, Tim Participacoes is lower quartile at -69% of EBITDA (-$1,164 million).

Tim Participacoes’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Tim Participacoes Sa Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Tim Participacoes was in the second quartile and lower quartile. Currently, Tim Participacoes is substantially below median at -61% of EBITDA (-$1,024 million).

Tim Participacoes’ Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Tim Participacoes Sa Peer Group. (Since 2016 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Tim Participacoes was in the third quartile and second quartile. Currently, Tim Participacoes is lower quartile at -38% of EBITDA (-$645 million).
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Tim Participacoes’ Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Tim Participacoes Sa Peer Group. (Since 2015 Cash, %Revenue has experienced a very sharp decline.) In most years, Tim Participacoes was in the second quartile. Currently, Tim Participacoes is at median at +11%.

PROFITABILITY

TSU’s return on equity has improved significantly since 2009 accelerating very sharply after the 2016 level.
This significant improvement was due to strong positive trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of TSU’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
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TSU’s return on equity is upper quartile (12.0%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is above median (4.9%) reflecting asset turnover that is substantially below median (0.46X) and upper quartile pretax margin (10.7%).
Tax “keep” rate (income tax management) is upper quartile (132.8%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is substantially below median (1.85X).

GROWTH RATES

There are no significant differences between Tim Participacoes SA’s longer term growth and growth in recent years.
Tim Participacoes SA’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -12.2% per year.

Total asset growth has been -7.2% per year.

Annual E.P.S. growth has been -12.2% per year.

Equity growth has been -6.3% per year.

Tim Participacoes SA’s consensus growth rate forecast (average of Wall Street analysts) is 5.9% — substantially above the average of the historical growth measures.
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Relative to the Tim Participacoes Sa Peer Group, Tim Participacoes’ historical growth measures are consistently lower quartile. Revenue growth (-12.2%) has been lower quartile. Total asset growth (-7.2%) has been lower quartile. E.P.S. growth (-12.2%) has been lower quartile. Equity growth (-6.3%) has been lower quartile.

Consistent with this pattern, consensus growth forecast (5.9%) is also lower quartile.
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PRICE HISTORY

Over the full time period, Tim Participacoes SA’s stock price performance has been variable and significantly below market. Between November, 2008 and September, 2019, Tim Participacoes SA’s stock price rose +37%; relative to the market, this was a -59% loss. Significant price moves during the period: 1) January, 2016 – April, 2018: +188%; 2) June, 2014 – January, 2016: -73%; and 3) March, 2009 – August, 2011: +321%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -1.6% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through July, 2019 of -1.6% is slightly above median relative to Tim Participacoes SA Peer Group.

Current 5-year total return performance of -8.2% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of -8.2% relative to S&P 500 Composite, Tim Participacoes’ total return performance is lower quartile relative to Tim Participacoes SA Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TSU’s overall valuation is quite low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is below median. Ratio of enterprise value/revenue is near the lower quartile. Ratio of enterprise value/assets is near the lower quartile. Price/earnings ratio is lower quartile. The lowest factor, the price/equity ratio, is lower quartile.
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Tim Participacoes has a very large value gap compared to the median. For TSU to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.04X to 1.67X. If TSU’s ratio of enterprise value/revenue were to fall to 1.67X, its stock price would be lower by $-3 to $11.
For TSU to achieve upper quartile valuation relative to the Tim Participacoes SA Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.04X to 2.17X. If TSU’s ratio of enterprise value/revenue were to rise to 2.17X, its stock price would increase by $1 from the current level of $14.

VALUE TARGETS

TSU’s future returns on capital are forecasted to be below the cost of capital. Accordingly, the company is expected to continue to be a Value Eraser.
Tim Participacoes SA’s current Price Target of $8 represents a -42% change from the current price of $14.04.
Tim Participacoes’ low appreciation potential results in an appreciation score of 15 (85% of the universe has greater appreciation potential.)
With this low Appreciation Score of 15, the neutral Power Rating of 46 results in an Value Trend Rating of F.
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Tim Participacoes SA’s current Price Target is $8 (-12% from the 2018 Target of $9 and -42% from the 09/09/19 price of $14.04). This slight fall in the Target is the result of a -5% decrease in the equity base and a -7% decrease in the price/equity multiple. Each of the Value Drivers contributed to this decline in the price/equity multiple. The forecasted decline in growth has a slight negative impact on the multiple. The forecasted increase in cost of equity also has a slight negative impact as did the decline in return on equity.
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PTR’s return on equity forecast is 2.3% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2011 peak of 13%.

PTR’s growth forecast is 3.0% — above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 18%.

PTR’s cost of equity forecast is 5.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2010 and 2018. The current forecast is below the 2011 peak of 8.4%.
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At Tim Participacoes SA’s current price of $14.04, investors are placing a positive value of $3 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of -2.0% per year, and a return on equity of 4.0% versus a cost of equity of 5.0%.
PTR’s 2020 Price Target of $8 is based on these forecasts and reflects an estimated value of existing assets of $42 and a value of future investments of $-34.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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