Rating Update: Stock Rating C-Low Neutral (11/7/19)-Tim Participacoes SA (TSU).

out_logo_500#31440.jpg

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.
out_plist#31440.jpg

INVESTMENT RATING

out_map1#31440.jpg

TSU’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a modest Value Builder.

Tim Participacoes has a current Value Trend Rating of C (Low Neutral).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. Tim Participacoes has a neutral Appreciation Score of 48 and a neutral Power Rating of 45, leading to the Low Neutral Value Trend Rating.

Tim Participacoes’ stock is selling at targeted value. The current stock price of $15.24 compares to targeted value 12 months forward of $16.
This neutral appreciation potential results in an appreciation score of 48 (52% of the universe has greater appreciation potential.)
out_pt#31440.jpg

Tim Participacoes has a Power Rating of 45. (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 neutral. An offsetting factor is the recent trend in TSU’s earnings estimates has been favorable.

INVESTMENT PROFILE

TSU’s financial strength is above average. Financial strength rating is 68.
out_pfit1#31440.jpg

Relative to the S&P 500 Composite, Tim Participacoes SA has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that TSU is normal risk. Low financial leverage is a positive for TSU. Relative weaknesses include: low forecasted profitability, and high earnings variability. TSU’s valuation is low: high dividend yield, low 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. The stock has just risen above its 200 day moving average.

ALERTS

Recent extremely meaningful positive changes in investment behavior have benefitted Tim Participacoes SA (NYSE: TSU): its shorter term price trend turned up, and the stock’s recent price rise disrupted its longer term downtrend.
Notable positive changes in fundamentals have recently occurred for Tim Participacoes SA (NYSE: TSU). Positive developments: the consensus estimate for December, 2020 increased significantly, the consensus estimate for December, 2019 increased significantly, and significant quarterly earnings acceleration occurred. Negative development: significant quarterly sales deceleration occurred.
The stock is currently rated C.
On 11/7/19, Tim Participacoes SA (NYSE: TSU) stock suffered a major decline of -18.8%, closing at $1.55. This decline was accompanied by normal trading volume. The stock has performed in line with the market over the last nine months and has risen 5.5% during the last week.

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 removed -$1,164 million (-69% of EBITDA) while equity investors received -$1,024 million (-61% of EBITDA).
out_cflow.1#31440.jpg

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).
out_cflow.2#31440.jpg

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 very significantly since 2009 accelerating very sharply after the 2016 level.
This very significant improvement was due to very strong positive trend in pretax operating return and strong 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.
More than offsetting this trend, however, pretax margin enjoyed a very strong overall uptrend that accelerated very sharply from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
out_dpgrfs3#31440.jpg

TSU’s return on equity is upper quartile (18.6%) for the four quarters ended June, 2019.
out_dpgrfs3.2#31440.jpg
Operating performance (pretax return on assets) is upper quartile (10.9%) reflecting asset turnover that is at the lower quartile (0.45X) and upper quartile pretax margin (24.1%).
Tax “keep” rate (income tax management) is at the upper quartile (97.5%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is at the lower quartile (1.75X).

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 and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -12.0% per year. (More recently it has been -0.1%.)

Total asset growth has been -6.9% per year.

Annual E.P.S. growth has been -4.8% per year. (More recently it has been 35.5%.)

Equity growth has been -5.8% per year. (More recently it has been 5.7%.)

Tim Participacoes SA’s consensus growth rate forecast (average of Wall Street analysts) is 7.8% — substantially above the average of the historical growth measures.
out_growthgrf#31440.jpg

Relative to the Tim Participacoes Sa Peer Group, Tim Participacoes’ historical growth measures are generally lower quartile. E.P.S. growth (-4.8%) has been below median. Total asset growth (-6.9%) has been lower quartile. Revenue growth (-12.0%) has been lower quartile. Equity growth (-5.8%) has been lower quartile.

Consistent with this pattern, consensus growth forecast (7.8%) is also at the lower quartile.
out_growthgrf.2#31440.jpg

PRICE HISTORY

Over the full time period, Tim Participacoes SA’s stock price performance has been variable and significantly below market. Between January, 2009 and November, 2019, Tim Participacoes SA’s stock price rose +82%; relative to the market, this was a -51% 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%.
out_price#31440.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of -5.0% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -5.0% is below median relative to Tim Participacoes SA Peer Group.

Current 5-year total return performance of -10.5% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -10.5% relative to S&P 500 Composite, Tim Participacoes’ total return performance is lower quartile relative to Tim Participacoes SA Peer Group.
out_quartret#31440.jpg

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 lower quartile. Ratio of enterprise value/revenue is near the lower quartile. Ratio of enterprise value/assets is near the lower quartile. Price/equity ratio is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
out_tradv#31440.jpg

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 2.11X to 1.66X. If TSU’s ratio of enterprise value/revenue were to fall to 1.66X, its stock price would be lower by $-4 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 2.11X to 2.46X. If TSU’s ratio of enterprise value/revenue were to rise to 2.46X, its stock price would increase by $3 from the current level of $15.

VALUE TARGETS

TSU’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a modest Value Builder.
Tim Participacoes SA’s current Price Target of $16 is little changed from the current price of $15.24.
This neutral appreciation potential results in an appreciation score of 48 (52% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 48, the neutral Power Rating of 45 contributes to an Value Trend Rating of C.
out_vc#31440.jpg

Tim Participacoes SA’s current Price Target is $16 (+72% from the 2018 Target of $9 and +5% from the 11/07/19 price of $15.24). This dramatic rise in the Target is the result of a -3% decrease in the equity base and a +77% increase in the price/equity multiple. The forecasted decline in growth has a slight negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
out_wc.1#31440.jpg
out_wc.2#31440.jpg

PTR’s return on equity forecast is 9.7% — above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is above the 2010 low of 6%.

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 7.2% — slightly above recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2010 and 2018. The current forecast is steady at the 2011 peak of 8.4%.
out_vc.2#31440.jpg
At Tim Participacoes SA’s current price of $15.24, investors are placing a positive value of $4 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 $16 is based on these forecasts and reflects an estimated value of existing assets of $14 and a value of future investments of $2.

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.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.