Analytical Report – TIM SA – WSE:TIM
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We maintain our opinion that TIM is a good investment for difficult times in the economy. In our opinion, a proven business model (asset light), a safe balance sheet (net cash) and a competent Management Board allow us to expect that the company will also use the coming economic turmoil to further strengthen its market position. We expect a deterioration in financial results in 2023-24, but cash flows should remain stable. This will be conducive to maintaining transfers to shareholders. 3LP's ambitious development path may weigh on consolidated results. Bearing in mind the deterioration of the macroeconomic environment and the worse results of the logistics business, we have lowered our forecasts for 2023-24. Lower forecasts, changes in the parameters of the DCF model and valuation ratios of companies from the comparative group resulted in a reduction in the final valuation. The determined current value of the company (PLN 37.9/share) still gives a large growth potential.
Slowdown is an opportunity for TIM We expect a decline in activity in the renovation and construction industry and industrial investments in the coming quarters. As a consequence, TIM's sales and margin will be lower. In our opinion, the company is well prepared for the downturn, both financially and operationally. In addition, the company's board of directors has great competence in running a business in difficult market conditions. We hope to strengthen TIM's market position at the expense of smaller competitors.
Skillful management of working capital
The company's management board pursues a very conservative liquidity management policy. Active warehouse management and quick adjustment of its level to forecasted sales is a characteristic feature of TIM. We believe that such an approach should work primarily in more difficult market conditions. Given the reduced sales dynamics, we expect a decrease in the value of inventories and freeing up some cash resources.
Transfers to shareholders maintained
TIM is a dividend company and we assume that it will remain so in the future. Currently, we identify two directions of transfer of funds to shareholders: dividend and buyback. The financial capacity allows us to maintain both of these streams in the years 2022-2024, and the recently launched share buyback should offset the projected decrease in the value of the dividend paid out.
The development of the logistics segment costs money
The 3LP company, despite an unsuccessful attempt to issue shares in order to obtain financing for new projects, did not stop the dynamic development. The increase in warehouse space will generate an increase in costs, which will be fully covered by revenues only after some time. We expect that in 2023-2024 the subsidiary responsible for the logistics business may generate negative results at the net level, thus affecting the reduction of consolidated profit.
We estimated the value of TIM shares based on the following valuation methods: DCF (in total for the entire group: PLN 31.9) and comparative (separately for the commercial business: PLN 33.8 and logistics: PLN 8.0), which, after weighing the above valuations, allowed set the present value at PLN 37.9.
VALUATION
We calculated the value of one share of TIM SA as the average of the comparative valuation and DCF, with a weight of 50% each. On this basis, we set the current value of the shares at PLN 37.9. With the comparative approach, we valued the commercial and logistics business separately (in both cases using the ratio analysis), and the sum of the obtained values contributed to the total value. When selecting the group of companies for the comparative analysis, in the case of the commercial segment, we decided on domestic companies (operating in the wholesale and / or e-commerce segment) and foreign companies (distribution of products from the electrical engineering segment), and in the case of the logistics segment, due to the lack of equivalents on the WSE, we chose foreign entities.
The lower valuation compared to our previous report is mainly due to the change in the parameters of the DCF model and lower ratios for peer companies. At the same time, we raised our forecasts for both the retail segment (TIM SA) and the logistics segment (3LP), which partially compensated for the decrease in valuation. Changes in forecasts are described later in the report.
DCF VALUATION
Assumptions:
- We rely on our own forecasts of consolidated results presented in this report,
- The value of cash flows discounted as at the date of publication of the report,
- Net debt as at 31/12/2021 in the amount of PLN 73 million (including lease liabilities under IFRS 16),
- Long-term growth rate after the forecast period equal to 0%.
- Share of equity in financing assets at the level of 80%.
- Effective tax rate of 20%.
- Risk-free rate of 6.8% (previously 6.7%), risk premium of 7.2% (previously 5.1%), beta of 1.0 (unchanged).
Analyst: Michał Sztabler Equity michal.sztabler@noblesecurities.pl +48 22 244 13 03
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