telecom italia (tlit.mi) greater uncertainty and ...€¦ · net debt/ebitda (x): 2.9 m&a rank:...

Key Data __________________________________

GS Forecast ________________________________

GS Factor Profile ____________________________

Source: Company data, Goldman Sachs Research estimates. See disclosures for details.

Marketcap:€11.7bn/$13.2bn

Enterprisevalue:€42.2bn/$47.9bn

3mADTV:€61.6mn/$71.0mn

Italy

EuropeTelecoms

Netdebt/EBITDA(X):2.9

M&ARank:3

12/17 12/18E 12/19E 12/20E

Revenue(€mn)New 19,828.0 19,350.3 19,325.7 19,363.1

Revenue(€mn)Old 19,828.0 19,157.9 19,113.8 19,207.0

EBIT(€mn) 3,291.0 1,767.0 4,149.2 4,285.9

EPS(€)New 0.05 0.01 0.08 0.09

EPS(€)Old 0.05 0.07 0.09 0.10

P/E(X) 15.0 71.5 6.9 6.6

Dividendyield(%) 0.0 0.0 0.0 3.5

CROCI(%) 12.2 324.5 274.2 236.9

EV/GCI(X) 20.3 14.3 11.8 10.1

6/18 9/18 12/18E --

EPS(€) 0.02 (0.07) 0.04 --

TLIT.MIrelativetoEuropeCoverage

TLIT.MIrelativetoEuropeTelecoms

Growth

FinancialReturns

Multiple

Integrated

Percentile 20th 40th 60th 80th 100th

Weakening macro, a surprise CEO change and shareholder disputes have raised uncertainty around the TI investment case. Despite our greater confidence in underlying operational trends (laid out in this report), we now see risks as more evenly balanced. Notably, the positive of a collaboration with Enel Open Fiber could be largely offset by a relatively modest rise in the cost of capital. With 2018E net debt/equity now 2.3x, share price volatility is implicitly higher and TI’s valuation less compelling. We downgrade to Neutral.

Negatives: Greater uncertainty and volatility - a new CEO creates uncertainty over strategic direction (notably cost-cutting) and the risk remains of Iliad launching competing fixed-line services. In addition, our economists forecast Italy flirting with recession, albeit briefly, in 2019. With limited scope for TI to meaningfully reduce its higher gearing, in our view, a 40 bp rise in the cost of capital would imply a >30% lower share price, all else equal.

Positives: Improving underlying operations and M&A – recent updates support our above-consensus view that TI enjoys the fastest-growing fixed-broadband market in Europe. We argue that this offsets even a worst-case scenario for Iliad’s June mobile launch (which looks to have been avoided), and Enel’s fibre overbuild. Italian authorities are reportedly building a framework for TI and Enel Open Fiber to collaborate, which could drive a re-rating, potentially doubling the share price we estimate (albeit visibility on this is low).

Valuation – we lower our ord target price to €0.60 from €0.80 (pref €0.55 from €0.70), reflecting higher 5G spectrum costs and cost of capital. TI’s valuation discount to the sector reflects its Italian exposure and higher gearing. Key risks: Open Fiber collaboration and weakening Italian macro - these could offset each other.

TLIT.MI 12mPriceTarget:€0.60 Price:€0.58 Upside:4.1%

TLITn.MI 12mPriceTarget:€0.55 Price:€0.50 Upside:10.0%

Telecom Italia (TLIT.MI)

Greater uncertainty and volatility, risks more evenly balanced; down to Neutral

27 November 2018 | 10:48PM GMT

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Andrew Lee +44(20)7774-1383 | [email protected] Goldman Sachs International

Nicola Gifford +44(20)7552-2936 | [email protected] Goldman Sachs International

Michael Bishop +44(20)7552-4248 | [email protected] Goldman Sachs International

Joshua Mills, CFA +44(20)7051-1890 | [email protected] Goldman Sachs International

Neutral

https://research.gs.com/

http://www.gs.com/research/hedge.html

mailto:[email protected]?subject=Greater%20uncertainty%20and%20volatility%2C%20risks%20more%20evenly%20balanced%3B%20down%20to%20Neutral




Ratios & Valuation _______________________________________

Growth & Margins (%) ____________________________________

Price Performance _______________________________________

Source: FactSet. Price as of 27 Nov 2018 close.

12/17 12/18E 12/19E 12/20E

EV/sales(X) 2.3 2.2 2.1 2.1

EV/EBITDAR(X) 5.1 4.4 4.0 3.7

EV/EBITDA(X) 5.7 4.8 4.4 4.1

EV/EBIT(X) 10.3 13.9 7.4 6.8

P/E(X) 15.0 71.5 6.9 6.6

Dividendyield(%) 0.0 0.0 0.0 3.5

CROCI(%) 12.2 324.5 274.2 236.9

ROIC(%) 6.3 3.7 6.9 7.0

ROA(%) 4.5 2.8 5.2 5.4

Daysinventoryoutst,sales 5.2 5.5 5.5 5.5

Assetturnover(X) 1.4 1.4 1.4 1.4

Netdebt/equity(%) 100.3 98.8 86.5 75.3

EBITDAinterestcover(X) 5.2 6.5 7.2 7.2

Capex/D&A(%) (126.7) (72.6) (87.8) (88.8)

Cashflowcoverofdiv.(X) NM NM NM 25.2

FCFcoverofdividends(X) -- -- -- 8.1

12/17 12/18E 12/19E 12/20E

Totalrevenuegrowth 4.2 (2.4) (0.1) 0.2

EBITDAgrowth (2.6) 4.5 5.6 1.7

EBITgrowth (11.6) (46.3) 134.8 3.3

Netinc.growth (35.6) (84.9) 936.4 4.2

EPSgrowth (35.6) (84.9) 936.4 4.2

DPSgrowth NM NM NM NM

TLIT.MI(€) FTSEWorldEurope(EUR)

Jan-18 Apr-18 Jul-18 Oct-18

0.4

0.6

0.8

1.0

1.2

1.4

420

440

460

480

500

520

3m 6m 12m

Absolute (4.0)% (20.8)% (18.7)%

Rel.totheFTSEWorldEurope(EUR) 2.5% (13.7)% (12.3)%

27 November 2018 2

Goldman Sachs

Income Statement (€ mn) __________________________________

Balance Sheet (€ mn) _____________________________________

Cash Flow (€ mn) ________________________________________

Source: Company data, Goldman Sachs Research estimates.

12/17 12/18E 12/19E 12/20E

Totalrevenue 19,828.0 19,350.3 19,325.7 19,363.1

Totaloperatingexpenses (12,038.0) (11,210.1) (10,731.6) (10,623.7)

R&D -- -- -- --

Otheroperatinginc./(exp.) -- -- -- --

EBITDA 7,790.0 8,140.2 8,594.2 8,739.4

Depreciation&amortisation (4,499.0) (6,373.2) (4,444.9) (4,453.5)

EBIT 3,291.0 1,767.0 4,149.2 4,285.9

Netinterestinc./(exp.) (1,495.0) (1,250.5) (1,187.2) (1,211.3)

Income/(loss)fromassociates (19.0) -- -- --

Profit/(loss)ondisposals -- -- -- --

Totalothernet -- -- -- --

Pre-taxprofit 1,777.0 516.5 2,962.0 3,074.6

Provisionfortaxes (490.0) (180.8) (1,036.7) (1,076.1)

Minorityinterest (166.0) (166.0) (166.0) (166.0)

Preferreddividends -- -- -- --

Netinc.(pre-exceptionals) 1,121.0 169.7 1,759.3 1,832.5

Post-taxexceptionals -- -- -- --

Netinc.(post-exceptionals) 1,121.0 169.7 1,759.3 1,832.5

EPS(basic,pre-except)(€) 0.05 0.01 0.12 0.12

EPS(basic,post-except)(€) 0.05 0.01 0.08 0.09

Wtdavgsharesout.(basic)(mn) 21,067.2 21,067.2 21,067.2 21,067.2

Leasepayments (1,166.0) (1,166.0) (1,166.0) (1,166.0)

Taxrate(%) 27.6 35.0 35.0 35.0

Commondividendsdeclared 0.0 0.0 0.0 300.8

DPS(€) 0.00 0.00 0.00 0.02

12/17 12/18E 12/19E 12/20E

Cash&cashequivalents 3,575.0 2,134.5 1,228.7 1,623.8

Accountsreceivable 4,959.0 4,959.0 4,959.0 4,959.0

Inventory 290.0 290.0 290.0 290.0

Othercurrentassets 1,507.0 1,507.0 1,507.0 1,507.0

Totalcurrentassets 10,331.0 8,890.5 7,984.7 8,379.8

NetPP&E 14,209.0 14,443.9 14,023.2 13,703.6

Netintangibles 36,654.0 34,675.1 34,554.4 34,376.7

Totalinvestments 1,768.0 1,768.0 1,768.0 1,768.0

Otherlong-termassets 5,814.0 6,455.2 6,299.2 6,259.8

Totalassets 68,776.0 66,232.6 64,629.6 64,487.8

Accountspayable 7,513.0 6,813.0 6,263.0 5,763.0

Short-termdebt 4,756.0 4,756.0 4,756.0 4,756.0

Othercurrentliabilities 112.0 112.0 112.0 112.0

Totalcurrentliabilities 12,381.0 11,681.0 11,131.0 10,631.0

Long-termdebt 28,108.0 26,291.3 23,745.5 22,478.6

Otherlong-termliabilities 4,504.0 4,504.0 4,504.0 4,604.0

Totallong-termliabilities 32,612.0 30,795.3 28,249.5 27,082.6

Totalliabilities 44,993.0 42,476.3 39,380.5 37,713.6

Preferredshares -- -- -- --

Totalcommonequity 21,557.0 21,364.3 22,691.1 24,050.2

Minorityinterest 2,226.0 2,392.0 2,558.0 2,724.0

Totalliabilities&equity 68,776.0 66,232.6 64,629.6 64,487.8

Capitalisedleases 1,450.0 1,450.0 1,450.0 1,450.0

Capitalemployed 56,647.0 54,803.6 53,750.6 54,008.8

Adjforunfundedpensions&GW (52,944.6) (52,944.6) (52,944.6) (52,944.6)

12/17 12/18E 12/19E 12/20E

Netincome 1,121.0 169.7 1,759.3 1,832.5

D&Aadd-back (4,499.0) (6,373.2) (4,444.9) (4,453.5)

Minorityinterestadd-back (166.0) (166.0) (166.0) (166.0)

Net(inc)/decworkingcapital (126.0) (700.0) (550.0) (500.0)

Otheroperatingcashflow (691.0) (952.0) (1,010.8) (1,166.7)

Cashflowfromoperations 6,973.0 6,488.2 7,033.4 7,072.7

Capitalexpenditures (5,701.0) (4,629.1) (3,903.6) (3,956.2)

Acquisitions -- -- -- --

Divestitures 0.0 -- -- --

Others 21.0 0.0 0.0 0.0

Cashflowfrominvesting (5,680.0) (4,629.1) (3,903.6) (3,956.2)

Dividendspaid(common&pref) (235.0) (232.5) (302.5) (343.4)

Inc/(dec)indebt 0.0 0.0 0.0 0.0

Otherfinancingcashflows (1,194.0) (1,250.5) (1,187.2) (1,111.3)

Cashflowfromfinancing (1,429.0) (1,482.9) (1,489.7) (1,454.6)

Totalcashflow (389.0) (1,440.5) (905.8) 395.0

Reinvestmentrate(%) 80.3 64.4 51.5 52.2

Telecom Italia (TLIT.MI) Rating since Nov 27, 2018Neutral

Telecom Italia (TLIT.MI)

Executive summary 4

Valuation: Gearing risks and uncertainty seemingly priced in 7

A closer look at the numbers - our summary financials and FCF stack 14

Catalysts: What could make us more positive or negative? 16

Operations: Recent updates suggest underlying trends are improving and better than expected 21

Changes to estimates 28

Summary Financials 29

Disclosure Appendix 32

27 November 2018 3

Goldman Sachs Telecom Italia (TLIT.MI)

Table of Contents

Executive summary

2018 has brought a series of negatives for TI, including a heavily inflated Italian spectrum auction and Iliad’s mobile launch in June. Italian macro and political uncertainty has compounded these, driving the shares down c.25% ytd (ords). Added to this, November brought an unexpected change of CEO.

In this report, we explain our confidence in the improving outlook and visibility for

TI’s domestic operational trends...

Visibility on the Iliad impact in mobile has improved, and Enel overbuild risk in fixed remains nascent, at least for now. We continue to argue that Italy being the fastest-growing broadband market in Europe, together with cost-cutting, can offset even a worst-case scenario (Iliad’s mobile impact, which looks to have been avoided, and Enel pain). If cost-cutting execution can be maintained, this should help TI Italy grow its EBITDA in 2019. We believe that all else equal, this could drive a first round of consensus earnings upgrades for a decade. Our 2019/20 EBITDA forecasts are +1%/+5% vs. Bloomberg consensus - although a macro downturn would undermine this. Growing speculation of a collaboration with Enel Open Fiber would be a significant positive in our view.

...but also lay out TI’s sensitivity and exposure to meaningful downside risks

Potentially, the new CEO could adjust financial and strategic targets. Furthermore, in a macro downturn in Italy, the pressure from price discounting competition (such as in mobile) would likely be exacerbated, with the scope for higher fixed-broadband penetration mitigated. With TI’s 2018E net debt/equity ratio at 2.3x, its share price volatility is implicitly higher and the impact of a rise in the cost of capital/de-rating notionally all the more material. Therefore, while we are more positive on the elements of the TI investment over which we have good visibility, the risk from harder-to-forecast drivers has also increased.

We reflect stock-specific and macro uncertainties (and a higher spectrum auction result) in our lowered price targets. Below, we show how the risks to the investment case appear well-balanced, while noting that visibility on many of them is limited. With c.5% upside we downgrade TI to Neutral. Since being added to the Buy List on March 8, 2018, Telecom Italia’s ord/pref shares are down 30.4%/31.3% vs. the FTSE World Europe’s 4.9% decline. We believe TI’s relative underperformance is a result of the macro/political trends seen this year in Italy, higher 5G spectrum costs and management change and associated uncertainty.

27 November 2018 4


TI risks well-balanced As noted on the front page, we view the Italian macro situation as the biggest negative risk (closely followed by uncertainty created by senior management change). The potential collaboration with Enel Open Fiber is the biggest positive risk in our view. However, we note that these could easily offset one another.

Exhibit 1: Rising Italian macro risk, higher spectrum costs and lower EBITDA estimates (mainly due to TI’s 28-day billing problems explained later) factored into our lower target price Our 12-month TI price target change (ords)

€ 0.80

€ 0.60

€ 0.06

€ 0.06

€ 0.08

€ -

€ 0.10

€ 0.20

€ 0.30

€ 0.40

€ 0.50

€ 0.60

€ 0.70

€ 0.80

€ 0.90

Old TP Spectrum auction Cost of capital Lower EBITDA New TP

Higher cost of capital reflecting rising Italian bond yields and higher ERP.

Lower EBITDA mainly due to 28-day billing impact (c.150mn p.a.)

Italian spectrum auction cost TI € 2.4bn. Spectrum bids were 2x ahead of reserve price...

Source: Goldman Sachs Global Investment Research.

Exhibit 2: TI’s valuation is sensitive to small changes in its WACC Increase in WACC and implied change in valuation (based on our ROIC valuation approach)

Exhibit 3: An Open Fiber collaboration driving higher growth and a re-rating to a c.6.2% unlevered 2019E FCF yield could boost the share price by c.70% we estimate Unlevered FCF yield (2019E) vs. EBITDA CAGR (19-22E), current price

Increase in WACC Change in share price

20bps -15%

40bps -30%

60bps -40%

80bps -50%

100bps -60%

3%

4%

5%

6%

7%

8%

-1.0% 1.0% 3.0% 5.0%

Unl

ever

ed F

CF

yiel

d 20

19E,

cur

rent

EBITDA CAGR 19-22E

ATCA.AS BT.L

ELISA.HE

KPN.AS

NOS.LS

O2Dn.DE

OBEL.BR ORAN.PA PROX.BR

SCMN.S

SRCG.S

TALK.L

TEF.MC TEL.OL

TLIT.MI

TELIA.ST

TNET.BR

TLIT.MI (w/Enel)

Implies c.70% share price increase

Source: Goldman Sachs Global Investment Research. Green = low complexity, Orange = medium complexity, Red = high complexity.

Source: FactSet, Goldman Sachs Global Investment Research.

27 November 2018 5


Downside risks

Italian macro uncertainty – Italy represents 80% of TI Group’s EBITDA, and our n

economists see risks that Italian GDP could briefly turn negative in 2019. This could drive consensus earnings cuts, like those we saw during the Southern European slowdown earlier in the decade.

Higher leverage and a debt/equity ratio – this raises share price volatility, all else n

equal. If TI’s WACC increases by 40 bp (we estimate the shares imply a 30 bp rise over the last six months), we estimate that its shares should fall by c.30%. While we forecast TI de-leveraging, from 3.2x net debt/EBITDA today, to 2.4x by 2021, as we show in our valuation section, we see limited scope to materially reduce debt in the near term.

CEO change - this creates uncertainty on strategic direction and the financial n

outlook (particularly cost-cutting near term, and the scope for capex/sales to fall from 30% to below 20% in 2019, as currently guided).

Incremental risk of Iliad launching fixed-line services – we estimate that this n

could hit TI Group’s 2020E EBITDA by 3%-5%.

Upside risks

Improving operational visibility and trends: n

Mobile - an improving competitive environment as Iliad’s impact, while initiallyo

material, starts to abate.

Fixed-line – Italy remains the fastest-growing fixed-line broadband market ino

Europe, having recently re-accelerated following the abatement of atemporary headwind. This is underestimated by consensus in our view.

Opportunity to collaborate with Enel Open Fiber to remove overbuild risk – n

press speculation (e.g. Reuters) has grown, but we do not know any of the key details around the potential structure of any collaboration. However, our top-down analysis of the opportunity shows that the boost to TI’s growth outlook (and subsequent potential re-rating) could raise its valuation by c.70% (all else equal and based on our existing valuation methodology).

Potential to share 5G network roll-out costs - press reports (e.g. Bloomberg) n

suggest that this could be with Vodafone. This could further the potential to reduce TI Group’s capex intensity and boost its FCF generation.

Italian stocks are already trading at their widest discount to European stocks n

in 20 years – however, we note that with its higher than average exposure to Italy, TI’s correlation to the Italian index could become even more important than stock-specific fundamentals.

27 November 2018 6


https://uk.reuters.com/article/italy-broadband/update-1-italy-to-offer-regulated-returns-for-single-broadband-company-draft-idUKL8N1XR37X

https://www.bloomberg.com/news/articles/2018-11-12/vodafone-telecom-italia-are-said-to-discuss-5g-network-deal

Valuation: Gearing risks and uncertainty seemingly priced in

We lower our 12-month target prices to €0.60/€0.55 (from €0.80/€0.70) reflecting:

Higher 5G spectrum costs. n

A higher cost of capital, given TI’s increased gearing and macro uncertainty. n

Lower earnings estimates, reflecting the dent to EBITDA from the 28-day billing n

issues in 1H18 (which have now abated).

Our price targets are based on an unchanged 12-month ROIC-based methodology. We reflect in our revised price target (ords) a €0.06/share impact from spectrum costs, calculated as the incremental NPV auction value per share which TI bid over and above our original estimate at the pre-Italian spectrum auction.

We also publish a new SoTP valuation (Exhibit 6) as a cross-check for our core valuations. This shows a relatively low valuation for TI’s retail assets (stripping out our estimate of the value of its fixed-line network and the valuation of its mobile tower assets, INWIT) to reflect lower returns and greater uncertainty on the outlook for this business. We would also note that while a potential sales process is ongoing for the Persidera and Sparkle assets, this would not meaningfully lower TI’s net debt position (assuming sale prices in line with the valuations in our SOTP), which currently (2018E) stands at 2.3x debt/equity. We expect net debt/EBITDA to decline by almost a turn over the next four years, which should support its valuation in our view. TI targets strong deleveraging over the next three years, but stepped away from its former near-term guidance at its 3Q18 results. We forecast a relatively rapid decline in its net debt/EBITDA (excluding spectrum), albeit off a higher base, vs. the sector.

Exhibit 4: Rising Italian macro risk has been the key driver of TI’s share price fall this year, in our view... TI (ords) share price change since March 2018

Exhibit 5: ...and we reflect this, the higher spectrum costs and our lower EBITDA estimates (mainly due to TI’s 28-day billing problems explained later) in our lower target price Our TI (ords) price target change

€ 0.79

€ 0.55

€ 0.06 € 0.08

€ 0.10

€ -

€ 0.10

€ 0.20

€ 0.30

€ 0.40

€ 0.50

€ 0.60

€ 0.70

€ 0.80

€ 0.90

March Shareprice

Spectrumauction

Cost of capital Lower EBITDA Current shareprice

Italian stocks trading at 20% discount reflecting macro uncertainty, TI management change.

Italian spectrum auction cost TI € 2.4bn. Spectrum bids were 2x ahead of reserve price... Lower EBITDA mainly due to 28-day

billing impact (c.150mn p.a.)

€ 0.80

€ 0.60

€ 0.06 € 0.06

€ 0.08

€ -

€ 0.10

€ 0.20

€ 0.30

€ 0.40

€ 0.50

€ 0.60

€ 0.70

€ 0.80

€ 0.90

Old TP Spectrumauction

Cost of capital Lower EBITDA New TP

Higher cost of capital reflecting rising Italian bond yields and higher ERP.

Lower EBITDA mainly due to 28-day billing impact (c.150mn p.a.)

Italian spectrum auction cost TI € 2.4bn. Spectrum bids were 2x ahead of reserve price...

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

27 November 2018 7


Exhibit 6: Telecom Italia - sum of the parts valuation Valuation based on 2020E, € mn and per share

CommentsSOTP Ownership (%) Consolidated EV % of EV EBITDA (2020E) EV/EBITDA (2020E)Domestic Fixed 100% 13,000 33% 2,200 5.9 Using BT Openreach's implied EV/EBITDA multiple as laid out in our March 8 TI reportSparkle 100% 594 1% 120 5.0 Set at a 20% discount to European telco assets given the relatively low barriers to entry for international cable assetsPersidera 70% 250 1% 42 6.0 Broadcast towers business valued at 6.0x 2020E EV/EBITDA, a modest 5% discount to European telecoms (average of 6.3x) given a likely declining top lineMobile network (Inwit) 60% 3,942 9% 256 15.4 Based on the current trading valuation of the listed entity INWITItalian Rump value 100% 18,875 44% 4,290 4.4 Set at a 30% disocunt to European telco opeers given no asset ownership and greater domestic macro risksTotal Italian 36,661 83% 6,908 5.3 Other eliminations 100% (81) 0% (16) 5.0TIM Brazil 67% 6,742 16% 1,848 3.6 Based on the current trading valuation of the listed entity TIM BrazilTotal EV 43,323 98% 8,739 5.0

Consolidated net debt (22,413)Less Minority equity value (3,606) Less: other (of which capex liability) (2,528) Less: Provisions/Restructuring (2,561) Equity value 12,215

Valuation SOTP (2020E)Ords 0.60Savers 0.55vs. Current share price Ords 10%Savers 17%

2020E


27 November 2018 8


As we have shown earlier in the report, TI’s high net debt/equity ratio makes its share price particularly sensitive to changes in the equity risk premium or broader cost of capital. This is a key risk, given macro uncertainties in Italy currently, the more so as our economists forecast a quarter of negative growth in Italy in 2019. Our economists’ macro outlook for 2019 is more pessimistic than Moody’s, or the Italian government’s view on the Italian fiscal outlook, which also implies downside risk for TI. Additionally, we note that Italian bond yields have been rising materially recently. Our Portfolio Strategists maintain that Italian equities are in some ways more vulnerable than debt to a sudden loss of confidence (see Europe equities: More “Skinny & Flat”).

Exhibit 7: We expect reasonably rapid de-leveraging for TI Net debt/EBITDA

Exhibit 8: TI Group’s debt/equity is currently 2.3x Net debt/equity, 2018E, € bn

3.2x

2.8x 2.6x

2.4x 2.3x

0

0.5

1

1.5

2

2.5

3

3.5

2018E 2019E 2020E 2021E 2022

8.6

€ 11,063.81

€ 25,714.82

€ -

€ 5,000.00

€ 10,000.00

€ 15,000.00

€ 20,000.00

€ 25,000.00

€ 30,000.00

2018E

Net debt, reported MV at current price

2.3x

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. MV based on closing prices for ords/savers as of November 23 and end-2017 share count.

Exhibit 9: TI’s valuation is sensitive to small changes in WACC Increase in WACC and implied change in valuation (based on our ROIC valuation approach)

Exhibit 10: Our economists see Italy flirting with recession in 1H 2019 Real GDP growth (%qoq) and its contribution to main components

Increase in WACC Change in share price

20bps -15%

40bps -30%

60bps -40%

80bps -50%

100bps -60%

-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

Mar17 Sep17 Mar18 Sep18 Mar19 Sep19

StocksNet ExportGross fixed capital formationGovt ConsumptionPrivate ConsumptionGDP

GS Forecasts

Source: Goldman Sachs Global Investment Research. Source: ISTAT, Haver Analytics, Goldman Sachs Global Investment Research.

27 November 2018 9


https://research.gs.com/content/research/en/reports/2018/11/20/ef7dd1d3-530e-4b6c-98e6-1ca810d8f077.html

https://research.gs.com/content/research/en/reports/2018/09/12/a804b004-f44c-4961-abde-da8234945bb7.html

Exhibit 11: Rising Italian bond yields over the past year 10-year Italian bond yields vs. TI’s share price (rebased)

0

50

100

150

200

250

10Y Government Bond (Bid) TI share price

Source: Bloomberg.

Exhibit 12: TI CDS 5Y over the past year Last price (€)

50

100

150

200

250

300

350

400

11/2

6/20

18

10/2

9/20

18

09/2

7/20

18

08/2

8/20

18

05/2

4/20

18

04/2

6/20

18

03/2

7/20

18

02/2

7/20

18

01/3

0/20

18

2/1/

2018

4/12

/201

7

Source: Bloomberg.

27 November 2018 10


A closer look at TI’s valuation comps TI trades on a 7.8% unlevered 2019E FCF yield, a c.24% discount to the sector. This reflects its greater volatility and the macro uncertainty it faces, in our view. In addition, we note that Italian stocks (with less exposure on average to Italy than TI) currently trade at their widest discount to the European market in over 20 years - a c.20% discount on our strategists’ estimates. We argue that the greater discount that TI trades on to the telecoms sector (compared to the average Italian discount) reflects TI’s materially higher gearing and exposure to Italy (at c.80% of 2019E Group EBITDA), as well as it recent CEO change (and consequent uncertainty) and shareholder disputes.

We forecast TI’s FCF rising materially in 2019 and into 2020. This expectation is driven by our view that TI’s top-line will prove more resilient than consensus expects, and, more meaningfully, by our expectations for TI’s cost-cutting execution and falling capex (as shown in our detailed FCF stack in the following section, ‘A closer look at the numbers’. However, the cost-cutting and capex reduction we model are consistent with the in-depth, strategic review of the previous CEO. In the context of a new CEO, there is now uncertainty over the pursuit of this strategy, in our view.

Our revised price targets for TI imply only a modest closing of the valuation discount to the sector, as shown in Exhibit 13 and in the following scatter charts.

Exhibit 13: TI’s valuation vs. the sector Valuation metrics at the group level

2019E 2020E 2019E 2020E 2019E 2020E 2019E 2020ETelecom Italia, current 4.6x 4.3x 8.9x 8.3x 7.8% 8.3% 14.5% 15.7%Sector average, current 6.4x 6.2x 12.6x 11.9x 6.0% 6.5% 7.2% 8.2%Telecom Italia, target 4.8x 4.5x 9.1x 8.6x 7.6% 8.0% 13.0% 14.1%Sector average, target 7.0x 6.7x 13.6x 12.8x 5.5% 6.0% 6.5% 7.3%

(Discount)/Premium -at current price -28.0% -29.8% -29.8% -30.3% -23.9% -21.6% -50.1% -47.7%-at target price -31.6% -33.5% -32.5% -32.8% -27.2% -25.1% -50.3% -48.0%

Unlevered FCF yield FCFE yield EV/EBITDA EV/EBITDA-capex


27 November 2018 11


Exhibit 14: Italian equities at a substantial discount to Euro area 12-month forward P/E

Exhibit 15: €4.1 bn of cumulative FCF (2018-20E); TI trades on a c.7.8% unlevered 2019E FCF yield (after reducing for minoritydividends/ smoothed spectrum capex) TI FCFe (GS definition) and FCFe/unlevered FCFF yield

-40

-30

-20

-10

0

10

20

95 97 99 01 03 05 07 09 11 13 15 17 19

Italy Discount

-20%

vs. US

vs. Euro Area

-36% 455

802 769

1,607 1,736 1,923 2,055

7.0%

14.5% 15.7%

17.4% 18.6%

5.6% 7.8% 8.3% 9.1% 9.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

500

1,000

1,500

2,000

2,500

2016 2017 2018E 2019E 2020E 2021E 2022E

FCFE

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FCFE

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ooth

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spec

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FCFE yield Unlevered FCFF yield

Source: Worldscope, Datastream, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 16: TI trades on 8.9x 2019E EV/EBITDA-capex... EV/EBITDA-capex (2019E) vs. EBITDA CAGR (2019-22E), current

Exhibit 17: ...and a 7.8% 2019E unlevered FCF yield Unlevered FCF yield (2019E) vs. EBITDA CAGR (2019 -22E), current

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

-1.0% 1.0% 3.0% 5.0%

EV/E

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, cur

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EBITDA CAGR 19-22E

ATCA.AS BT.L

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TEF.MC TEL.OL

TLIT.MI

TELIA.ST

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3%

4%

5%

6%

7%

8%

-1.0% 1.0% 3.0% 5.0%

Unl

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EBITDA CAGR 19-22E

ATCA.AS BT.L

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TELIA.ST

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Green = low complexity, Orange = medium complexity, Red = high complexity.

Source: Goldman Sachs Global Investment Research, FactSet


Source: Goldman Sachs Global Investment Research, FactSet

Exhibit 18: We estimate that TI trades on a target EV/EBITDA-capex (incl. smoothed spectrum) multiple of 9.1x... EV/EBITDA-capex (2019E) vs. EBITDA CAGR (19-22E), at target price

Exhibit 19: ... and a 7.6% 2019E unlevered FCF yield Unlevered FCF yield (2019E) vs. EBITDA CAGR (19-22E), at target price

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

-1.0% 1.0% 3.0% 5.0%

EV/E

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3%

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TLIT.MI

TNET.BR





27 November 2018 12


Exhibit 20: EV/IC vs. ROIC correlation

R^2 = 0.9242

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

2.5% 4.5% 6.5% 8.5% 10.5% 12.5% 14.5% 16.5%

EV/IC

201

8E

ROIC (2018E)

ELISA.HE TEL.OL

TNET.BR

DTEGn.DE ORAN.PA

TELIA.ST TEF.MC TLIT.MI

VOD.L

DRIG.DE PROX.BR

KPN.AS NOS.LS

SCMN.S

OBEL.BR BT.L

TLIT.MI 2020

Source: Goldman Sachs Global Investment Research, Company data

Exhibit 21: TI is trading slightly below its 5-year average, but not at its lowest level 1 year-forward EV/EBITDA and EV/EBITDA-capex

3.00x

5.00x

7.00x

9.00x

11.00x

13.00x

15.00x

Q41

3

Q11

4

Q21

4

Q31

4

Q41

4

Q11

5

Q21

5

Q31

5

Q41

5

Q11

6

Q21

6

Q31

6

Q41

6

Q11

7

Q21

7

Q31

7

Q41

7

Q11

8

Q21

8

Q31

8

EV/EBITDA 1y-fwd EV/EBITDA-capex 1y-fwd

Average: 10.44x

Average: 5.04x

Max: 14.35x

Max: 6.45x

Min: 3.8x

Min: 6.9x

Current: 4.95x

Current: 8.93x

Source: Company data, Goldman Sachs Global Investment Research

27 November 2018 13


A closer look at the numbers - our summary financials and FCF stack

Exhibit 22: A combination of a c.+1% domestic EBITDA CAGR and growing Brazil EBITDA drives a group EBITDA CAGR c.+2% Summary financials: revenues, EBITDA and capex; group, domestic and Brazil

Telecom Italia 2017 2018E 2019E 2020E 2021E 2022E 2018-22E CAGR

Mobile service revenue €mn 4,655 4,580 4,351 4,134 3,968 3,889 Iliad’s 2H18 impact softer than expected in 2018; upside risk to our worst case forecasts -4.0%

- change yoy % 1.6% -1.6% -5.0% -5.0% -4.0% -2.0%

Fixed service revenue €mn 9,952 9,955 9,978 9,972 10,001 10,060 0.3%

- change yoy % -0.1% 0.0% 0.2% -0.1% 0.3% 0.6%

Equipment revenues & eliminations, net €mn 747 770 787 803 819 835

Total domestic revenues €mn 15,354 15,305 15,116 14,909 14,789 14,784 -0.9%

- change yoy % 2.3% -0.3% -1.2% -1.4% -0.8% 0.0%

Brazil €mn 4,502 4,074 4,237 4,482 4,612 4,746 3.9%

- change yoy % 11.2% -9.5% 4.0% 5.8% 2.9% 2.9%

- service revenue in local currency % 5.1% 5.3% 6.0% 6.0% 3.0% 3.0%

Other activities & eliminations €mn -28 -28 -28 -28 -28 -28

Group revenues €mn 19,828 19,350 19,326 19,363 19,373 19,503 0.2%

- change yoy % 4.2% -2.4% -0.1% 0.2% 0.1% 0.7%

Fixed opex €mn -4,522 -4,225 -4,075 -3,903 -3,767 -3,625 -3.8%

- change yoy % -5% -7% -4% -4% -3% -4%

Volume driven costs €mn -3,809 -4,294 -3,961 -3,999 -4,072 -4,174

- as %-age of domestic revenues % 24.8% 28.1% 26.2% 26.8% 27.5% 28.2%

Non-recurring expenses, net €mn -852 -200 -150 -100 -100 -100

Total domestic opex €mn -9,183 -8,719 -8,186 -8,002 -7,938 -7,899 -2.4%

- change yoy % 10.5% -5.0% -6.1% -2.2% -0.8% -0.5%

- change yoy, excl. non-recurring expenses % 2.5% 2.3% -5.7% -1.7% -0.8% -0.5%

Domestic EBITDA €mn 6,171 6,585 6,930 6,908 6,851 6,885 1.1%

- EBITDA margin % 40.2% 43.0% 45.8% 46.3% 46.3% 46.6%

- EBITDA growth % -7.9% 6.7% 5.2% -0.3% -0.8% 0.5%

Brazil EBITDA €mn 1,635 1,574 1,723 1,848 1,916 1,987 6.0%

- EBITDA margin % 36.3% 38.6% 40.7% 41.2% 41.5% 41.9%

- EBITDA growth % 23.4% -3.7% 9.5% 7.2% 3.7% 3.7%

- EBITDA growth, local currency % 19% 12% 11% 7% 4% 4%

Other activities & eliminations €mn -16 -16 -16 -16 -16 -16

Group EBITDA €mn 7,790 8,140 8,594 8,739 8,751 8,856 2.1%

- EBITDA margin % 39.3% 42.1% 44.5% 45.1% 45.2% 45.4%

- EBITDA growth % -2.6% 4.5% 5.6% 1.7% 0.1% 1.2%

Domestic capex €mn 4,551 3,679 2,969 3,015 2,957 4,637

- as %-age of domestic revenues % 29.6% 24.0% 19.6% 20.2% 20.0% 31.4%

Brazil capex €mn 1,150 950 935 941 922 949

- as %-age of Brazil revenues % 25.5% 23.3% 22.1% 21.0% 20.0% 20.0%

Group capex €mn 5,701 4,629 3,904 3,956 3,879 5,586

- as %-age of group revenues % 28.8% 23.9% 20.2% 20.4% 20.0% 28.6%

Group EBITDA-capex €mn 2,089 3,511 4,691 4,783 4,872 3,270 5.8%*

- growth % -33.2% 68.1% 33.6% 2.0% 1.8% -32.9%

Group EBITDA-capex (ex-spectrum) €mn 2,719 3,990 4,710 4,898 4,929 5,007

- as %-age of group revenues % -13.0% 46.7% 18.0% 4.0% 0.6% 1.6%

Fixed market growth offsetting Open Fiber overbuild

Italian macro represents the key incremental risk to Italian revenues

Robust u/l growth in Brazil; FX remains a risk

Brazil offsets 1% domestic declines, driving flattish revenue outlook for group 2018-22E

Digitalisation underpins c.4% CAGR 18-22E fixed cost reduction…

TI guides capex/sales falling to <20% FY19 but there is risk the new CEO changes this target

Brazil capex falling in 2019 is broadly in-line with guidance.

The fall in capex is a key driver of EBITDA - capex expansion

… but the CEO change is a risk to sustained execution into 2019

Domestic EBITDA CAGR of c.1% over 18-22E, with cost-cutting partly offsetting c.1% revenue declines

c.6% EBITDA CAGR in Brazil, driven by revenue growth & margin improvement

Combination of c.+1% domestic EBITDA CAGR & growing Brazil EBITDA drives group EBITDA CAGR c.+2%

*adjusted for spectrum capex

Source: Company data, Goldman Sachs Global Investment Research.

27 November 2018 14


Exhibit 23: Telcom Italia trades on a 7.8% 2019 unlevered FCF yield, on our estimates TI FCF, net debt and FCF yield

Telecom Italia FCF and net debt 2016 2017 2018E 2019E 2020E 2021E 2022E

Reported EBITDA 8,002 7,790 8,140 8,594 8,739 8,751 8,856 Cost-cutting and falling capex intensity are key drivers of TI’s FCF expansion.

Capex (including spectrum) -4,876 -5,701 -4,629 -3,904 -3,956 -3,879 -5,586

Group EBITDA-capex 3,126 2,089 3,511 4,691 4,783 4,872 3,270

Cash interest, net -1,372 -1,263 -1,250 -1,187 -1,111 -1,074 -1,001

Cash taxes, net -218 -1,100 -822 -881 -1,037 -1,076 -1,092

Working capital & other items within FCFE -928 351 -830 -680 -630 -430 -430

Group FCFE, pre minority dividends 608 77 609 1,943 2,005 2,292 747

Minority dividends -61 -69 -67 -116 -156 -207 -215

Group FCFE, post minority dividends 547 8 542 1,827 1,849 2,085 532

Dividends -166 -166 -166 -187 -187 -488 -488

Sale of investments and other disposals 745 33 0 0 0 0 0

Other items driving change in reported net debt 1,394 -11 0 0 0 0 0

Decrease/(increase) in net debt 2,520 -136 376 1,640 1,662 1,597 45

Net debt, reported 25,955 26,091 25,715 24,075 22,413 20,816 20,771

Net debt/EBITDA x 3.2 3.3 3.2 2.8 2.6 2.4 2.3

Net debt incl. spectrum/ EBITDA 3.4 3.0 2.8 2.6 2.5

FCFE yield 2016 2017 2018E 2019E 2020E 2021E 2022E

Group FCFE, post minority dividends 547 8 542 1,827 1,849 2,085 532

add back: spectrum capex 0 887 479 19 115 57 1,737

less: ’smoothed’ spectrum @ 4% of MSR -92 -93 -252 -239 -227 -218 -214

FCFE post ’smoothed’ spectrum 455 802 769 1,607 1,736 1,923 2,055

Market capitalisation, current 11.1

FCFE yield % 7.0% 14.5% 15.7% 17.4% 18.6%

add back: cash interest, net 1,372 1,263 1,250 1,187 1,111 1,074 1,001

add back: other financial expenses 287 309 309 309 309 309 309

Underlying FCFF (un-levered fcf) 2,114 2,374 2,328 3,103 3,157 3,306 3,365

Unlevered FCFF yield % 5.6% 7.8% 8.3% 9.1% 9.3% UFCF yield is c.30% discount to the sector, but the average Italian dicosunt to European stocks is 20% and TI is more geared with greater Italian exposure

Arguably levered FCF yield reflects TI operational complexity and high gearing

CEO change could impact execution or targets, it is a key uncertainty. 5G network sharing deal with VOD is upside risk

restructuring costs raise 2018-20

auctions, raising annual spectrum costs


27 November 2018 15


Catalysts: What could make us more positive or negative?

Positive catalysts

1. Consensus upgrades: Our 2019/20E EBITDA is 5% ahead of Bloomberg consensusOur forecasts are ahead of consensus, mainly reflecting our expectation of a sustained, fast-growing fixed-broadband market in Italy (three times faster growth than in any other European market). We believe consensus implies this is not sustainable, and that growth will not re-accelerate following a recent slowdown (which we argue is temporary). We also model TI achieving its cost-cutting guidance, though we acknowledge that this is now less certain given management change. We note that our positive view on these two themes appears materially ahead of consensus (it offsets what we argue are worst-case scenarios with regard to Iliad’s impact in mobile and Enel’s overbuild hit to wholesale fixed-line revenues, which we incorporate in our forecasts - see the ‘Operations’ section in the report).

2. Collaboration with Enel Open Fiber - potential to drive TI’s share price materiallyhigher TI currently enjoys c.90% wholesale fixed-line market share in Italy. Its biggest threat in fixed-line, and a key driver of the discount valuation in the share price, in our view, is the overbuild risk from Enel’s (covered by Alberto Gandolfi) Open Fiber business (50% owned by Enel, 50% by the Italian government). Open Fiber has extensive fibre-to-the-home (FTTH) overbuild plans, which would see it cover c.70% of households and take >50% of TI’s wholesale customers over the longer term, if achieved. Its FTTH network would be superior to TI’s network across most of its overlaps (given TI’s FTTH plans currently amount to 20% coverage of the country). These plans have been given some credence by Italian government support, granting Enel the majority of the available subsidies to support roll-out in more rural areas. However, we believe TI’s shares and consensus forecasts already discount Enel achieving its ambitious targets, and do not factor in the offsetting benefit of significant Italian market growth. We also note that some investors believe Enel’s roll-out pace has been slower than expected.

We assume Enel achieves its target of 4 mn wholesale users on its network by 2022, a worst-case scenario for TI in our view. This implies a c.€500 mn hit to TI’s wholesale

Exhibit 24: Our estimates vs. consensus € mn

2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020ERevenue 19,350 19,326 19,363 19,192 19,047 19,035 1% 1% 2%EBITDA 8,340 8,744 8,839 8,238 8,315 8,401 1% 5% 5%Capex 4,629 3,904 3,956 4,965 4,084 3,930 -7% -4% 1%

Consensus GS vs. ConsensusGS

*Organic EBITDA

Source: Company data, Bloomberg.

27 November 2018 16


revenues by 2022E, though we model this impact being offset by fixed-broadband market growth.

More encouragingly, recent press speculation (e.g. Reuters) suggests that the Italian authorities are building a framework to support a collaboration between TI and Enel Open Fiber. This would remove overbuild risk to TI, we believe. Crucially, no details are known regarding how this collaboration could be facilitated. It has been suggested (e.g. Reuters) that TI could spin off its fixed-line network and merge the ‘Netco’ with Enel’s Open Fiber. Alternatively, (e.g. Bloomberg) TI could seek to combine its network with Open Fiber (in this event it is not clear if TI would assume 100% of the incremental capex for network roll-out to which Open Fiber has committed).

While we take no view on the structure of any future potential collaboration, we have analysed a simple scenario in which TI and Open Fiber work together, based on the following assumptions:

1. The collaboration removes the overbuild risk posed by Open Fiber.

2. TI loses none of its wholesale revenues (i.e. the c.€500 mn that would have been lostby 2022 if Enel were to achieve its target of 4 mn wholesale customers).

3. TI’s capex rises to support the Open Fiber roll-out plans - we assume this is c.€350mnpa, less than the >€500 mn of current planned annual Open Fiber capex as there would

Exhibit 25: Enel’s overbuild impact on TI’s wholesale revenues and subscribers as factored into our model Subscribers (‘000), revenues (€ mn)

2019E 2020E 2021E 2022E 2023E 2024E

Total Enel subscribers (taken from TI) 1,150 1,950 2,950 3,950 4,750 5,450

Revenue 134 260 412 580 731 857

Revenues gained (ex. Enel) 122 188 346 493 617 740

Market net adds on TI wholesale 692 1,015 1,777 2,413 2,877 3,287

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Exhibit 26: Enel Open Fiber’s coverage targets imply that it overbuilds c.70% of Italy over time Italy fixed-line coverage, current and future (expected)

Source: Goldman Sachs Global Investment Research, Company data.

27 November 2018 17


https://uk.reuters.com/article/italy-broadband/update-1-italy-to-offer-regulated-returns-for-single-broadband-company-draft-idUKL8N1XR37X

https://www.reuters.com/article/us-telecomitalia-openfiber/telecom-italia-keen-to-discuss-fiber-to-the-home-tie-up-with-open-fiber-idUSKBN1JG1UD

https://www.bloomberg.com/news/articles/2018-11-08/telecom-italia-is-said-to-discuss-network-deal-with-open-fiber

likely be some savings where TI and Open Fiber had previously both planned to roll-out FTTH.

We believe this scenario could support a c.70% valuation uplift for TI, all else equal, though it is clear that there is a wide range of outcomes depending on the nature of the collaboration. Based on the preceding assumptions, Exhibit 27 shows that FCF would decline in the near term (given immediately higher capex, but retained wholesale revenues being more meaningful in the outer years), while the growth outlook for TI improves materially further out. We believe this would merit a re-rating. We derive the appropriate implied re-rating from the magnitude of the improvement in the growth outlook of TI, while assuming the shares continue to trade at a similar discount to the sector, as shown in the scatter plots below. Based on the sector-implied multiples in Exhibits 28-29, there is notional valuation upside of c.70% in this scenario for TI.

Exhibit 27: In our scenario analysis, collaboration with Open Fiber increases TI’s unlevered FCF by c.5 pp TI, standalone and in our Enel collaboration scenario

2019E 2020E 2021E 2022E CAGR (19-22E) 2019E 2020E 2021E 2022E CAGR (19-22E)Domestic Revenue €mn 15,116 14,909 14,789 14,784 -0.7% 15,169 15,095 15,125 15,338 0.4%Group revenue €mn 19,326 19,363 19,373 19,503 0.3% 19,378 19,549 19,709 20,056 1.2%Group EBITDA €mn 8,594 8,739 8,751 8,856 1.0% 8,646 8,925 9,086 9,410 2.9%Group EBITDA - capex* €mn 4,471 4,573 4,682 4,770 2.2% 4,173 4,409 4,667 4,973 6.0%Unlevered FCF €mn 3,103 3,157 3,306 3,365 2.74% 2,805 2,978 3,242 3,478 7.43%

Without partnership With partnership

*including smoothed capex


Exhibit 28: EV/EBITDA-capex (2019E) vs. EBITDA CAGR (2019E), current price

Exhibit 29: Unlevered FCF yield (2019E) vs. EBITDA CAGR (2019 -22E), current

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

-1.0% 1.0% 3.0% 5.0%

EV/E

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DA

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, cur

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EBITDA CAGR 19-22E

ATCA.AS BT.L

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ORAN.PA PROX.BR

SCMN.S

SRCG.S TALK.L

TEF.MC TEL.OL

TLIT.MI

TELIA.ST

TNET.BR

TLIT.MI (w/Enel) Implies c.70% share price increase

3%

4%

5%

6%

7%

8%

-1.0% 1.0% 3.0% 5.0%

Unl

ever

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CF

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19E,

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EBITDA CAGR 19-22E

ATCA.AS BT.L

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SCMN.S

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TEF.MC TEL.OL

TLIT.MI

TELIA.ST

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TLIT.MI (w/Enel)

Implies c.70% share price increase


Source: Goldman Sachs Global Investment Research, FactSet.


Source: Goldman Sachs Global Investment Research, FactSet.

27 November 2018 18


Negative catalysts

1. Macro slowdown driving a higher cost of capital - TI’s gearing makes it sensitive tochange We laid out in the ‘Valuation’ section in this report how TI’s 2.3x 2018E net debt/equity ratio leaves its valuation vulnerable to a higher cost of capital. For example, we calculate that a 40 bp rise in the cost of capital would lower TI’s valuation by 30%, all else equal. The key driver of a rise in the cost of capital, in our view, would be an Italian macroeconomic slowdown.

2. Macro slowdown driving lower revenue growth rates or declinesIf the Italian macro backdrop worsens, we could see significant downside to our existing forecasts. In the following exhibits, we show how TI’s mobile and fixed revenue growth underperformed the European average materially during the financial crisis of 2008-10, and during the Southern European periphery slowdown two years later.

3. Iliad fixed-line launch could lower EBITDA by 3%-5%If Iliad were to launch a fixed-line offering to complement its mobile operations, this would likely dent TI’s retail business and potentially materially lower its group EBITDA. Iliad launched as a mobile operator in June 2018. As we lay out in the ‘Operations’ section of this report, it had already gained over 2 mn customers by the end of August. It is rolling out a mobile network according to the spectrum allocation it paid for, but it is notable that while this process has been ongoing, it has agreed a wholesale contract with Wind (granted as a remedy by the EU for approval of the Hutchison/Wind merger). In France, Iliad has pursued a convergent, fixed-plus mobile strategy, for the past six years, though we note that it was a fixed-only player for a decade and launched mobile as a result of a supportive regulatory shift. We see scope for Iliad to pursue a fixed-line strategy in Italy, and while we do not expect it to launch fixed operations in 2019, this represents a clear downside risk.

We have modelled the potential impact of Iliad launching a fixed-line offer in Italy, flexing key variables. We assume TI would receive wholesale revenues from Iliad in fixed-line in the near-to-medium term. This would be a mitigating positive to TI’s lost retail revenues.

Exhibit 30: Mobile revenue trends during macro slow down TI MSR growth vs. European average (% yoy)

Exhibit 31: Fixed revenue trends during macro slow down TI fixed revenues vs. incumbent average (% yoy)

-4%

-8% -8% -9%

-9%

-16%

-10%

3.1% 1.2%

-0.1% -0.2% 2.1%

1.0% 1.0%

-20%

-15%

-10%

-5%

0%

5%

2008 2009 2010 2011 2012 2013 2014

TI MSR growth yoy European average

-3.1% -2.9% -2.7% -2.8% -3.0%

-1.7%

-0.7%

-1.7%

-4.2%

-4.1%

-5.6%

-7.8%

-6.7%

-3%

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%2009 2010 2011 2012 2013 2014 2015

Incumbent average (consumer only) TI domestic fixed revenues yoy

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

27 November 2018 19


While Iliad might sign a contract with Enel Open Fiber, as Open Fiber’s network is very limited at present, we believe it would be likely that Iliad would have to wholesale from TI in the near-to-medium term, for most of its fixed-line offering.

The key negative impact from an Iliad launch would therefore be on TI’s retail fixed-line operations, in our view.

Exhibit 32: Potential impact on TI Group revenue, EBITDA and FCF from competition in the fixed business, with loss of broadband subscribers and pressure on the ARPU of the remaining customer base Potential impact on TI retail revenue, EBITDA and FCF of new entrant in fixed (2020E)

Impact on TI retail revenue-19% 0% -4% -8% -12%0% 2% -2% -6% -10%-2% 0% -4% -8% -12%-4% -2% -6% -10% -14%-6% -4% -8% -12% -15%-8% -6% -10% -13% -17%

-10% -8% -12% -15% -19%

Impact on TI group EBITDA-9% 0% -4% -8% -12%0% 1% -1% -3% -5%-2% 0% -2% -4% -6%-4% -1% -3% -5% -7%-6% -2% -4% -6% -8%-8% -3% -5% -7% -8%

-10% -4% -6% -8% -9%

Impact on TI group FCF-35% 0% -4% -8% -12%0% 4% -4% -11% -19%-2% 0% -7% -15% -22%-4% -4% -11% -18% -25%-6% -7% -14% -22% -29%-8% -11% -18% -25% -32%

-10% -15% -22% -29% -35%

Bro

adba

nd s

ub

loss

esB

road

band

sub

lo

sses

Fixed ARPU impact

Fixed ARPU impact

Bro

adba

nd s

ub

loss

es

Fixed ARPU impact


27 November 2018 20


Operations: Recent updates suggest underlying trends are improving and better than expected

Domestic operational trends are improving, and more so than consensus has been expecting. With greater visibility over a key uncertainty, the impact of Iliad in mobile (which we now model in more detail), we continue to see scope for domestic performance to beat consensus over the medium term. This is primarily driven by our confidence in fixed-broadband market growth. This section runs through the underlying operational trends. However, as we have already noted, a material downturn in the Italian macro-environment would clearly represent downside risk to our estimates.

In 4Q17, TI was growing its domestic total service revenue at 2.1%, with mobile service revenues growing +0.5% and fixed service revenues +1.2% (having improved from a run-rate of -7.1%/-2.8%/-3.9% in 2014/15/16). However, the launch of Iliad in mobile in June 2018 created considerable uncertainty and near-term headwinds in mobile. In fixed, TI and its competitors suffered material headwinds in 1H18 from a failed attempt to move to 28-day billing, scuppering the opportunity to up-sell broadband in many cases. In addition, the roll-out of Enel’s Open Fiber network adds to the uncertainty over the scale of headwinds to TI’s wholesale business.

We have been positively surprised by the trajectory of recent trends however· The decline in TI mobile service revenues in 3Q18 was better than we expected at -2.7% (we had expected a 5% declines or worse for 3Q/4Q18), despite Iliad’s impressive customer adds and the 28-day billing headwind appears to have disappeared by 3Q18. As a result, fixed-broadband market growth re-accelerated, raising our confidence in our thesis that Italian fixed-broadband market growth will remain the fastest in Europe for many years (as broadband penetration catches up to the level of other European markets). We believe this can offset fixed-line wholesale pressure from Enel’s roll-out over time.

Exhibit 33: TI’s fixed and mobile service revenues % change yoy

0.6% 0.7% 1.1%

3.0%

2.2%

2.5% 1.6%

0.5%

3.7%

-0.2%

-2.7%

1.4% 1.6%

-1.6%

-5.0% -5.0%

-4.0%

-2.0% -4.3%

-4.8%

-3.6% -3.0%

-2.4%

0.8% -0.1%

1.2%

-0.2%

-0.9%

-0.2%

-3.9%

-0.1% 0.0% 0.2%

-0.1% 0.3% 0.6%

-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

2016

2017

2018

E

2019

E

2020

E

2021

E

2022

E

FSR growth MSR growth


27 November 2018 21


Mobile - visibility improved, upside risk to our worst case scenario outlook We continue to forecast what we believe represents a worst-case scenario regarding Iliad’s impact on TI’s mobile service revenue (MSR) growth trends (a 4%-5% compound revenue decline). We lay out our forecasts below, including new sense-checks, and include analysis made possible by disclosure of data regarding the pricing and initial net add run rate of Iliad. To date, the impact on TI has been less than we or consensus had expected.

Despite Iliad taking a material number of net adds since launch, TI’s MSR growth trends has declined to only -2.7% yoy in 3Q18. We had expected a 5%+ decline. With Iliad having raised prices twice already, to €7.99 (from the launch price of €5.99), its net adds halved in September. We expect further price rises to come.

Exhibit 34: Lower human net adds this quarter, reflecting Iliad’s impact, however (MSR) not as bad as expected in the near-term... Mobile service revenue growth (% yoy, LHS) and active human net adds (‘000, RHS)

Exhibit 35: ... but cautiously maintaining -5% yoy decline 2019/20E Estimated mobile service revenue change yoy (%)

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-400

-300

-200

-100

0

100

200

300

400

Q217 Q317 Q417 Q118 Q218 Q318E

Human (active) net adds MSR growth (YoY)-6%

-5%

-4%

-3%

-2%

-1%

0%

2018E 2019E 2020E 2021E

Previous estimate

Source: Company data. Source: Goldman Sachs Global Investment Research.

Exhibit 36: Iliad - slowing subscriber growth slowing in Italy Approximate net adds (‘000) per month since mobile launch

0

100

200

300

400

500

600

700

800

900

1000

June July August September


27 November 2018 22


We have based our worst-case scenario assumption on the impact that Iliad had in France when it launched a mobile service in 2012. This drove an 8% annual decline to incumbent Orange’s mobile service revenue trends. It was the equivalent of a 6 pp headwind to Orange’s already declining trends. We model TI’s MSR recording a -5% CAGR (2018-21E), the equivalent of a 6 pp headwind to the 2% growth that TI was previously delivering. We believe this is cautious, since in France Iliad already had a fixed customer base to cross-sell to and a brand - it had neither when launching in Italy. Additionally, pricing in Italy was already half the level of that in France in 2012 when Iliad launched.

Our TI forecasts are broadly commensurate with Iliad’s market share targets in Italy, and also reflect a similar ARPU premium (TI vs. Iliad in four years) as that which Orange was charging in France four years after Iliad’s launch.

Exhibit 37: We forecast Iliad gaining a mobile subscriber base which is 10% of the population and 7% of TI mobile subscriber base by 2020E Expected number of mobile subscribers, based on Iliad entering Italian mobile market

2018E 2019E 2020E 2021E 2022EIliad customers 2,965 4,475 6,083 7,336 8,224As % of total Italian market subs 4% 6% 8% 9% 10%As % of population 5% 7% 10% 12% 14%TI human customers lost 581 931 1,251 1,501 1,701As % of population 1% 2% 2% 2% 3%As % of TI 2017 base 3% 5% 6% 8% 9%Total Italian subs 82,340 81,095 80,445 79,787 79,121Italian population 60,518 60,485 60,445 60,398 60,346

Source: Goldman Sachs Global Investment Research

Exhibit 38: We model TI mobile service revenues declining at a c.4% CAGR in the 3 years following Iliad’s launch, half the impactseen on Orange Mobile service revenue - Orange 2011-14; Telecom Italia 2017-20E

Exhibit 39: We forecast that Iliad pressures the incumbent’s ARPU in Italy, similar to that seen in the French market ARPU (€) four years after Iliad launch into mobile: Italy (forecast) vs. France (actual)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Orange Telecom Italia

Year 0 Year 1 Year 2 Year 3

Orange: -8% CAGR over 3 years

Telecom Italia: -4% CAGR over 3 years

ARPU 4 years after Iliad launch into mobile

TI 18.13 Orange 24.71

Iliad 10.00 Iliad 13.96

Incumbent vs. Iliad 181% 177%

Italy (2021) France (2016)


27 November 2018 23


Fixed: re-accelerating market growth can offset Enel pain We believe that growth in the Italian fixed-broadband market can offset the headwind from Enel’s intended overbuild of TI’s network. Despite a material slowdown of trends in 1H18, caused by the 28-day billing failure, the re-acceleration of trends in 3Q18 supports our view that Italian broadband penetration is continuing to erode the c.25 pp gap vs. the rest of Europe.

TI benefits from a faster-growing broadband market than any other in Europe. Following years of underinvestment, it is now monetising its completed fibre-to-the-cabinet roll-out, which had been running a year or two behind that of most incumbents. This means it can now provide superfast broadband speeds to consumers, potentially reverse the aggressive fixed-to-mobile substitution that has weighed on growth for

Exhibit 40: We forecast downward pressure on Telecom Italia’s ARPU... MSR, ARPU and subscriber CAGR (2018-21E)

2017-21E CAGR (18-21E)MSR -15% -5%

Total subscribersARPU -15% -5%Subs -3% -1%

Human subscribersARPU -8% -3%Subs -8% -3%


Exhibit 41: We estimate that fixed service revenues will gradually re-accelerate TI domestic fixed revenues (% yoy)

-100

-50

0Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2017 2018E

-7.8%

-6.7%

-3.1%

-1.5%

1.8%

-0.5% 0.0% -0.1% 0.3% 0.6%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

2021

E

2022

E

Source: Company data, Goldman Sachs Global Investment Research

27 November 2018 24


years, and catch up with the rest of Europe on broadband penetration. This should sustain market growth for the next five years at least. Despite a slowdown in 1H18, owing to TI’s failed attempt (along with its competitors) to move to 28-day billing, we believe the recent market growth re-acceleration should be sustained. We model higher growth from 2019 onwards, compared to the suppressed 2018 growth rate.

However, increased competition in the mobile market from Iliad’s launch has also spilled into the fixed-line market. As a result, we now expect TI’s retail market share to decline over the coming years, as Vodafone and Wind (among others) compete more aggressively for customers.

Exhibit 42: Fixed broadband penetration to trend towards the European average, rising c.20 pp Fixed broadband penetration as a percentage of total households - 2016, and Italy forecast for 2022 (previous and current)

Exhibit 43: Lowering estimates for TI share of Italian Broadband market Telecom Italia share of Italian broadband market (%)

98% 90% 88% 88% 86%

81% 79% 78% 77% 73% 72% 71% 71%

57% 57%

0%

10%20%30%40%50%60%70%80%

90%

100%

Hou

seho

lds

with

fixe

d br

oadb

and

conn

ectio

n

Previous estimate Current estimate

38.0%

40.0%

42.0%

44.0%

46.0%

48.0%

50.0%

2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Old estimates Updated estimates Updated estimates

Source: EC, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 44: Headwinds to near-term broadband growth but re-accelerating in the long term Italian broadband market growth, yoy (%)

Exhibit 45: Slow down in trends in 1H18, but re-acceleration in 3Q18 Domestic wholesale revenue (yoy %)

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2016 2017 2018E 2019E 2020E 2021E 2022E

Old estimates Updated estimates-5.9%

-1.5% -1.1%

1.2%

-2.8%

-1.8%

2.9%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Q117 Q217 Q317 Q417 Q118 Q218 Q318

Source: Company data, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research, Company data.

27 November 2018 25


We model Enel hitting its wholesale customers target of 4 mn by 2022. However, we show in the following exhibit how this could be offset by market growth.

Cost-cutting and capex falling We model declining fixed opex (€4,225 mn to €3,625 mn between 2018E and 2022E). As identified in our Digital Divergence note, the benefits of digitisation for TI are back-end loaded (from 2020E onwards). Exhibit 49 shows decreasing fixed costs for TI as a proportion of its total operating cost base (54% and 44% in 2017 and 2024E respectively).

We also model capex falling from above 30% of sales in the last year to below 20% by 2019, in line with company guidance. This reflects the end of TI’s accelerated roll-out of fibre-to-the-cabinet (FTTC), needed to catch up with the rest of Europe and drive broadband penetration. Our 20% of sales forecast includes continued FTTH roll-out by TI, with the aim of reaching c.20% of homes in the next two to three years. However,

Exhibit 46: TI has seen a decreasing share of the Italian broadband market Number of broadband lines (‘000)

46.5% 46.4% 46.2% 46.2% 45.1% 45% 45.3% 45.4% 44.9%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

TIM Wind Tre Fastweb Vodafone Others

Source: Agcom, Company data, Goldman Sachs Global Investment Research.

Exhibit 47: The Enel overbuild impact on TI’s wholesale revenues and subscribers which we factor into our model Subscribers (‘000), revenues (€ mn)

2019E 2020E 2021E 2022E 2023E 2024E

Total Enel subscribers (taken from TI) 1,150 1,950 2,950 3,950 4,750 5,450

Revenue 134 260 412 580 731 857

Revenues gained (ex. Enel) 122 188 346 493 617 740

Market net adds on TI wholesale 692 1,015 1,777 2,413 2,877 3,287

Ope

n Fi

ber h

it to

TI

Who

lesa

le

Tele

com

Ita

lia

who

lesa

le

grow

th (e

x-En

el) f

rom

br

oadb

and

mar

ket

grow

th


27 November 2018 26


https://research.gs.com/content/research/en/reports/2017/11/12/c2e70fa4-7110-4912-9980-74d6727c86a8.pdf

we note that a new CEO creates a degree of uncertainty over the pursuit of these targets.

Exhibit 48: We model fixed opex reductions of c.4% pa over 2019-22E Yoy change in fixed opex - absolute and percentage

Exhibit 49: Total organic opex break down: fixed & volume driven

-372

-251 -297

-150 -151 -139 -135

-7.2%

-5.3%

-6.6%

-3.6% -3.7% -3.5% -3.6%

-400

-350

-300

-250

-200

-150

-100

-50

0

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%2016 2017 2018E 2019E 2020E 2021E 2022E

change in fixed opex yoy absolute €mn, RHS change in fixed opex yoy %, LHS

4.5 4.2 4.1 3.9 3.8 3.6 3.5 3.4

3.6 4.1 3.7 3.8 3.8 3.9 4.0 4.1

8.3 8.5 8.1 7.9 7.8 7.8 7.8 7.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Opex net of volume driven costs Volume driven costs

Additional volume driven costs Total opex


Exhibit 50: Lower capex/sales trajectory expected to continue TI capex (€ mn, LHS) and capex/sales (%, RHS)

Exhibit 51: Italy has committed to the future roll-out of FTTH FTTH current vs. future roll-out targets

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016 2017 2018E

TI Group Capex (€mn) - Capex/Sales (%)

1.2%

1.7%

2.8%

30.0

%

12.0

% 54

.0%

66.0

%

49.0

%

29.2

%

84.0

%

97.3

%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%G

erm

any

Uni

ted

King

dom

Belg

ium

Net

herla

nds

Italy

Switz

erla

nd

Denm

ark

Nor

way

Fran

ce

Swed

en

Spai

n

FTTH

cov

erag

e

Current Future

Source: Company data. Source: Goldman Sachs Global Investment Research.

Exhibit 52: Impact of digitisation cost-cutting on a typical telco operator and Telecom Italia GS telco dummy model (above) vs. Telecom Italia (below)

Telcom Incumbent (model) T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 Terminal YoY growth 10 year changeRevenue 100 101 101 102 103 104 105 106 107 108 109 0.9% 8.90%-yoy growth 0.7% 0.7% 0.8% 0.8% 0.8% 0.9% 0.9% 0.9% 1.0% 1.0%Total fixed opex (% of sales) 39 38 36 35 34 33 31 30 29 28 27 -3.5% -30%-yoy growth -2.6% -5.3% -2.8% -2.9% -2.9% -6.1% -3.2% -3.3% -3.4% -3.6%

Telecom Italia 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E YoY growth 10 year changeRevenue (€mn) 19,025 19,828 19,350 19,326 19,363 19,373 19,503 19,689 19,863 20,086 20,335 0.7% 6.88%-yoy growth 4.2% -2.4% -0.1% 0.2% 0.1% 0.7% 1.0% 0.9% 1.1% 1.2%Total fixed opex (€mn) -4,773 -4,522 -4,225 -4,075 -3,903 -3,767 -3,625 -3,499 -3,377 -3,243 -3,101 -4.2% -35%-yoy growth -5.3% -6.6% -3.6% -4.2% -3.5% -3.8% -3.5% -3.5% -4.0% -4.4%


27 November 2018 27


Changes to estimates

We revise our estimates, primarily to reflect the 3Q18 results and the operational trends discussed above. In general, the

revisions are very modest. Note that our 2018 EBIT/net income forecasts fall significantly (-50%/-89%) reflecting the

inclusion of a €2 bn write-down of the Italian core domestic business, announced at the 3Q18 results.

Exhibit 53: Updating our estimates following the 3Q18 results TI - key estimates; € mn and per share

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

- Fixed service revenue 9,955 9,978 9,972 10,001 10,060 10,093 10,110 9,875 9,924 9,975 10,026 10,072 10,097 10,106 10,161 10,237 10,325 1% 1% 0% 0% 0% 0% 0% 0% 0% 0%

- Mobile service revenue 4,580 4,351 4,134 3,968 3,889 3,889 3,889 4,515 4,289 4,075 3,912 3,755 3,755 3,755 3,755 3,755 3,755 1% 1% 1% 1% 4% 4% 4% 4% 4% 4%

Italy 15,305 15,116 14,909 14,789 14,784 14,833 14,864 15,160 15,000 14,853 14,757 14,662 14,703 14,726 14,795 14,885 14,987 1% 1% 0% 0% 1% 1% 1% 1% 1% 1%

Brazil (R$mn) 17,150 18,136 19,182 19,740 20,314 20,906 21,515 17,150 18,142 19,193 19,753 20,331 20,925 21,537 22,167 22,816 23,485 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Brazil 4,074 4,237 4,482 4,612 4,746 4,885 5,027 4,026 4,142 4,382 4,510 4,642 4,777 4,917 5,061 5,209 5,362 1% 2% 2% 2% 2% 2% 2% 2% 2% 2%

Other -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Total revenues 19,350 19,326 19,363 19,373 19,503 19,689 19,863 19,158 19,114 19,207 19,239 19,276 19,452 19,615 19,828 20,066 20,321 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

Italy 6,582 6,887 6,908 6,851 6,885 6,972 7,043 6,710 7,004 7,257 7,313 7,367 7,443 7,503 7,608 7,734 7,872 -2% -2% -5% -6% -7% -6% -6% -6% -6% -6%

Brazil on TIM basis (R$mn), reported 6,680 7,429 7,961 8,255 8,559 8,874 9,201 6,680 7,429 7,961 8,255 8,560 8,876 9,203 9,541 9,892 10,255 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Brazil 1,574 1,723 1,848 1,916 1,987 2,061 2,137 1,556 1,684 1,805 1,873 1,942 2,014 2,089 2,166 2,246 2,329 1% 2% 2% 2% 2% 2% 2% 2% 2% 2%

Other -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Total EBITDA 8,140 8,594 8,739 8,751 8,856 9,017 9,164 8,249 8,672 9,046 9,170 9,293 9,442 9,576 9,759 9,964 10,185 -1% -1% -3% -5% -5% -4% -4% -4% -4% -4%

307

D&A -6,373 -4,445 -4,454 -4,456 -4,486 -4,529 -4,568 -4,330 -4,396 -4,418 -4,425 -4,433 -4,474 -4,512 -4,560 -4,615 -4,674 47% 1% 1% 1% 1% 1% 1% 1% 1% 1%

EBIT 1,767 4,149 4,286 4,295 4,371 4,489 4,595 3,920 4,275 4,629 4,745 4,859 4,968 5,065 5,198 5,349 5,512 -55% -3% -7% -9% -10% -10% -9% -9% -8% -8%

Net interest -1,250 -1,187 -1,211 -1,174 -1,101 -1,010 -938 -1,250 -1,187 -1,211 -1,174 -1,101 -1,010 -938 -873 -832 -790 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Tax P&L -181 -1,037 -1,076 -1,092 -1,145 -1,217 -1,280 -934 -1,081 -1,196 -1,250 -1,316 -1,385 -1,445 -1,514 -1,581 -1,652 -81% -4% -10% -13% -13% -12% -11% -11% -10% -9%

Net income 170 1,759 1,833 1,863 1,960 2,095 2,212 1,569 1,841 2,055 2,155 2,277 2,406 2,517 2,645 2,770 2,903 -89% -4% -11% -14% -14% -13% -12% -11% -11% -10%

Italy 3,679 2,969 3,015 2,957 4,637 2,900 2,900 4,200 2,950 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 -12% 1% 4% 2% 60% 0% 0% 0% 0% 0%

Brazil (R$mn) 4,000 4,000 4,028 3,948 4,063 4,181 4,303 6,556 4,000 4,030 3,951 4,066 4,185 4,307 4,433 4,563 4,697 -39% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Brazil 950 935 941 922 949 977 1,005 1,539 913 920 902 928 955 983 1,012 1,042 1,072 -38% 2% 2% 2% 2% 2% 2% 2% 2% 2%

Total capex 4,629 3,904 3,956 3,879 5,586 3,877 3,905 5,739 3,863 3,820 3,802 3,828 3,855 3,883 3,912 3,942 3,972 -19% 1% 4% 2% 46% 1% 1% 1% 1% 1%

EBITDA - capex 3,511 4,691 4,783 4,872 3,270 5,140 5,259 2,510 4,808 5,226 5,368 5,465 5,586 5,693 5,846 6,023 6,213 40% -2% -8% -9% -40% -8% -8% -7% -7% -7%

Working capital -700 -550 -500 -300 -300 -300 -300 -700 -550 -500 -300 -300 -300 -300 -300 -300 -300 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Cash interest, net -1,250 -1,187 -1,111 -1,074 -1,001 -910 -838 -1,250 -1,187 -1,111 -1,074 -1,001 -910 -838 -773 -732 -690 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Cash taxes, net -822 -881 -1,037 -1,076 -1,092 -1,145 -1,217 -822 -934 -1,081 -1,196 -1,250 -1,316 -1,385 -1,445 -1,514 -1,581 0% -6% -4% -10% -13% -13% -12% -11% -11% -10%

Other items within FCFE -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Group FCFE pre minority dividends 609 1,943 2,005 2,292 747 2,656 2,773 -392 2,007 2,404 2,668 2,784 2,930 3,040 3,199 3,347 3,512 -255% -3% -17% -14% -73% -9% -9% -8% -7% -7%

Dividends, incl. minority div -232 -303 -343 -695 -703 -711 -721 -232 -603 -643 -693 -701 -709 -719 -729 -740 -752 0% -50% -47% 0% 0% 0% 0% 0% 0% 0%

Other items driving change in net debt 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Decrease/(increase) in net debt 376 1,640 1,662 1,597 45 1,945 2,052 -624 1,404 1,761 1,975 2,083 2,222 2,321 2,469 2,607 2,760 -160.3% 16.8% -5.6% -19.1% -97.9% -12.5% -11.6% -10.6% -9.7% -9.1%

Adj Net debt 24,932 23,292 21,630 20,033 19,988 18,043 15,991 25,932 24,528 22,767 20,792 18,709 16,487 14,166 11,697 9,090 6,330 -3.9% -5.0% -5.0% -3.7% 6.8% 9.4% 12.9% 17.8% 25.7% 40.9%

Reported net debt 25,715 24,075 22,413 20,816 20,771 18,826 16,774 26,715 25,311 23,550 21,575 19,492 17,270 14,949 12,480 9,873 7,113 -3.7% -4.9% -4.8% -3.5% 6.6% 9.0% 12.2% 16.7% 23.7% 36.4%

New Old Change


27 November 2018 28


Summary Financials

Exhibit 54: Income statement

Telecom Italia Income statement 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027ERevenues 19,719 19,025 19,828 19,350 19,326 19,363 19,373 19,503 19,689 19,863 20,086 20,335 20,594

Other Income 287 311 523 523 523 523 523 523 523 523 523 523 523

Total operating revenues and other income 20,006 19,336 20,351 19,873 19,849 19,886 19,896 20,026 20,212 20,386 20,609 20,858 21,117

EBITDA, reported 7,006 8,002 7,790 8,140 8,594 8,739 8,751 8,856 9,017 9,164 9,358 9,576 9,803

- EBITDA margin, reported % 35.0% 41.4% 38.3% 41.0% 43.3% 43.9% 44.0% 44.2% 44.6% 45.0% 45.4% 45.9% 46.4%

-2,347 -2,548 -2,656 -2,708 -2,640 -2,588 -2,533 -2,721 -2,643 -2,578 -2,524 -2,478 -2,440

- Amortization of intangible assets with a finite useful life -1,788 -1,743 -1,817 -3,666 -1,805 -1,865 -1,923 -1,765 -1,885 -1,990 -2,096 -2,199 -2,297

Depreciation and amortization -4,135 -4,291 -4,473 -6,373 -4,445 -4,454 -4,456 -4,486 -4,529 -4,568 -4,620 -4,677 -4,737

- D&A as %-age of revenues % 21.0% 22.6% 22.6% 22.6% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0%

EBIT 2,963 3,722 3,291 1,767 4,149 4,286 4,295 4,371 4,489 4,595 4,738 4,899 5,066

- EBIT margin, reported % 14.8% 19.2% 16.2% 8.9% 20.9% 21.6% 21.6% 21.8% 22.2% 22.5% 23.0% 23.5% 24.0%

Income (loss) equity invest. valued equity method 11 -16 -19 0 0 0 0 0 0 0 0 0 0

Net Financial Income / (Expenses) -2,521 -907 -1,495 -1,250 -1,187 -1,211 -1,174 -1,101 -1,010 -938 -873 -832 -790

PBT, from continuing operations 453 2,799 1,777 517 2,962 3,075 3,121 3,270 3,479 3,658 3,865 4,067 4,276

Income tax expense -403 -880 -490 -181 -1,037 -1,076 -1,092 -1,145 -1,217 -1,280 -1,353 -1,423 -1,497

- tax rate (P&L) % 89% 31% 28% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%

Profit (loss) from continuing operations 50 1,919 1,287 336 1,925 1,999 2,029 2,126 2,261 2,378 2,512 2,644 2,779

Profit (loss) from Discontinued operations/Non-current assets he 611 47 0 0 0 0 0 0 0 0 0 0 0

Profit (loss) for the year 661 1,966 1,287 336 1,925 1,999 2,029 2,126 2,261 2,378 2,512 2,644 2,779

- owners of the Parent -70 1,808 1,121 170 1,759 1,833 1,863 1,960 2,095 2,212 2,346 2,478 2,613

- non-controlling interests 731 158 166 166 166 166 166 166 166 166 166 166 166

Basic EPS, Ordinary -0.33 8.27 5.32 0.81 8.35 8.70 8.84 9.30 9.94 10.50 11.14 11.76 12.41

Basic EPS, Savings -0.33 8.58 5.32 0.81 8.35 8.70 8.84 9.30 9.94 10.50 11.14 11.76 12.41


27 November 2018 29


Exhibit 55: Balance sheet

Telecom Italia Balance sheet 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

Goodwill 29,383 29,612 29,462 29,462 29,462 29,462 29,462 29,462 29,462 29,462 29,462 29,462 29,462

Intangible assets with a finite useful life 6,480 6,951 7,192 5,213 5,092 4,915 4,680 4,615 4,445 4,185 3,838 3,409 2,905

Property, plant and equipment owned 12,659 13,947 14,209 14,444 14,023 13,704 13,362 14,527 14,045 13,642 13,304 13,021 12,785

Assets held under finance leases 2,208 2,413 2,331 2,331 2,331 2,331 2,331 2,331 2,331 2,331 2,331 2,331 2,331

Non-current financial assets 2,989 2,698 1,768 1,768 1,768 1,768 1,768 1,768 1,768 1,768 1,768 1,768 1,768

Miscellaneous receivables and other non-current assets 1,804 2,222 2,422 2,422 2,422 2,422 2,422 2,422 2,422 2,422 2,422 2,422 2,422

Deferred tax assets 853 877 993 1,634 1,478 1,439 1,422 1,370 1,297 1,235 1,162 1,091 1,018

Other non-current assets 86 64 68 68 68 68 68 68 68 68 68 68 68

Total non-current assets 56,462 58,784 58,445 57,342 56,645 56,108 55,515 56,564 55,839 55,114 54,356 53,573 52,759

Cash and cash equivalents 3,559 3,964 3,575 2,134 1,229 1,624 2,657 -383 124 3 1,212 2,566 4,075

Inventories 254 270 290 290 290 290 290 290 290 290 290 290 290

Trade and miscellaneous receivables and other current assets 5,086 5,426 4,959 4,959 4,959 4,959 4,959 4,959 4,959 4,959 4,959 4,959 4,959

Securities and other 1,840 1,908 1,430 1,430 1,430 1,430 1,430 1,430 1,430 1,430 1,430 1,430 1,430

Current income tax receivables 163 94 77 77 77 77 77 77 77 77 77 77 77

Total current assets 10,902 11,662 10,331 8,890 7,985 8,380 9,413 6,373 6,880 6,759 7,968 9,322 10,831

Discontinued operations/assets held for sale 3,904 0 0 0 0 0 0 0 0 0 0 0 0

Total assets 71,268 70,446 68,776 66,233 64,630 64,488 64,929 62,937 62,719 61,873 62,324 62,895 63,590

Equity attributable to equity holders of the Parent 17,554 21,207 21,557 21,364 22,691 24,050 25,089 26,216 27,470 28,831 30,315 31,920 33,650

Equity attributable to Minority Interests 3,695 2,346 2,226 2,392 2,558 2,724 2,890 3,056 3,222 3,388 3,554 3,720 3,886

Total equity 21,249 23,553 23,783 23,756 25,249 26,774 27,979 29,272 30,692 32,219 33,869 35,640 37,536

Non-current financial liabilities 30,518 30,469 28,108 26,291 23,746 22,479 21,915 18,830 17,392 15,219 14,219 13,219 12,219

Employee benefits 1,420 1,355 1,736 1,736 1,736 1,736 1,736 1,736 1,736 1,736 1,736 1,736 1,736

Deferred tax liabilities 323 293 265 265 265 265 265 265 265 265 265 265 265

Provisions 551 830 825 825 825 825 825 825 825 825 825 825 825

Miscellaneous payables and other non-current liabilities 1,429 1,607 1,678 1,678 1,678 1,778 1,878 1,978 2,078 2,178 2,278 2,378 2,478

Total non-current liabilities 34,241 34,554 32,612 30,795 28,250 27,083 26,619 23,634 22,296 20,223 19,323 18,423 17,523

Current financial liabilities 6,224 4,056 4,756 4,756 4,756 4,756 4,756 4,756 4,756 4,756 4,756 4,756 4,756

Trade and miscellaneous payables and other current liabilities 7,563 7,646 7,513 6,813 6,263 5,763 5,463 5,163 4,863 4,563 4,263 3,963 3,663

Current income tax payables 110 637 112 112 112 112 112 112 112 112 112 112 112

Total current liabilities 13,897 12,339 12,381 11,681 11,131 10,631 10,331 10,031 9,731 9,431 9,131 8,831 8,531

Liabilities directly associated with Discontinued operations/Non-curre 1,881 0 0 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 71,268 70,446 68,776 66,233 64,630 64,488 64,929 62,937 62,719 61,873 62,324 62,895 63,590


27 November 2018 30


Prices in this report are as of the close of November 23, 2018.

Exhibit 56: Cash flow statement

Telecom Italia FCF and Net Debt 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

EBITDA 7,006 8,002 7,790 8,140 8,594 8,739 8,751 8,856 9,017 9,164 9,358 9,576 9,803

CAPEX -5,197 -4,876 -5,701 -4,629 -3,904 -3,956 -3,879 -5,586 -3,877 -3,905 -3,935 -3,965 -3,996

Working capital change -337 -98 -126 -700 -550 -500 -300 -300 -300 -300 -300 -300 -300

Provisions for employee benefits 389 -131 437 0 0 0 0 0 0 0 0 0 0

Operating provisions and other changes 113 -41 96 0 0 0 0 0 0 0 0 0 0

Net operating free cash flow (TI definition) 1,974 2,856 2,496 2,811 4,141 4,283 4,572 2,970 4,840 4,959 5,124 5,311 5,507

Cash interest, net -1,513 -1,372 -1,263 -1,250 -1,187 -1,111 -1,074 -1,001 -910 -838 -773 -732 -690

Cash taxes -363 -218 -1,100 -822 -881 -1,037 -1,076 -1,092 -1,145 -1,217 -1,280 -1,353 -1,423

Free cash flow to equity holders before other items 98 1,266 133 739 2,073 2,135 2,422 877 2,786 2,903 3,070 3,226 3,393

Other items -461 -658 -56 -130 -130 -130 -130 -130 -130 -130 -130 -130 -130

Free cash flow to equity holders -363 608 77 609 1,943 2,005 2,292 747 2,656 2,773 2,940 3,096 3,263

Sale of investments and other disposals 1,571 745 33 0 0 0 0 0 0 0 0 0 0

Share capital increases/reimbursements 186 1,304 16 0 0 0 0 0 0 0 0 0 0

Financial investments -51 -15 -12 0 0 0 0 0 0 0 0 0 0

Dividends, including minority leakage -204 -227 -235 -232 -303 -343 -695 -703 -711 -721 -731 -742 -754

- Telecom Italia dividends -166 -166 -166 -166 -187 -187 -488 -488 -488 -488 -488 -488 -488

- Minority dividends, total -38 -61 -69 -67 -116 -156 -207 -215 -223 -233 -244 -255 -266

- of which: TIM Brasil minority dividends -36 -12 -21 -65 -104 -152 -157 -163 -171 -180 -189 -198

- of which: Inwit minority dividends -22 -36 -46 -50 -53 -55 -58 -60 -62 -64 -66 -68

Change in finance lease contracts -1,523 -218 -68 0 0 0 0 0 0 0 0 0 0

Change in net financial debt from Discontinued operations/Non-curre -243 -38 0 0 0 0 0 0 0 0 0 0 0

Change in adjusted net financial debt -627 2,159 -189 376 1,640 1,662 1,597 45 1,945 2,052 2,208 2,354 2,509

Change in adj for fair value valuation of derivatives and related underl 173 361 53 0 0 0 0 0 0 0 0 0 0

Change in reported net financial debt -454 2,520 -136 376 1,640 1,662 1,597 45 1,945 2,052 2,208 2,354 2,509


27 November 2018 31


Disclosure Appendix

Reg AC We, Andrew Lee, Nicola Gifford, Michael Bishop, Joshua Mills, CFA, Shweta Jain and Yemi Falana, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.

GS Factor Profile The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows:

Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B, price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile).

Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics).

For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.

M&A Rank Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2 representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not factor into our price target, and may or may not be discussed in research.

Quantum Quantum is Goldman Sachs’ proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN GS SUSTAIN is a global investment strategy focused on the generation of long-term alpha through identifying high quality industry leaders. The GS SUSTAIN 50 list includes leaders we believe to be well positioned to deliver long-term outperformance through superior returns on capital, sustainable competitive advantage and effective management of ESG risks vs. global industry peers. Candidates are selected largely on a combination of quantifiable analysis of these three aspects of corporate performance.

Disclosures Coverage group(s) of stocks by primary analyst(s) Andrew Lee: Europe-Telecom Services. Michael Bishop: Europe-Telecom Services. Joshua Mills, CFA: Europe-Telecom Services.

Europe-Telecom Services: Altice N.V., Bouygues, BT Group, BT Group, Cellnex Telecom SAU, Deutsche Telekom, Drillisch AG, Elisa OYJ, Eutelsat Communications, Freenet, Iliad, Infrastrutture Wireless SpA, Inmarsat Plc, Liberty Global Plc, Nos SGPS, Orange, Orange Belgium SA, Proximus Plc, Royal KPN NV, SES SA, Sunrise Communications Group, Swisscom, TalkTalk, Tele Columbus, Tele2, Telecom Italia, Telecom Italia, Telefonica, Telefonica Deutschland, Telenet, Telenor, Telia Co., United Internet, Vodafone, Vodafone.

Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, “Goldman Sachs”) and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs has received compensation for investment banking services in the past 12 months: Telecom Italia (€0.58) and Telecom Italia (ADR) ($6.54)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Telecom Italia (€0.58) and Telecom Italia (ADR) ($6.54)

Goldman Sachs had an investment banking services client relationship during the past 12 months with: Telecom Italia (€0.58) and Telecom Italia (ADR) ($6.54)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: Telecom Italia (€0.58) and Telecom Italia (ADR) ($6.54)

Goldman Sachs International acts as corporate broker to: Telecom Italia (€0.58) and Telecom Italia (ADR) ($6.54)

Goldman Sachs holds a position greater than U.S. $15 million (or equivalent) in the debt or debt instruments of: Telecom Italia (€0.58) and Telecom Italia (ADR) ($6.54)

Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

27 November 2018 32


As of October 1, 2018, Goldman Sachs Global Investment Research had investment ratings on 2,814 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See ‘Ratings, Coverage groups and views and related definitions’ below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

Price target and rating history chart(s)

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The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst’s area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director or advisor of any company in the analyst’s area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

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Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 35% 54% 11% 64% 57% 55%

27 November 2018 33



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Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock’s total return potential relative to its coverage. Any stock not assigned as a Buy or a Sell on an Investment List with an active rating (i.e., a stock that is not Rating Suspended, Not Rated, Coverage Suspended or Not Covered), is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular analyst’s coverage group may vary as determined by the regional Investment Review Committee. Additionally, each Investment Review Committee manages Regional Conviction lists, which represent investment recommendations focused on the size of the total return potential and/or the likelihood of the realization of the return across their respective areas of coverage. The addition or removal of stocks from such Conviction lists do not represent a change in the analysts’ investment rating for such stocks.

Total return potential represents the upside or downside differential between the current share price and the price target, including all paid or anticipated dividends, expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The total return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst’s investment outlook on the coverage group relative to the group’s historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group’s historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group’s historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group’s historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; Ombudsman Goldman Sachs Brazil: 0800 727 5764 and / or [email protected]. Available Weekdays (except holidays), from 9am to 6pm. Ouvidoria Goldman Sachs Brasil: 0800 727 5764 e/ou [email protected]. Horário de funcionamento: segunda-feira à sexta-feira (exceto feriados), das 9h às 18h; in Canada by either Goldman Sachs Canada Inc. or Goldman Sachs & Co. LLC; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman Sachs & Co. LLC. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.

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General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst’s judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman Sachs & Co. LLC, the United States broker dealer, is a member of SIPC (http://www.sipc.org).

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Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.

The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analyst’s published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analyst’s fundamental equity rating for such stocks, which rating reflects a stock’s return potential relative to its coverage group as described herein.

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.

The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report.

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