5G And IoT Expansion Will Drive Future Success

Key Takeaways

• 5G expansion and digital ecosystem development are expected to boost revenue, improve customer perception, and enhance earnings.
  
• Growth in B2B IoT contracts and digital operational efficiencies are anticipated to increase revenue and improve profitability.
  
• Increasing competition and pricing difficulties in key segments may challenge revenue growth and limit diversification, particularly impacting postpaid market and alternative revenue streams.

Catalysts

A telecommunications company, provides mobile, fixed, long-distance, data transmission, and broadband services in Brazil.

• Expansion of 5G coverage and network quality improvements are set to enhance customer perception, which could drive increased subscription rates and thus boost service revenue and margins.
  
• The development of a digital ecosystem, with growth in platforms like Cartao de Todos and new financial service partnerships, is expected to generate additional revenue streams contributing positively to future earnings.
  
• The B2B IoT sector is identified as a growth area, with substantial contracts in agribusiness, logistics, and utilities anticipated to increase revenue.
  
• Continued digitalization and operational efficiencies, including cost negotiations and digital channel enhancements, are projected to improve net margins and reduce operational expenses, thus enhancing earnings.
  
• Strategic focus on postpaid customer growth and high ARPU maintenance, supported by a more-for-more strategy, is likely to drive increased revenue and profitability.

TIM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TIM's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 17.8% in 3 years time.
• Analysts expect earnings to reach R$5.2 billion (and earnings per share of R$2.23) by about April 2028, up from R$3.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$6.4 billion in earnings, and the most bearish expecting R$4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, up from 13.5x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 13.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.92%, as per the Simply Wall St company report.

TIM Future Earnings Per Share Growth

Risks

• Increasing competition from mature peers and new entrants could lead to challenges in revenue growth, particularly affecting postpaid market share, which is a crucial revenue driver.
  
• Efforts to enhance network perception may not yield immediate results, potentially impacting the ability to translate 5G leadership into revenue and customer base growth.
  
• Continued reliance on significant price increases to drive revenue growth may face resistance due to consumer price sensitivity, especially in times of economic uncertainty, impacting net margins.
  
• Intense competition and pricing difficulties in the fiber broadband segment may constrain revenue contribution from this area, limiting diversification efforts.
  
• Monetization challenges in customer platforms and partnerships, such as the recently resolved C6 Bank partnership, might affect expectations for alternative revenue streams, thereby impacting overall earnings.

Valuation

• The analysts have a consensus price target of R$20.786 for TIM based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$23.0, and the most bearish reporting a price target of just R$18.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$29.1 billion, earnings will come to R$5.2 billion, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 16.9%.
• Given the current share price of R$17.53, the analyst price target of R$20.79 is 15.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.