Analysis: KKR's Telecom Italia approach may call time on Italy discount LONDON Reuters -- A $12 billion takeover proposal for Telecom Italia by private equity giant KKR has highlighted an 'Italian discount' which a surge in investor interest and a European fund aimed at supporting its struggling economy could help narrow.
Italian stocks trade at the widest discount in nine years and more than twice their 20 year average of 16% at a 36% discount to world stocks, based on 12 month forward earnings.
The euro zone equity market is trading at a 13.8% discount to world indexes and only 1.2 times the discount to its own 20 year average.
Italy's index composition, which is heavy in old economy energy and banking stocks, has nearly two-thirds of Italian blue chips made up of financial firms, utilities, telecom, oil and gas companies, while only about 20% of the 50 largest companies in the euro zone operate in those sectors.
Two decades of near zero economic growth, an ageing population and Italy's high debt levels have dragged down equity prices in the country.
Italian equity markets are cheap in a global context and this has given us the chance to own some great companies that could trade on much higher valuations if they were listed in other countries like the U.S., according to James Matthews, European equity fund manager at Invesco.
After touching record highs in September 2021, De' Longhi's price-to- earnings PE ratio of 13.5 times was lower than French competitor Seb's 15.6 and below the average of 17 for the STOXX 600, although De' Longhi shares rose from 11 euros to 29 euros in March 2020.
Even after a 50% share price jump following KKR's proposal, Telecom Italia remains among the cheapest in its sector, with the offer implying an enterprise value below 6 times core earnings against a sector average of 7 times, according to BofA Global Research.
Some people who are more skeptical about Italian equities say that they can find better returns elsewhere.
Peter Rutter, head of equities at Royal London Asset ManagementLondon Asset Management, said that there are some good companies in Italy but on a global basis the same types of businesses in other parts of the world are more profitable and can generate higher returns on capital.
Even though Telecom Italia has a higher operating profit margin than rivals Telefonica and BT Group, it has a lower return on equity, according to Refinitiv data.
Since the start of the epidemic, investors have begun to shine on Italy's mid-sized segment, with the FTSE Italia Star index, an index of 75 small and mid-sized companies, soaring 165% since the start of the epidemic to a record high in November.
Alberto Chiandetti, a portfolio manager at Fidelity International, said a hefty price discount is not justified for many companies, as Italy is the biggest beneficiary of the 750 billion euro recovery fund.
An iShares MSCI Italy ETF has 18.7 million shares outstanding, up almost 180% from November last year, far outstripping inflows into an MSCI euro zoneETF, while UBS advises higher allocations to Italy and Amundi said it is selectively repositioning in Milan-listed stocks.
Italy plans to use some of the EU cash for its internet infrastructure, technology enabling companies have been obvious beneficiaries with the shares of tech company Reply climbing 300% since the beginning of the epidemic to reach a market value of 6.3 billion euros.
If you think about where the discount is today, I don't think it's in small caps anymore. Chiandetti said that the discount is more in mid, big caps or single stock names that are still maybe undiscovered.