Joice Alves

LONDON, (Reuters) – A takeover proposal worth $12 billion Telecom Italia Private equity firm KKR highlighted the ‘Italian Discount’. A surge in investor interest, and a European fund aimed to support its economy struggling could reduce this gap.

Italian Equities are trading at a 36% discount on world stocks based upon 12-month forward earnings. This is the biggest discount they have seen in nine years, and twice their average 20-year price of 16%.

The wider eurozone equity market is trading at 13.8% off world indices, and just 1.2x its 20-year average.

This disparity can be explained by Italy’s index composition. It is heavily influenced in old economy energy and banks stocks. Nearly two-thirds (or nearly three quarters) of Italian blue chip companies are made up of telecom companies, financial companies and utilities. Only 20% of all 50 largest eurozone companies operate in these sectors.

However, equity prices have fallen in Italy due to two decades worth of stagnant economic growth and an ageing populace.

James Matthews (European equities manager at Invesco), said that Italian equity markets were cheap within a global context. He cited De’ Longhi, small appliance maker, as an example.

De’ Longhi shares have risen from 11 euro per share in March 2020 up to 29 euros today, following a record-setting 40-euro high in September 2021. But their price-toearnings ratio (PE), of 13.5x is still lower than French competitor Seb’s 15.6 and less than the average 17 for the.

ITALIAN DISCOUNT

Telecom Italia is one of the most expensive in the sector, even with a half-price jump due to KKR’s proposal. According to BofA Global Research, the offer implies an enterprise worth below 6 times core earnings. This compares to a sector average 7 times.

Some people are less skeptical about Italian Equities, but they believe that you can get better returns elsewhere.

Peter Rutter from Royal London Asset Management said, “There are many good companies in Italy, but the same type of businesses can generate higher returns and more profit on capital.”

According to Refinitiv data, Telecom Italia’s operating profit margin is higher than that of rivals Telefonica (NYSE) and BT Group. However, it also has a lower return-on-equity.

Investors have begun to notice Italy’s mid-cap sector with the Italia Star Index, which is composed of 75 small- and medium-sized businesses. It has risen 165% from the beginning of the pandemic, to record levels in November.

Alberto Chiandetti (a portfolio manager at Fidelity Internaional) has increased Italy’s allocations, saying that such a steep price discount for companies is not justifiable, as Italy is the most important beneficiary of the European Union’s recovery fund, which amounts to 750 billion euros.

The iShares MSCI Italy ETF currently has 18.7 Million shares outstanding. This is almost 180% more than the November 2011 inflows. UBS advises higher allocations for Italy, and Amundi stated it selectively repositions in Milan-listed stocks.

Italy will use some EU cash to improve its internet infrastructure. Technology enabling businesses have been evident beneficiaries, with Reply’s shares climbing by 300% from the start of the pandemic and reaching a market capitalization of 6.3 billion euro.

When you look at where today’s discount is, it doesn’t seem to be in small caps. Chiandetti stated that the discount is higher in large caps and single stocks names, which are perhaps still undiscovered.