telefonica - banco bpi
TRANSCRIPT
BPI
Back to growth(Price Target raised from € 9.40 to € 12.50; Recommendation upgraded from Reduce to
CoRe Buy)
4 More visibility in Spain. The last two quarters revealed an improving trend for
TEF Spanish operations powered by strategic decisions taken in 2012 (no
subsidization and convergent offers). The risks of ARPU dilution are being
more than compensated by the savings experienced and the transformation of
the market towards convergence which is bound to be a structural competitive
advantage for TEF. Also the commitment to improve efficiency is becoming
evident in the company's results and should help sustain an improving OIBDA
evolution in the coming quarters.
4 Organic OIBDA likely to post growth in 2013. We upgraded our consolidated OIBDA
estimates for 2013 by 4.7% following our more optimistic view on the evolution
of the Spanish market. Following a flattish organic evolution of consolidated
OIBDA in the last two quarters we now expect the company to post positive
organic growth in 2013 ahead of the guidance provided. Aside from this, and
following the announced divestments we now believe that TEF is already on
track to meet its FY net debt guidance.
4 Upgrading our recommendation to CoRe Buy. We have updated our estimates,
reflecting our revised macro assumptions, including the cut in the Spanish
Rf+CrP from 5% to 4.1%, and raised our YE13 Price Target to € 12.50 (+33%).
An improving trend in TEF Spanish operations, an astonishing delivery in balance
sheet deleverage and a still enticing outlook for Latam are compelling arguments
to be positive on the investment case. Aside from this we anticipate some
tailwinds from European regulation that could be particularly beneficial for
TEF given the intense competition witnessed currently in Spain. CoRe Buy.
Stock data
Price (24th May): 10.73 Price Target: 12.50
No. of shares (mn): 4 551 Market Cap.(€ mn): 48 810
Reuters/Bloomberg: TEF.MC/TEF SM Free-Float: 89%
Net Debt/EBITDA '13: 2.34 ROE '13: 20%
EPS Growth ('11-'14): 7.4% Avg. Daily Turnover [€ '000]: 344 933
Major shareholders: BBVA (5.753%); Criteria: (5.596%); Blackrock (3.895%)
Estimates 2011 2012 2013F 2014F 2015F 2016F
EPS Adj. (€) 1.60 0.86 1.01 1.03 1.07 1.19
P/E Adj. 6.7 12.4 10.6 10.4 10.0 9.1
Dividend Yield 14.2% 7.7% 3.4% 7.0% 7.0% 9.0%
FCF yield 14.1% 11.2% 10.8% 10.4% 10.6% 11.1%
EV/EBITDA 5.0 5.2 5.3 5.3 5.2 5.0
TEF vs IBEX 35 vs DJ Stoxx 600
EQUITY RESEARCH
TelefonicaTelecoms
CoRe BuyMedium-Risk
31st May 2013
Spain
Source: Bloomberg.
Historical Recommendation
Date Recommendation
18-Oct-11 Hold
22-Oct-12 Reduce
Source: BPI Equity Research.
Analysts
Pedro Oliveira
Phone (351) 22 607 3194
João Urbano
(351) 22 607 3221
Available on our website:
www.bpiequity.bpi.pt, BPI Online,
and Bloomberg at NH BPD
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Equity Research 4 Telefonica 4 May 2013
BPI vs. Consensus
Company: Telefonica
Sector: DJ Euro Stoxx Telecom. € Pr
Valuation monitor
Relative Valuation 2013 2014 2015
EV/EBITDA
BPI 5.3 5.3 5.2
Consensus 4.9 4.7 4.5
Sector 6.5 6.3 6.0
P/E
BPI 10.8 10.7 10.4
Consensus 10.2 9.5 9.2
Sector 11.6 11.0 10.4
PBV
BPI 2.1 2.1 2.0
Consensus 2.0 1.9 1.8
Sector 6.9 2.7 2.3
Dividend yield
BPI 3.4% 7.0% 7.0%
Consensus 7.0% 7.0% 7.0%
Sector 6.9% 7.0% 7.2%
P&L and B\S monitor
BPI estimates/Consensus 2013 2014 2015
Revenues 0.0% -1.3% -1.7%
EBITDA 0.6% -2.9% -3.6%
EBIT -0.2% -7.0% -5.7%
Net Profit -3.3% -7.9% -8.3%
Net Debt -1.3% 0.6% 1.4%
Capex 1.3% 6.3% 1.4%
Profitability monitor
EBITDA Margin
BPI 34.3% 33.8% 34.2%
Consensus 34.2% 34.4% 34.8%
EBIT margin
BPI 16.9% 16.2% 16.9%
Consensus 16.9% 17.2% 17.6%
Net Profit margin
BPI 7.9% 8.1% 8.4%
Consensus 8.2% 8.6% 9.0%
Key leverage ratios
Net Debt/EV
BPI 0.46 0.45 0.44
Consensus 0.49 0.47 0.46
Net Debt/EBITDA
BPI 2.45 2.45 2.32
Consensus 2.38 2.25 2.09
Stock Momentum
Price Performance Forward P/E and EV/EBITDA
Market Price Rating (€) Market Recommendations
Fair Value Comparison (€) CAGR 2012-15
EBITDA Consensus (€mn) EPS Consensus (€)
Source: Factset, Bloomberg and BPI Equity Research.
0% 5% 10% 15%
YTD
3 M
1 Y
Telefo nica DJES Telecom
-10
0
10
20
30
40
50
93 95 97 99 01 02 04 06 08 10 11 13
-20
0
20
40
60
80
100
Fo rward P /E
EPS Gro wth
0
4
8
12
16
Jan-12 M ay-12 Sep-12 Jan-13 M ay-13
P rice
P rice Target Consensus
P o sit ive40%
Negative24%
Neutral36%
-10% -5% 0% 5%
Revenues
EB ITDA
EB IT
Net P ro fit
A dj. EP S
B P I Consensus
19 000
21 000
23 000
25 000
Jan-11 No v-11 Aug-12 M ay-13
FY13
FY14
FY15
1.0
1.4
1.8
2.2
Jan-11 Nov-11 Aug-12 May-13
FY13
FY14
FY15
12.60
8.02
11.8112.50
0
6
12
18
P/E PBV Consensus BPI
Current M arket Price
3
Equity Research 4 Telefonica 4 May 2013
Telefónica at a Glance
Revenue Organic Growth (yoy) Operational Cash Flow breakdown (FY13F)
Source:Telefónica. Source: BPI Equity Research.
Mobile Revenue Market Share in Spain (4Q12) Wireline Revenue Mkt Share in Spain (4Q12)
Source:Telefónica. Source: CMT & BPI Equity Research.
DPS evolution (€) FY13F Op. CF Margin per division
Source: Telefonica and BPI Equity Research. Source: BPI Equity Research.
Debt maturity at FY12 (€ mn)
Source:Telefónica.
Financial Struture
(€ bn) 1Q13
Net Debt (1) 53.9
Avg cost of debt 5.22%
% debt in Eur 78%
% debt in Latam 11%
% debt in other 11%
Rating(S&P/Fitch) BBB/BBB+
Source:Telefónica.
-10.5%
6.8%
-16.3%
-1.6%
-20% -15% -10% -5% 0% 5% 10% 15%
Telefó nicaEuro pe
Telefó nicaLatino américa
Telefó nicaEspaña
Co nso lidated
1Q2011 2Q2011 3Q2011 4Q12011 1Q2012 2Q20123Q2012 4Q2012 1Q2013
Telefó nica Latam
45%
Telefónica Europe
12%
Telefónica Spain43%
Vo dafo ne28%
M ovistar(Telefó nica)
38%
Others7%
Yo igo5%
Orange22%
Ono15%
Jazztel9%
Orange7%
Vo dafo ne5%
Other8%
Telefonica56%
0.82
1.49 1.40 1.60
0.75 0.75
0.000.0
0.4
0.8
1.2
1.6
2.0
2008 2009 2010 2011 2012 2013 2014
18.8%
16.1%
9.6%
18.8%
37.0%
0% 10% 20% 30% 40%
Spain
Brazil
Other LaTA m
Euro pe
Co nso lidated
10 2457 850
11 4199 774
27 565
15% 12% 17% 15% 41%0
10000
20000
30000
2013 2014 2015 2016 >2016
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Equity Research 4 Telefonica 4 May 2013
MARKET SEEMS OVERLY CONSERVATIVE IN SPAIN
Results of the change in strategy more visible now
TEF launched during 2012 several structural changes in its strategy for the Spanish
market with important impact in financials. Of those we highlight the following:
i) End of handsets subsidization
ii) Progressive elimination of the loyalty program
iii) Launch of a convergent offer
i) End of handsets subsidization
TEF announced in the first quarter of last year the end of handsets subsidization.
Orange decided not to follow while Vodafone tried to pursue the same policy.
Nonetheless, a few months down the road VOD introduced again subsidization
due to the intense competition from Orange, Yoigo and the MVNOs. The decision
to eliminate subsidization had a powerful impact in TEF’s financials (more visible
in the last three quarters) reducing significantly commercial costs through lower
volume of handsets sales as well as through lower subscriber acquisition costs.
ii) Progressive elimination of the loyalty program
The loyalty program consisted in attributing points based on the level of consumption
that could be used as discounts in the renewal of equipments. The loyalty program
was a major source of subsidization as operators frequently offered additional points
at the time of the renewal of equipment. TEF decided first to eliminate the offer of
points at the time of the renewal of equipment and then in a second stage migrate
clients to packages that did not offer points for consumption like the convergent
offer "Movistar Fusion".
iii) Launch of a convergent offer
TEF launch of Movistar Fusion last October has been a huge success and kicked a
structural transformation of the market particularly meaningful for the mobile
segment. We believe that this offer empowered by FTTH connections provide TEF
a strong competitive advantage and reinforces the commitment to reduce commercial
expenses by reducing churn and by using the wireline service as the tool to attract
mobile customers (instead of handsets subsidization).
Movistar Fusion Movistar Fusion
customers (k) new customers / gross adds (%)
Source: Telefonica.
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Equity Research 4 Telefonica 4 May 2013
Due to the lag of implementation, the impact of these initiatives only revealed
profitability improvements in the last two quarters. However, since the 3Q last
year, when TEF reported handsets revenues down 38% yoy (+6.4% and + 2.7% in
the previous two quarters) the effects in financials started being noticeable.
Handset revenues in Spain (€ mn)
Source: Telefonica.
The main risk of Movistar Fusion is its ARPU dilutive nature as its main selling
point is savings for the user in the telecommunication monthly cost. At the same
time, the end of subsidization and loyalty program implies an important loss of
subscribers and one could argue that it is also ARPU dilutive. Therefore pressure
in customer revenues from TEF’s new policy is unavoidable.
Mobile customer revenues evolution in Spain (yoy)
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Source: TEF & BPI Equity Research.
Despite the anticipated pressure, mobile customer revenues have improved in the
last couple of quarters due to the impact of the loyalty program. The points attributed
under this program (both on a monthly basis as well as those attributed at the
renewal of the handset) are recorded as minus revenues. Excluding this effect we
believe the underlying trend has been relatively stable and should improve in the 2H of the
year as comparables become more benign. It is worth highlighting that 2Q results
should still reflect the positive impact of the loyalty program.
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Equity Research 4 Telefonica 4 May 2013
Service revenues evolution in Spain (yoy)
Source: Telefonica.
While it is always difficult to assess how good a strategic shift has been because we
never know the results of the alternative scenario, it seems that ending the loyalties
program has been the right strategy. TEF apparently did not erode the underlying
trend and still benefited from the savings (which were previously recorded as minus
revenues) of the implied subsidization. 3Q will likely be clean of the loyalty program
impact and therefore more depressed but, it is also true that the subscriber base
has reduced significantly the number of subscribers willing to churn to find the
best handset offer. Moreover, the first wave of convergent offers has been very
strong boosting churn levels. As soon as the first wave of convergence fades, churn
will likely come down and stabilize at lower levels than before.
In the wireline, we expect the trend to continue improving throughout the year
empowered by increasing penetration of convergence and FTTH connections that
constitute an important leverage vis-à-vis the competition. All in all, we expect Spanish
service revenues (including wireline and mobile) to fall 9.8% in FY13 vs. 12% in Q1.
The devil is in the details!
We continue to witness some excessive conservativeness in margins estimates, in
our view. The company revealed a strong optimism on its ability to continue to trim
down costs across the board in its last results' conference call and the trend seems
enthusiastic.
Opex quarterly evolution
1Q12 2Q12 3Q12 4Q12 1Q13
Personnel 576 574 539 544 559
-8.2% -9.4% -9.1% -13.3% -3.0%
Commercial 663 571 431 486 411
-9.4% -16.9% -27.7% -24.1% -38.0%
Other 1 063 1 038 1 008 958 830
-8.3% -10.0% -12.5% -25.1% -21.9%
Total Opex 2 302 2 183 1 977 1 988 1 799
-8.6% -11.8% -15.5% -22.0% -21.8%
Source: TEF & BPI Equity Research.
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Spanish GDP quarterly yoy
evolution (%)
Source: Bloomberg.
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
1Q12 3Q12 1Q13E 3Q13E
7
Equity Research 4 Telefonica 4 May 2013
Commercial costs have been the main source of Opex cuts, reflecting the new
strategic approach of the company for Spain. To better scrutinize this caption we
prefer to look at it net of handset sales to better understand the trends in
subsidization (by cutting handset sales it is possible to improve margins but only
improves OIBDA if subscriber acquisition costs [SAC] decreases).
Commercial costs evolution (€ mn)
Source: BPI Equity Research.
Looking in detail we believe that commercial costs will be a source of pressure in the
OIBDA yoy trend in the coming quarters. The reason behind is that churn levels were
very low in the 2Q and 3Q last year (1.7%) and unlikely to be repeated this year
given the intense competitive environment. Moreover, in the 1Q results comparables
were somewhat benign as churn in 1Q12 stood at 2.8% (dropping to 2.3% in
1Q13) and still SACs only dropped by 5% indicating an increase in SAC per gross
add. Our reading is that the competitive environment does not allow TEF to reduce
much more its levels of SACs. Finally we expect some acceleration in handset revenues
following some promotions by TEF, as users start to get acquainted with the leasing
model. Although this trend is likely to pressure commercial costs, it should have a
meaningless impact in OIBDA. We expect commercial costs and handset revenues
to fall yoy in 2013 by 18.3% and 44.5%, respectively (37.8% and 67.5% in the
1Q13).
Personnel costs with room for surprises… Telefonica is currently underway with its
restructuring plan and we estimate that around 5K employees have already left the
company under this program. When analysing the numbers reported in the 1Q
personnel costs seem oddly high, dropping only 3% which compares with 13%
and 9% falls in previous quarters. Considering that the program to cut down
employees is still not finished (around 2k still expected to accept early retirement)
and that the impact drags for a few quarters, we believe 1Q evolution does not
reflect the expected trend for the FY. We estimate a 6.9% fall in 2013.
-10%
-32%
-22%
-20%
-5%
-5%
+14%+18%
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Equity Research 4 Telefonica 4 May 2013
Aside from commercial and personnel costs the company anticipates further
efficiencies from insourcing and deepening in simplification. From the recent
evidence of other operators in distressed markets, we believe TEF still has room to
improve its efficiency levels. Moreover, we believe that Movistar Fusion, by
concentrating several RGUs in a single client’s account, will simplify and optimize
customer care and as the company walks through the learning curve of tackling
the market as an integrated player we expect further efficiencies delivered. TEF
booked a € 233mn Opex ex-commercial while personnel expenses decrease in 1Q
and we expect a € 718mn fall in the FY.
Opex anual evolution
2010 2011 2012 2013F 2014F
Personnel 2 658 2 482 2 233 2 079 2 053
-6.6% -10.0% -6.9% -1.3%
Commercial 2 933 2 656 2 151 1 758 1 870
-9.5% -19.0% -18.3% 6.4%
Other 4 838 4 742 4 066 3 349 3 177
-2.0% -14.3% -17.6% -5.1%
Total Opex 10 430 9 880 8 450 7 186 7 100
-5.3% -14.5% -15.0% -1.2%
Note: 2011 figures are adjusted of the € 2.6bn provision for restructuring plan.
Source: TEF & BPI Equity Research.
All in all we believe that OIBDA yoy trend might worsen slightly in the next quarter
due to tough comparables, on the back of low churn levels in 2Q12, but the trend
should improve in the 2H.
OIBDA 1Q evolution
Source: BPI Equity Research.
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Equity Research 4 Telefonica 4 May 2013
The improvement in service revenues for the 2H of the year coupled with room for
further Opex cuts lead us to expect OIBDA to fall by 7.1% in 2013 vs. a fall of 8.2%
in 1Q13 (-6.3% in organic terms) with room for positive surprises. Looking to
consensus, it seems to be pointing towards a double digit fall in OIBDA for the FY
which we deem as overly conservative leaving room for possible upgrades in the
coming quarters.
OIBDA FY evolution
Source: BPI Equity Research.
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Equity Research 4 Telefonica 4 May 2013
UPGRADING ESTIMATES
We have raised our estimates supported by a strong upgrade for TEF’s Spanish
operation. As described before we see an improving trend and more clarity on
TEF’s strategy which, in our view, provides room for upgrades in profitability despite
the additional pressure in top line.
Changes in estimates breakdown
Old New Old New Old New
2013E 2013E Chg (%) 2014E 2014E Chg (%) 2015E 2015E Chg (%)
Revenues
Spain 13 540 13 238 -2.2% 13 321 12 583 -5.5% 13 525 12 604 -6.8%
Europe ex-Spain 14 635 14 141 -3.4% 14 796 14 242 -3.7% 14 998 14 436 -3.7%
UK 6 619 6 390 -3.4% 6 704 6 441 -3.9% 6 802 6 531 -4.0%
Germany 5 227 5 185 -0.8% 5 328 5 287 -0.8% 5 445 5 406 -0.7%
Czech Republic and Slovakia 2 099 1 892 -9.9% 2 105 1 869 -11.2% 2 122 1 880 -11.4%
Latam 27 680 29 279 5.8% 27 378 29 211 6.7% 26 783 28 957 8.1%
Brazil 12 957 13 151 1.5% 12 810 12 917 0.8% 12 443 12 528 0.7%
Total Revenues 55 855 57 463 2.9% 55 494 56 840 2.4% 55 306 56 802 2.7%
OIBDA
Spain 5 619 6 347 13.0% 5 544 5 779 4.2% 5 599 5 709 2.0%
Europe ex-Spain 3 895 3 843 -1.3% 4 036 3 907 -3.2% 4 199 4 036 -3.9%
UK 1 558 1 607 3.2% 1 659 1 666 0.4% 1 760 1 726 -1.9%
Germany 1 406 1 375 -2.2% 1 447 1 418 -2.0% 1 511 1 481 -1.9%
Czech Republic and Slovakia 888 730 -17.8% 886 696 -21.4% 894 704 -21.3%
LatAm 9 823 9 955 1.3% 9 683 9 975 3.0% 9 503 10 106 6.3%
Brazil 4 562 4 637 1.6% 4 520 4 693 3.8% 4 452 4 741 6.5%
Total OIBDA 19 139 20 029 4.7% 19 065 19 544 2.5% 19 103 19 734 3.3%
Source: BPI Equity Research.
In Latam the upgrades are basically powered by Brazil where we expect a slightly
better outlook and more favourable €/BRL FX. TEF Brazil continues to strengthen
its competitive position in the mobile segment and become a clear winner in the
higher value added customers. The company is poised to lead data revolution in
Brazil and we still see room for higher efficiency in the post-merger process. On
the other hand, the wireline continues to be a concern as competition remains
tough and we fail to see decisive steps to empower the Pay-TV business.
Also worth highlighting are the downgrades in Chile (-10% in OIBDA13) and
Mexico (-26%) that posted disappointing results in the 1Q results. These downgrades
were offset by upgrades in Argentina (+23%) and Venezuela (+20%) due changes
in FX estimates in the first case and ability to partially offset the Bolivar devaluation
with price increases (ARPU in 1Q raised 13% in local currency) against our previous
expectation.
In UK, similarly to Spain, we also expect an improvement in profitability despite
having to cut our top line estimates. However, we have to stress that in this case
the improvement in top line trend is much clearer than in Spain. The main reason
behind our optimism in profitability is the company’s success in increasing its
TEF group change in estimates
(€ mn) 13F 14F 15F
Revenues 2.9% 2.4% 2.7%
EBITDA 4.7% 2.5% 3.3%
Op.Income 6% 4% 8%
Net Income 1% 6% 18%
Capex -7% -7% -5%
Op. Cash-Flow 17% 13% 10%
Source: BPI Equity Research.
11
Equity Research 4 Telefonica 4 May 2013
contract mix and decreasing churn which consequently reduces significantly
commercial costs. We expect commercial cost to decrease by 12% in 2013. The
German unit is being impacted by a high competitive environment that is pressuring
voice prices down which we attribute to the concentrated decrease of mobile
termination rates in 2013.
OIBDA organic evolution (yoy)
Source: Telefonica.
From a consolidated view the trend of the business seems to be improving for the
fourth consecutive quarter and is now presenting a flattish organic OIBDA growth.
We believe TEF will surpass easily its 2013 guidance of organic revenue growth
and lower decline in margins than in 2012. Indeed we believe revenue growth
should stand in line with expectations with slight growth (+0.4%) but margins
have room for positive surprises and should decrease only marginally (-0.1pp).
Therefore, we expect consolidated OIBDA to raise 0.3% organically, which implies
a slight improvement in the trend for the remaining of the year. We do not exclude
some upside risks to our estimates. On capex we remain conservative as the
company's challenges on this front are multiple, though acknowledging that recent
agreements for shared investments provide some optimism.
2013 guidance
TEF BPI (1)
Revenues Growth 0.4%
OIBDA margin Lower margin decline 35%
than in 2012 (-1.4pp) (-0.1pp)
Capex (ex-Spectrum) Similar Capex / 14.8%
Sales as in 2012 (14.1%)
Net financial debt < 47bn 46.8
(1) According to TEF guidance criteria.
Source: TEF & BPI Equity Research.
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Equity Research 4 Telefonica 4 May 2013
Regarding Net Debt, which has been one the investment case�s main caveats, we
believe that the announced divestments already ensures TEF is able to meet it�s FY
guidance. Nonetheless, TEF indicated that it will likely continue to de-leverage
which if confirmed will provide TEF with balance sheet flexibility and allow the
company to consider other value creation opportunities.
Net Debt evolution 2013 (E mn)
Source: BPI Equity Research.
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Equity Research 4 Telefonica 4 May 2013
VALUATION SUMMARY
Following the upgrade in our consolidated estimates, we have upgraded our valuation
by 33%. The main contributions to this upgrade were a 30% increase in the
valuation of the Spanish unit (+16% excluding the decrease of Rf+CrP from 5% to
4.1%) and a c. 25% raise in Latam brought mainly by upgrades in Brazil, Peru,
Central America, Argentina and Venezuela.
Telefonica Sum-of-Parts
(€ mn) Stake EV @ stake Weight Method WACC EV/Op.CF13F EV/EBITDA13F
Spain 100% 40 747 37.7% DCF 8.1% 8.3x 6.4x
Europe ex-Spain 21 998 20.4% 12.7x 6.7x
UK 100% 10 766 10.0% DCF 8.2% 13.7x 6.7x
Germany 77% 7 661 7.1% DCF 7.6% 13.6x 7.2x
Czech R. /Slovakia 69% 3 219 3.0% DCF 9.1% 11.2x 6.4x
Ireland 100% 352 0.3% DCF 11.2% 7.7x 3.4x
Latam 41 867 38.7% 9.8x 5.0x
Brazil 74% 18 461 17.1% DCF 8.8% 10.1x 5.4x
Argentina 100% 1 942 1.8% @ 4.5x OpCF - 4.5x 2.1x
Chile 99% 5 593 5.2% DCF 8.8% 12.6x 6.1x
Peru 99% 7 332 6.8% DCF 9.0% 13.7x 8.0x
Mexico 100% 2 053 1.9% DCF 9.3% 41.4x 5.1x
Venezuela 100% 2 644 2.4% DCF 14.8% 3.6x 2.5x
Colombia 70% 1 814 1.7% DCF 8.9% 12.8x 4.2x
Other Latam 1) 84% 2 028 1.9% DCF 9.6% 10.9x 4.9x
Tax credits 1 190 1.1% NPV
OIBDA non-contributing assets 2) 2 274 2.1% MV & BV
Total assets 108 075 100.0%
Attributable Net debt 3) 48 217
Other financial commitments 3 017
YE13 Equity value 56 841
# shares 4 551
YE13 price target 12.50
Source: BPI Equity Research.
Notes to Sum-of-Parts:
1) This division includes Central America (Guatemala, El Salvador, Nicaragua,
Panama and Costa Rica) as well as Ecuador and Uruguay. TEF sold in April a
40% in Central America ex-Costa Rica for USD 500mn plus a variable amount
of up to USD 72mn.
14
Equity Research 4 Telefonica 4 May 2013
Source: BPI Equity Research.
4) Other financial commitments includes commitments related with workforce
reduction (€ 3bn), post-employment defined benefit plans (€ 2.3bn) deducted
from associated long term assets (€ 1.5bn), and tax credits arising from these
commitments (€ 695mn).
2) OIBDA non-contributing assets are detailed as follows:
OIBDA non-contributing assets
(€ mn) Method
China Unicom 1 009 MV
DTS, Distribuidora de Televisión Digital 488 Aq. Value
BBVA 266 MV
Telco (1) 0 MV
Loans to associates (2) 352 BV
Prisa convertible bond 100 BV
PTC 55 MV
Amper 2 MV
Total 2 274
1) Adjusting Telecom Italia BV for current market prices implies a negative BV for Telco
2) TEF reports €852mn of loans to associate companies. We deduct the €100mn Prisa
convertible bond detailed below and atribute a 50% loss (€400mn) to the loans
provided to Telco.
3) Considering that our total EV is already at stake we adjust the net debt
proportionally to TEF’s stakes in Brazil, Germany and Czech Republic (reduction
of € 382mn). Also, we attribute a 50% discount to the cash held in Venezuela
adding to the net liabilities in the SoP € 949mn. Finally, we consider the fair
value of short and long-term financial investments included in the net financial
debt (according to TEF’s annual report fair value of these investments should
be € 836mn lower than book value)
Net liabilities reconciliation Sensitivity of YE13 price target to
changes in Rf and G of the Spanish
businesses (€/share)
g
-1.00% 0.50% 1.00%
-1.00% 15.67 15.84 16.01
Rf 0.00% 12.35 12.50 12.63
1.00% 9.80 9.91 10.03
Source: BPI Equity Research.
DCF Assumptions
EBIT
WACC Re Rf mg (1)
Spain 8.1% 11.1% 4.1% 31.1%
Europe
ex-Spain 8.2% 10.7% 3.4% 16.4%
UK
(mobile) 8.2% 11.0% 3.3% 14.4%
Germany
(mobile) 7.6% 10.2% 3.3% 16.0%
Czech Rep. and
Slovakia 9.1% 10.7% 4.3% 24.5%
Ireland
(mobile) 11.2% 12.3% 6.3% 9.6%
Latam 10.0% 11.9% 5.6% 23.1%
Brazil 8.8% 10.9% 4.7% 26.0%
Argentina 23.8% 24.8%19.7% 9.1%
Chile 8.8% 11.6% 4.2% 19.5%
Peru 9.0% 10.8% 4.6% 26.2%
Mexico 9.3% 11.3% 4.6% 11.5%
Venezuela 14.8% 14.8% 9.7% 33.1%
Colombia 8.9% 10.8% 4.6% 15.5%
Other 9.6% 10.9% 4.9% 14.0%
(1) Perpetuity.
Source: BPI Equity Research.
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Equity Research 4 Telefonica 4 May 2013
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Spain Brazil UK
Venezuela Germany Others
Our valuation for the Latam unit implies a 9.8x Op.CF13 or 5.0x EV/EBITDA13 with
a weighted average real WACC of 8.1% and an Op.CF CAGR13-20 of 4.2% in
Euros. Brazil is the main asset of Latam and is worth 44% of the total value of the
Latam unit. Our DCF valuation for Brazil implies an upside to current market prices of
22%.
Latam countries overview
Population GDP per LT LT Tax Mobile Data non-SMS Mobile Mobile
(k) capita (USD) GDP (1) CPI (1) rate penetration penetration mkt share ARPU (€)
Brazil 201 420 12 079 4.2% 4.5% 34% 135% 20% 30% 8.5
Argentina 41 028 11 576 3.0% 10.1% 35% 145% 14% 30% 10.0
Chile 17 403 14 552 4.6% 3.0% 20% 149% 14% 39% 11.3
Peru 30 474 5 948 6.0% 2.0% 30% 86% 11% 58% 6.8
México 114 872 10 247 3.3% 3.0% 28% 92% 13% 19% 5.2
Venezuela 29 517 12 956 2.6% 20.0% 34% 110% 22% 29% 15.6
Colombia 46 598 7 855 4.5% 3.0% 33% 116% 21% 24% 6.9
1) IMF.
Source: Telefonica, IMF and BPI Equity Research.
We share the market view on the upside potential for Latam and the importance
mobile data should have to monetize this potential. Nonetheless, we diverge in the
valuation of Argentina and Venezuela units where we prefer to have a more
conservative stance given the underlying political risks added to the difficulties to
transfer funds out of these countries. We value these assets at 2.1x and 2.5x EV/
EBITDA, respectively.
After Brazil, Mexico is the second most important country in TEF’s latam coverage
and probably the one where TEF has more upside risks. The regulation changes
that are in process of being approved might reduce the hegemony of Carlos Slim’s
group and allow TEF to extract a lot more value from the country. Our valuation
reflects a conservative scenario in case this scenario materializes or an aggressive
one in case the status quo is maintained.
Following Brazil, Peru and Chile are the second and the third most valuable assets
in TEF Latam portfolio. Peru seems poised to prosper in the coming years with the
IMF anticipating the higher GDP growth in the region. The low levels of ARPU, a
reflection of the depressed GDP per capita coupled with very low levels of data
penetration lead us to anticipate strong growth ahead (Op.CF CAGR13-20 of 8.6%).
TEF dominant position in the country ensures a leading role in capturing this
growth potential, we think. Chile is probably the more stable economy in the region,
though still presenting interesting GDP growth expectations. The stability coupled
with a low tax environment enhances the value of the asset. Strong competition
and the current high ARPU levels cap, in our view, some of the growth potential.
We value Spain through a DCF with a 8.1% WACC, an Op.CF carg13-20 of -2.9%
and an EBIT margin in perpetuity of 31% yielding a 8.3x EV/Op.CF and a 6.4x EV/
EBITDA, 30% up from our last valuation. We cut our Rf+CrP from 5% to 4.1% and
adjust our cost of debt to reflect decreasing risk of Spanish economy but also TEF
Proportional OIBDA & OpCF
breakdown (2013E)
Source: BPI Equity Research.
16
Equity Research 4 Telefonica 4 May 2013
healthier balance sheet (down from 6.5% to 5.1%). Excluding this impacts our
valuation would have value raised by 14% or 16% only considering the changes in
Rf+CRP.
A DDM approach is also supportive of our positive recommendation
We decided to cross-check our valuation with a consolidated DDM approach. Our
methodology includes the NPV of the expected dividends in the explicit period
(until 2020) added of a perpetuity based on 2020 FCFE, assuming an implied
100% pay-out thereafter, updated to YE13. We use a blended cost of equity of
11.3% and a perpetuity growth rate of 1.5% on this approach. We then adjust the
equity value adding non-OIBDA and non-dividend contributing assets, tax credits
and deduct other commitments.
To calculate the FCFE released to pay dividends we exclude the listed subsidiaries
(Brazil, Germany and Czech Republic) plus Argentina and Venezuela contribution
and add the expected proportional dividends to be received by these units. We
assume zero dividends from Venezuela and Argentina.
FCFE calculation (€ mn)
2013 2014 2015
Consolidated EBITDA-Capex 10 804 10 396 11 360
(-) Listed subsiaries + Arg + Venez -4 793 -4 100 -4 975
Cancelation of commitments - 775 - 624 - 492
Net interest payment (1) -2 790 -2 616 -2 522
Payment for tax (1) 335 305 136
WK (1) 485 89 - 37
Dividends from subsdiaries 2 335 2 577 2 902
FCFE 5 600 6 027 6 372
(1) Excludes listed subsidiaries + Arg + Venez.
Dividends received (€ mn) [Proportional]
2013 2014 2015
Brazil 1 465 1 639 1 907
Argentina 0 0 0
Venezuela 0 0 0
Czech Republic and Slovakia 225 263 266
Germany 625 649 684
China Unicom 19 26 45
Total 2 335 2 577 2 902
Source: PT, BPI Equity Research (E).
The estimated dividends to be paid by TEF’s parent company are derived from
target leverage below 2x by the end of the explicit period, which we believe is a
long-term sustainable level. Dividends promised for 2014 yield a 7% return and
even under a conservative leverage assumption (<2.0x) we still see room for upgrades
beyond 2016 (inclusive). Our estimated dividend CAGR13-20 stands at 11.7%.
Effective interest rating (12
month rolling)
Source: Telefonica.
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Equity Research 4 Telefonica 4 May 2013
FCFE vs. DY and leverage
Source: BPI Equity Research.
Our DDM valuation seems also supportive of a positive recommendation as we reach a
€ 12.2 fair value per share, 2.8% below our base case. Moreover, we have to stress
that under this methodology Venezuela and Argentina are worth zero which in our
view is overly conservative. For the sake of completeness if we assume that both
Venezuela and Argentina start paying annual dividends beyond 2020 worth 50%
of the respective Op.CF our DDM Fair value would jump to € 12.6 per share.
Incumbents multiples
EV/EBITDA P/E
13F 14F 13F 14F
Telefonica (1) 5.3x 5.3x 10.6x 10.4x
P. Telecom (1) 5.0x 4.6x 16.1x 9.6x
Telecom Itália 3.3x 3.3x 5.4x 5.3x
Hellenic OTE 3.4x 3.4x 11.0x 10.9x
France Telecom 3.9x 3.9x 7.5x 7.8x
Deutsche Telek. 4.5x 4.4x 13.2x 12.5x
British Telecom 4.8x 5.0x 11.9x 10.8x
KPN 3.7x 4.2x 8.2x 9.6x
SwissCom 6.6x 6.9x 13.5x 13.2x
Telekom Austria 3.9x 4.2x 19.0x 16.6x
Telenor 7.1x 6.6x 12.5x 11.2x
Belgacom 4.5x 4.8x 9.4x 10.0x
TeliaSonera 7.1x 6.9x 10.8x 10.4x
Average 4.9x 4.9x 11.5x 10.7x
Source: Factset and BPI Equity
Research.
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DDM Valuation
(€ mn)
Discount DDM 55 863
Other adjust. (562)
Equity value 55 301
# shares (mn) 4 551
Fair Value (€ per share) 12.2
Source: BPI Equity Research.
18
Equity Research 4 Telefonica 4 May 2013
Revenues and EBITDA breakdown (€ mn)
2011 2012 2013 2014 2015 2016
Revenues
Spain 17 284 14 985 13 238 12 583 12 604 12 724
Europe ex-Spain 15 524 15 010 14 141 14 242 14 436 14 704
UK 6 927 7 040 6 390 6 441 6 531 6 641
Germany 5 036 5 213 5 185 5 287 5 406 5 541
Czech Republic and Slovakia 2 130 2 010 1 892 1 869 1 880 1 894
LaTam 28 941 30 520 29 279 29 211 28 957 29 249
Brazil 14 326 13 618 13 151 12 917 12 528 12 390
Total Revenues 62 837 62 356 57 463 56 840 56 802 57 483
OIBDA
Spain 5 072 6 830 6 347 5 779 5 709 5 710
Europe ex-Spain 4 233 3 414 3 843 3 907 4 036 4 084
UK 1 836 1 602 1 607 1 666 1 726 1 737
Germany 1 219 1 351 1 375 1 418 1 481 1 514
Czech Republic and Slovakia 930 832 730 696 704 705
LatAm 10 891 11 103 9 955 9 975 10 106 10 384
Brazil 5 303 5 161 4 637 4 693 4 741 4 830
Total OIBDA 20 210 21 231 20 029 19 544 19 734 20 061
OIBDA margin
Spain 29.3% 45.6% 47.9% 45.9% 45.3% 44.9%
Europe ex-Spain 27.3% 22.7% 27.2% 27.4% 28.0% 27.8%
UK 26.5% 22.7% 25.2% 25.9% 26.4% 26.2%
Germany 24.2% 25.9% 26.5% 26.8% 27.4% 27.3%
Czech Republic and Slovakia 43.7% 41.4% 38.6% 37.3% 37.4% 37.2%
LatAm 37.6% 36.4% 34.0% 34.1% 34.9% 35.5%
Brazil 37.0% 37.9% 35.3% 36.3% 37.8% 39.0%
Total OIBDA 32.2% 34.0% 34.9% 34.4% 34.7% 34.9%
Capex Breakdown (mn)
Spain 2 914 1 692 1 455 1 521 1 676 1 718
Europe ex-Spain 1 705 1 770 2 484 1 681 1 707 1 573
UK 731 748 1 495 762 773 710
Germany 557 609 643 654 671 607
Czech Republic and Slovakia 229 248 314 235 236 229
LatAm 5 261 5 416 4 880 5 540 4 585 4 448
Brazil 2 469 2 444 2 160 2 ,833 2 058 1 850
Total Capex 10 224 9 458 9 225 9 148 8 374 8 145
Domestic KPI's (€ mn) 2011 2012 2013 2014 2015 2016
Mobile
# Subscribers 24 174 20 531 19 293 19 146 19 288 19 552
Net adds -135 -3,643 -1 238 -147 142 263
ARPU - customer bill 20.62 19.50 17.84 17.48 17.60 17.75
MOU 137.2 135.5 134.6 136.0 137.3 138.3
Handset sales 1 200 1 011 561 595 633 655
Data as % of service revenues 28.0% 32.0% 36.0% 40.1% 42.5% 44.6%
Wireline
# Subscribers (Fixed Voice) 12 305 11 723 11 582 11 663 11 745 11 827
# Subscribers (Broadband) 5 627 5 709 5 753 6 024 6 271 6 475
Broadband ARPU 32.2 26.7 23.5 21.8 21.8 22.2
Blended ARPU 62.8 54.9 49.2 45.6 44.9 44.4
Source: Telefonica, BPI Equity Research (E)
19
Equity Research 4 Telefonica 4 May 2013
Income Statement
CAGR
(€ mn) 2011 2012 2013F 2014F 2015F 2016F 12-16F
Turnover (1) 63 576 63 178 58 326 57 747 57 754 58 482 -2%
EBITDA 20 210 21 231 20 029 19 544 19 734 20 061 -1%
EBITDA margin 31.8% 33.6% 34.3% 33.8% 34.2% 34.3% 0
Dep.+ Prov. 10 146 10 433 10 190 10 172 9 976 9,657 -2%
EBIT 10 064 10 798 9 839 9 372 9 759 10 404 -1%
EBIT margin 15.8% 17.1% 16.9% 16.2% 16.9% 17.8% 0
Net Financials 3 576 4 934 3 125 2 815 2 722 2 633 -15%
Extraordinaries 0 0 0 0 0 0 0
Income Tax 301 1 461 1 673 1 634 1 753 1 936 7%
Minority interest 784 475 428 246 411 441 n.s.
Net Profit 5 403 3 928 4 613 4 678 4 872 5 393 8%
(1) Includes capitalized expenses.
Balance Sheet
CAGR
(€ mn) 2011 2012 2013F 2014F 2015F 2016F 12-16F
Net Intangibles 53 171 50 041 50 041 50 041 50 041 50 041 0%
Net Fixed Assets 35 469 35 022 34 057 33 033 31 431 29 918 -4%
Net Financials 20 160 19 264 17 728 17 384 17 074 16 795 -3%
Inventories 1 164 1 188 1 095 1 083 1 082 1 095 0
ST Receivables 12 898 12 539 11 555 11 430 11 422 11 559 -2%
Other assets 0 0 0 0 0 0 n.s.
Cash & Equivalents 6 761 11 719 6 009 6 009 6 009 6 009 -15%
Net Assets 129 623 129 773 120 485 118 980 117 059 115 418 -3%
Equity & Minorities 27 383 27 661 29 897 30 392 31 179 31 564 3%
MLT Liabilities 69 662 70 601 69 825 67 453 65 267 62 131 -3%
o.w. Debt 57 244 58 247 58 247 56 500 54 805 52 064 -3%
ST Liabilities 32 579 31 511 20 763 21 134 20 614 21 722 -9%
o.w. Debt 10 652 10 390 234 653 179 1 251 -41%
o.w. Payables 11 973 11 929 11 594 11 567 11 592 11 612 -1%
Equity + Min. + Liab. 129 623 129 773 120 485 118 980 117 059 115 418 -3%
Cash Flow Statement
(€ mn) 2011 2012 2013F 2014F 2015F 2016F
+ EBITDA 20 210 21 231 20 029 19 544 19 734 20 061
- Chg in Net W.C. -173 283 485 89 -37 -114
- Income Taxes 301 1 461 1 673 1 634 1 753 1 936
= Operating Cash Flow 20 082 19 487 17 872 17 821 18 019 18 239
- Expansion Capex -1 171 930 864 550 507 0
- Recurrent Capex 11 395 8 528 8 361 8 598 7 867 8 145
= Cash Flow after Inv. 9 858 10 029 8 647 8 673 9 645 10 095
- Chg Net Fin. Inv. 1 849 -896 -1 536 -344 -310 -279
- Net Fin. Exp. 3 576 4 934 3 125 2 815 2 722 2 633
- Dividends Paid 6 860 2 866 1 643 3 413 3 413 4 399
+/- Equity 9 34 0 0 0 0
Other 2 881 1 811 -969 -1 460 -1 650 -1 674
=Change in Net Debt -463 -4 970 -4 445 -1 329 -2 169 -1 668
Net Debt 56 229 51 259 46 814 45 485 43 316 41 648
Source: TEF (2011, 2012) and BPI Equity Research (F).
20
Equity Research 4 Telefonica 4 May 2013
Research
Bruno Almeida da Silva, CFA [email protected] (351) 22 607 4375
Iberia
Banking Carlos Peixoto [email protected] (351) 22 607 3141
Engineering, Manuel Coelho [email protected] (351) 22 607 3173
Capital Goods & Industrials
Food, Travel & Leisure João Safara [email protected] (34) 91 328 9853
Guilherme Macedo Sampaio [email protected] (351) 22 607 3179
Healthcare Ignacio Ortiz de Mendivil [email protected] (34) 91 328 9857
José Rito [email protected] (351) 22 607 3142
Infrastructures Filipe Leite [email protected] (351) 22 607 3136
Flora Trindade, CFA [email protected] (351) 22 607 4377
Retail, Pulp & Paper, Chemicals José Rito [email protected] (351) 22 607 3142
Bruno Bessa [email protected] (351) 22 607 3183
Ignacio Ortiz de Mendivil [email protected] (34) 91 328 9857
TMT's Pedro Oliveira [email protected] (351) 22 607 3194
João Urbano [email protected] (351) 22 607 3221
Utilities, Renewables, Oil Flora Trindade, CFA [email protected] (351) 22 607 4377
Gonzalo Sánchez-Bordona [email protected] (34) 91 328 9852
Macro & Strategy Tiago Veiga Anjos, CFA [email protected] (351) 22 607 3275
France
Utilities & Industrials Louis Boujard [email protected] (33) 1 4450 3343
Metals & Mining, Oil & Gas Alexandre Leroy [email protected] (33) 1 4450 3311
Stock Picking Pierre Bucaille [email protected] (33) 1 4450 3358
Consumer Hubert d'Aillières [email protected] (33) 1 4450 3326
Institutional Sales (Iberia) Ana Spratley Ferreira, CFA [email protected] (351) 22 607 3196
Diogo Rolo [email protected] (351) 22 607 3344
Francisco Pires [email protected] (351) 22 607 3296
Frederico Torre, CFA [email protected] (34) 91 432 1792
Javier Barrio [email protected] (34) 91 432 1793
Luís Sousa Pinto, CFA [email protected] (351) 22 607 3256
Pedro Prista Guerra, CFA [email protected] (351) 22 607 3218
Raquel Araújo Almeida [email protected] (351) 22 607 3243
Sérgio Godinho [email protected] (351) 22 607 3139
Institutional Sales (France) Pedro Prista Guerra, CFA [email protected] (33) 1 4450 3325
Alain Goldschild [email protected] (33) 1 4450 3318
Sales/Trading Luís Sousa Pinto, CFA [email protected] (34) 914 321 797
Carlos Gallego [email protected]
Francisco Chaves [email protected]
José Maria Alves [email protected]
Marta Brito e Cunha [email protected]
Pedro Moreira [email protected]
Ramon Blanco [email protected]
Xavier Estragués [email protected]
Publishing Maria do Céu Gonçalves [email protected] (351) 22 607 3137
Carla Gomes Alves [email protected] (351) 22 607 3160
Economics and Fixed Income Research
Paula Gonçalves Carvalho
Chief Economist [email protected] (351) 21 310 1187
BPI
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