Telefonica Is Managing Well During 2022; Positive Q3 With Sales and EBITDA Growth; Maintaining FVE

Telefonica is progressing well through a complicated year, handling inflationary pressure properly and managing to grow sales by 3.8% organically during the third quarter and 4.1% during the first nine months of 2022. Although EBITDA grew less than sales (2.9% in the quarter), we are pleased with this performance given inflationary pressure on telecommunication firms’ cost base and their normally limited ability to pass through price increases to customers. On the energy front (a headwind for several telecommunication companies in our coverage this quarter) Telefonica has more than 60% of energy costs hedged until 2023, and seems to be managing well as highlighted by EBITDA growth. Currency exposure in Latin America is, for once, a tailwind, having contributed an additional EUR 176 million in free cash flow during the first nine months (compared with a total of EUR 2.5 billion). We are maintaining our EUR 4.90 fair value estimate, which at this point provides 35% upside.