Telefonica Earnings: Steady Performance Across All Geographies Sustains EBITDA

We were pleased with no-moat Telefonica’s performance across most of its portfolio in the first quarter, as the company was able to protect and increase its service revenue, helping to offset inflationary pressures in its cost base and protect margins. Telefonica Deutschland (Germany) and Virgin Media O2 (U.K.) increased revenue 8% and 4% organically, respectively, thanks to market share gains and price raises, growing EBITDA around 1.5% in both geographies. Vivo’s (Brazil) performance was also very satisfactory, with sales up 12% organically thanks to market share gains and pricing increases, which also resulted in healthy EBITDA growth of 9.5%. Overall company revenue increased 5% organically while EBITDA was up 1% (31.5% margin). We are maintaining our EUR 4.90 fair value estimate with the shares trading at EUR 3.90 at the time of the writing. However, investors interested in Telefonica might need patience until value materializes through portfolio simplification, network transactions, and divestiture of noncore operations in Latin America.