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Stock Analyst Note

Telefónica reported a 0.9% year-on-year increase in revenue in the first quarter of the year, mainly driven by strong service revenue growth of 2.3%. EBITDA grew by 1.9% year over year thanks to revenue growth and control of operating expenses, which just increased by 0.5%. Shares have run by 20% since the lows recorded in February. We are maintaining our EUR 4.90 fair value estimate.
Stock Analyst Note

No-moat Telefonica's revenue grew by 4.1% organically year over year in fourth-quarter 2023, while EBITDA increased by 4.5% after restructuring and goodwill impairments were removed. In Spain, EBITDA continued to stabilize as seen in prior quarters, growing 0.1% on an organic basis as service revenue increased 3.2% compared with a decline of 2.1% last year as the firm delivered on cost efficiencies. It’s the second big restructuring Telefonica has undertaken in the past three years and will generate EUR 285 million in annual savings, compared with a restructuring expense of EUR 1.38 billion. We are pleased with Telefonica’s recent focus on cost-cutting, especially in Spain as we believe the firm's employee base is too large here. In Germany, Telefonica continued with the healthy performance we are used to as EBITDA grew organically by 3.7%. Brazil and Virgin Media O2 were the standouts with EBITDA up 8.9% and 10.6% in the quarter, respectively, the latter due to subscriber growth and realization of synergies after the merger. For 2024 Telefonica expects 1% revenue growth with EBITDA up 1%-2%, also in line with its medium-term targets for the next three years announced at its most recent capital markets day. Capital intensity will decrease in 2024, enhancing free cash flow generation, from 14% of sales this year to a maximum of 13%. We maintain our EUR 4.90 fair value estimate.
Company Report

After expanding its operations to many European and Latin American countries during the 1990s and 2000s, Telefonica has turned around its strategy in recent years to focus on four key markets: Spain, the United Kingdom, Germany, and Brazil. Telefonica is divesting or restructuring its Latin American operations (except Brazil) and infrastructure assets such as towers or noncore fiber networks and intends to use the proceeds to reduce debt, a strategy we look favorably upon.
Stock Analyst Note

We maintain our no moat rating and EUR 4.90 fair value estimate after Telefonica’s third-quarter results and capital markets day. It achieved 2.5% organic revenue growth, which translated into 3% EBITDA growth, helped by cost controls. The strongest organic revenue growth was recorded in Germany and Brazil at 2.2% and 7.5%, respectively. In Spain, the EBITDA growth trend keeps improving with negative 0.5% in the third quarter after four quarters at negative 1%-3%.
Stock Analyst Note

Narrow-moat Telefonica upgraded its full-year guidance after a good set of results supported by growth in Germany, Brazil, and the U.K., and stability in the Spanish market. Management now expects 4% and 3% growth in revenue and EBITDA, respectively, compared with low-single-digit growth previously. Growth in operating expenses remained in check (2.3% year-over-year growth compared with 5.4% growth in the first quarter) as personnel and supply costs have moderated. Telefonica has executed several pay rises across its portfolio in recent months, but this has been offset by cost reductions in other expenses. Spanish inflation has declined sharply to 1.6% in June 2023, one of the lowest in the European Union, which should help Telefonica with indexation of personnel expenses entering 2024. We are maintaining our EUR 4.90 fair value estimate.
Company Report

After expanding its operations to many European and Latin American countries during the 1990s and 2000s, Telefonica has turned around its strategy in recent years to focus on four key markets: Spain, the United Kingdom, Germany, and Brazil. Telefonica is divesting or restructuring its Latin American operations (except Brazil) and infrastructure assets such as towers or noncore fiber networks and intends to use the proceeds to reduce debt, a strategy we look favorably upon.
Stock Analyst Note

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.
Stock Analyst Note

No-moat Telefonica's revenue grew by 3.9% organically year over year in the fourth quarter, while EBITDA increased by 3.5% as management controlled inflation well in its cost base. Spain continues to see declines in EBITDA (down 2.1% in the quarter) despite flat revenue growth due to cost pressures, although the declining trend is easing as the year progresses. This decline has been compensated by the remainder of its geographies. In Germany, Telefonica’s strongest performer in the past two years, sales and EBITDA grew by 6.6% in the fourth quarter. In the U.K, after the joint venture with Virgin Media, EBITDA grew by 9.9% as merger synergies were realized, while Brazil had a 6.6% increase. We are maintaining our EUR 4.90 fair value estimate.
Stock Analyst Note

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.
Company Report

After expanding its operations to many European and Latin American countries during the 1990s and 2000s, Telefonica has turned around its strategy in recent years to focus on four key markets: Spain, the United Kingdom, Germany, and Brazil. Telefonica is divesting or restructuring its Latin American operations (except Brazil) and infrastructure assets such as towers or noncore fiber networks and intends to use the proceeds to reduce debt, a strategy we look favorably upon.
Stock Analyst Note

Telefonica delivered in the second quarter, with sales growing 5.2% organically driven by healthy performance in Germany, Latin America, and Brazil. EBITDA only grew by 3.4% as the cost base remains pressured due to higher energy costs and general inflation. Telefonica also gave an update on guidance and now expects to finish the year at the upper part of its previously guided range of low-single-digit growth in sales and EBITDA. The company continued its value crystallization strategy and closed the sale of a 45% stake in BlueVia, its rural fiber-to-the-home network in Spain, for EUR 1 billion, which implies a valuation of EUR 2.5 billion for the whole entity. The sale was done at a multiple of 27 times EBITDA, which we consider attractive. The proceeds will be used for debt reduction purposes, which we consider the main capital allocation priority. As we have highlighted in the past, we believe Telefonica is doing a good job in highlighting the value of its assets by taking a portfolio approach. We are maintaining our EUR 4.90 fair value estimate, and at this point the shares remain slightly undervalued.
Stock Analyst Note

Telefonica recorded a solid beat of consensus expectations in revenue, EBITDA and free cash flow. This was due to healthy performance in all geographies and currency effects acting as a strong tailwind, as Brazilian and Latin American currencies recently appreciated. Organic revenue growth was 3.2%, with the largest contributors being Germany and Brazil (5.2% and 4.6% growth respectively), and with Spain remaining stable at 0.9% organic growth. Group EBITDA grew less than revenue at 2.1%, hit by cost inflationary pressures. Despite the beat, management preferred to maintain its guidance of low-single-digit growth in sales and EBITDA, given current macroeconomic uncertainties. We maintain our EUR 4.90 fair value estimate and view shares as fairly valued.
Company Report

After expanding its operations to many European and Latin American countries during the 1990s and 2000s, Telefonica has turned around its strategy in recent years to focus on four key markets: Spain, the United Kingdom, Germany, and Brazil. Telefonica is divesting or restructuring its Latin American operations (except Brazil) and infrastructure assets such as towers or noncore fiber networks and intends to use the proceeds to reduce debt, a strategy we look favorably upon.
Stock Analyst Note

Fiscal 2021 has been one of changes for Telefonica, with the sale of its towers, reduced exposure to Latin America (sale of El Salvador, Costa Rica and fiber assets in Colombia and Chile) and the creation of its U.K. joint venture with Virgin Media. We are pleased with this strategic direction as it is crystalizing the value of Telefonica’s assets and using the proceeds to reduce debt, while simplifying the company’s structure and reducing currency exposure at the same time. We expect Telefonica will continue to pull different levers during 2022, like a partial monetization of its tech unit (approximately EUR 1 billion in revenue), continued reduction in Latin America or sale of remaining assets. All of this is supported by favorable regulatory changes in Spain, its main market, in late 2021. We maintain our EUR 4.90 fair value estimate, which represents 15% upside.
Stock Analyst Note

Aside from the good financial performance, with revenue and EBITDA up 3.6% and 1.6% organically, we believe there were several points of good news during no-moat Telefonica’s third quarter. First, the Spanish competition authority CNMC confirmed in October its intention to further deregulate the fiber market, which means Telefonica will not be required to provide wholesale access to its fiber network in 70% of the country. Although Telefonica still has to facilitate infrastructure access to Vodafone and Orange to deploy their networks, we believe this will result in long-term stability for Telefonica’s fiber and convergent customer bases, something much needed given the fiercely competitive Spanish mobile market. Telefonica’s position in Spain is unmatched, with the best fiber-to-the-home (FTHH) network, coupled with proprietary content and football rights, which results in a 65% higher convergent ARPU compared with Orange. We are maintaining our EUR 4.90 fair value estimate, which represents a 30% upside.
Stock Analyst Note

We are downgrading Telefonica’s moat rating to none from narrow, as we believe the company’s advantaged position in Spain and the United Kingdom as a result of effcient scale is not enough to offset its weaker position in Germany, Brazil, or Latin America. Although Telefonica is doing a good job of reshaping its portfolio by divesting no-moat divisions and crystallizing value through asset sales, the company’s returns on invested capital are close or just slightly above its cost of capital, leaving little margin for error, which reduces our certainty that the company will more likely than not be able to generate excess ROICs over the next 10 years. Our moat rating downgrade together with more moderate revenue growth and margin assumptions is the main explanation for our fair value estimate cut to EUR 4.90 from EUR 8.70 (our new fair value implies a 6.0 times terminal enterprise value/EBITDA multiple).
Company Report

After expanding its operations to many European and Latin American countries during the 1990s and 2000s, Telefonica has turned around its strategy in recent years to focus on four key markets: Spain, the United Kingdom, Germany, and Brazil. Telefonica is divesting or restructuring its Latin American operations (except Brazil) and infrastructure assets such as towers or noncore fiber networks and intends to use the proceeds to reduce debt, which we think is the right move.
Stock Analyst Note

We are placing Telefonica under review as we transfer coverage to a new analyst and reassess our investment thesis and long-term economic drivers as the company has undergone significant changes over the past two years. We expect to adjust our forecasts, which will likely result in a reduction of our fair value estimate for the firm. We anticipate relaunching coverage shortly.
Company Report

Telefonica has shifted its strategy, narrowing its focus to four main markets--Spain, Brazil, Germany and the U.K.--a move away from pursuing growth across several markets. This includes a restructuring plan to set up an autonomous unit comprising all Latin American markets, except Brazil. Additionally, the firm has created separate infrastructure and technology divisions in order to pursue growth or divestment opportunities outside the tradictional telecom space. In early 2021 Telefonica continued with its divestment strategy and sold its stake in Telxius (its tower infrastructure arm) to American Tower for EUR 7.7 billion, which will be used for debt reduction. We think the new strategy is beneficial as it reduces emerging market macroeconomic and currency risks, improves efficiency of operations and provides deleveraging opportunities. Like other European telecoms firms, Telefonica sees business-to business, or B2B, services, like the "Internet of Things," cloud and cybersecurity as key growth streams with low capital spending needs. The digitalization trend is favorable, but the B2B segment is fragmented and competitive.

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