Telefonica’s 2009 results – Financial review and forecast 2010


Telfónica has recently published 2009 results. I found interesting the BBVA’s TMT team review on these results and its impact in the share value. Please find it next. Enjoy. (Disclosure: No positions in any referred company).

Telefonica’s results overview.

Overall, we highlight (following Q409 results presentation) encouraging 2010 operating guidance (EBITDA 10: +1%/+3%). We believe this is achievable on the back of the company’s strong track record. This guidance implicitly assumes a certain improvement in the domestic business, in line with the trends seen in Q4, expecting a 2010 in which domestic results could come close to flat growth (way above the -8.0% Organic EBITDA 09).

In LatAm, TEF continues working to redress Telesp, and managing the difficult situation in Venezuela. Mexico, Vivo, Argentina and Peru should take the lead as growth contributors in 2010. Weakness of Euro may prove to be a strong ally for TEF next year.

M&A: doubts not completely dispelled, but in our opinion largely priced in. Growth is decelerating, but that was already stated in mid-term guidance. Above all, we don’t believe at Ord PE 10e: 9.7x investors are paying for any growth, but rather for reliability in numbers. In this regard, TEF’s impressive track record should deserve full credibility. Valuation is just too attractive. BUY (TP: EUR21).

Rationale.

  1. Guidance 2010 remains the most attractive issue to retain out of Q4 09 Results. Together with the release of FY09 results TEF announced its operating targets for 2010. Revenues: +1% / +4%, EBITDA: +1% / +3% (in line with 2009 guidance). An outlook which is at the least encouraging. Even if numbers do not account for significant underlying growth, we have to take into account the still relatively tough situation in Spain, and in some of the LatAm businesses (Telesp, and Venezuela). Therefore, in this, still challenging environment, maintaining some operating growth has to be, in our opinion, seriously considered.
  2. On top of this, 2010 numbers; i) implicitly assume a significant recovery in Spain (a clear catalyst for the stock in our opinion), and ii) could be enhanced in real terms by the increasing weakness of the Euro (could be one of TEF’s best allies vis-à-vis 2010).
  3. 2010 EPS guidance: EUR2.1 was also reinstated, although it should be achieved through a substantial amount of non- recurrent items (EUR1.0bn announced at last Investor Day; EUR0.17/sh.), as well as a favourable comparison in terms of financial results and tax. Therefore, our opinion, this should not act as much of a driver for the stock.
  4. Finally, dividend policy re-confirmed with DPS 10e: EUR1.4, and 2012e: EUR1.75 minimum. In our opinion fully achievable given; i) the high credibility we attach to current Guidance (on the back of the solid track record, even in a scenario as tough as 2009 was for the domestic business), ii) the extremely comfortable financial situation.
  5. It’s true that non-organic growth (Hansenet) has been taken into account for the first time for the 2010 guidance calculation, however, it contributes just 0.4% to EBITDA growth.
  6. Spain, gradually showing slight improvements. This has been the trend in Q4 09, especially for the fixed line business, but also for the mobile business at top line level. Furthermore, management expects the trend to continue throughout 2010, as a result showing a much better performance than the -8.0% Organic EBITDA recorded in 09, with 2010 overall growth probably just slightly in the red (and may turn positive as early as 2H).
  7. LatAm: Telesp and Venezuela, remain key assets for the company. Although it cannot be denied that they will hardly contribute to any growth for the company in 2010, it’s important for TEF to redress the situation in both businesses after a weak Q4 09 (Telesp Q4 09 EBITDA: -16.1% in local currency, Venezuela: -0.9%)
  8. Vivo, Argentina, Mexico and Peru should take the lead as growth contributors for 2010.
  9. M&A; Still in the air? By way of response to the multiple questions regarding the TEF-TIT issue, TEF chairman stated that TEF is currently very satisfied with the relationship it has within the Telco holding and that it is a very good way to create value for its shareholders. He also reminded Investors that the shareholders agreement within Telco was recently renewed for another tree years.
  10. Does this dispel all doubts about a possible change in the current situation? Not in our opinion. Although we would remind investors that TEF is one of the only major Telecoms operators which can claim to be able to create value through efficiency improvements, and that we think any kind of further integration with TIT would most likely be accretive from the very start. In all, we would look at any possible operation as value accretive, and even if M&A speculation increase concerns in the short term, in this case they are largely priced into the share.

Conclusion

FY 09 comes without any major surprises, with Q4 09 showing slight improvements in Spain. TEF meets its guidance (once again) even after being hit by the worst of the crisis. Also, 2010 Guidance looks encouraging, and above all credible, especially on the back of the strong track record recorded by TEF in the past.

But, is the company going ex-growth? (the main argument supported today by the “bears” in the share). We do not believe there is any disagreement on this issue from anybody in the market. The company, in its last Investor Day already projected mid-term targets (2008-12) which assumed a significant lower growth profile for the company (EBITDA 08-12e: +2%/+4%, vs. +7%/+11% in 2006- 2010e). This said, the new Guidance could easily result in 10% range EPS growth in the mid term, and above all, this is no longer a “selling” argument for a share trading at EV/EBITDA 10e: 5.0x, Ord PE 10e: 9.7x.

TEF is no longer trading with any premium vs. sector, but rather a certain discount (Ord. PE 2010e: 9.7x, vs. 10.7 avg. for the sector), offering slightly higher growth (CGAR EPS 2009-11e: 8.8%, vs 7.2% of sector average), and above all, in our opinion safer numbers. Therefore, we reinforce our BUY recommendation (TP: EUR21/sh).


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