Telefonica 3Q2010 results: LatAm strong, Spain a bit weaker

TEF has reported 3Q10 results roughly in line, with Adj. EBITDA +2.8% (vs +3.2%e). Adj. Net Income below estimates (-10.7% vs. +10.6%e) due to higher taxes. On the positive front, LatAm keeps on delivering impressive growth, whilst on the negative front adjusted numbers for Spain come in slightly weaker.

TEF has reported 3Q numbers roughly in line with estimates. It has booked Revenues: +7.7% (vs. +7.6%e), Adj. EBITDA +2.8% (vs.+3.2%) and Net Income below estimates (3Q10 -10.7% vs. +10.6%e) due to higher taxes

Consolidated numbers are roughly in line with estimates both at the revenue and EBITDA level. LatAm and Europe sustain growth showing Adj. EBITDA LatAm 3Q10e +7.4% vs. +8.8%e, EBITDA Europe 3Q10 +9.7% vs. +8.6%e. Spain shows some sequential improvement in reported Q310 numbers (EBITDA 3Q10: -4.6% vs. -6.3%e) but mainly due to non-recurrent items accounted in the quarter. Adjusted numbers come in slightly below estimates in Spain.

Numbers have been adjusted by: + EUR3797mn due to VIVO consolidation, -EUR202mn restructuring costs in Germany, and -EUR321mn for deferred taxes.

LaTAm keeps on delivering impressive numbers. Once again LatAm confirms its role as the group’s growth engine and delivers on expectations. Revenues LatAm were up 12.8% in 3Q10 (in line vs. +13.3e), and EBITDA: +7.4% (vs. +8.8e). We highlight strong numbers in Brazil with Telesp on its way to a recovery (EBITDA Telesp 3Q10: -6.0% in local currency vs. -12.1% in 2Q10). The only negative point in the region can be found in Mexico which has seen margin contraction for the first time and posted EBITDA 3Q10 of -14.7% (in local currency).

Spain slightly ahead in reported figures, but due to non-recurrent items. Adjusted numbers come in slightly below our estimates Adj. EBITDA Spain 3Q10 -5.9% (vs. -2.9%e). Reported figures in Spain come in slightly above our estimates, although mainly due to non-recurrent items (Universal service, recovery of bad debts, sale of service applications). However, if we adjust the numbers, they would come in slightly below, with Adj. Revenues Spain 3Q10 -4.2% (vs. -3.5%e and -2.9% in 2Q) and Adj. EBITDA 3Q 10 Spain -5.9% (vs. -2.9%e and -3.7% in 2Q).

Overall, numbers are sound (Adj. EBITDA 3Q10 +2.8%), with LatAm and Europe offsetting slightly weaker results in Spain. All guidance reiterated, and TEF on track to meet our FY estimates. The stock remains very attractive on a valuation basis. Outperform (TP EUR24.0)