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Why This Telecom Colossus Is a Bright Investment Option

April 30, 2014 | About:

Telefónica Brasil SA (VIV) is in the spotlight of the Brazilian telecommunications industry. Its best-in-class mobile network and its dominant position in Sao Paulo’s fixed-line market have enabled the firm to boast sustained growth in a market that has fallen over 8% year to date amid a weak economy and currency issues.

The company ended 2013 with a fourth-quarter revenue increase of 5.1% thanks to a 6% growth of its mobile business. A 7% expansion of its postpaid base augmented its market share in this segment to 39.8%, which in turn resulted in a 5.1% increment of its ARPU, mainly driven by data revenue from smartphones and modem sales. Also, postpaid churn decreased by 30 bps to 1.5%. Data and value-added services boosted by 3.8% and minutes of use remained in the upswing, with 8.1% growth relative to the year-ago period.

Competitive Positioning

Telefónica Brasil’s integration of its fixed-line and mobile businesses has allowed the firm to expand its fixed-line offering throughout the nation and to offer bundled services, thereby boosting its profitability and competitive position.

On the mobile front, the company continues to expand its subscriber base and to lead the market in both data and postpaid segments showing attractive long-term opportunities. Thus, while competitor Claro (the Brazilian unit of Mexican America Móvil SAB de CV (AMX)) saw its market share reduce to 25.13% in March from 25.28% in February, Telefonica Brasil’s share grew from 28.62% to 28.68% in the same period. Furthermore, while average revenue per user in the mobile sector has fallen for five consecutive years, the firm’s mobile unit Vivo was the only carrier to generate ARPU growth in 2013.

On the fixed-line side, although total revenue fell 3.7% year over year, the company expects to resume growth in this segment through the expansion of video, broadband Internet and Pay-TV services. To this aim, the firm launched its IPTV platform in late 2013 and is growing its FTTH footprint. Along these lines, it will invest 18% to 19% of its revenue in deploying high-speed fiber optic cable in the state of Sao Paulo in order to cover 2.5 households in 2014. Thus, the company will be better positioned to compete with giants like cable operator Net Servicos de Comunicacao SA (NETC), which also offers bundled services and has aggressively expanded its Internet and TV subscriber base in the state.

Investing for Long-term Growth

Looking forward, Telefónica Brasil is investing in technology and network expansion to further empower its competitive position. The firm is expanding its 3G network based on CDMA EV-DO and HSPA technologies, which provide a great advantage over its peers. Further, it expects to benefit from the growth opportunities in the 4G market. Consequently, it has signed a deal with Ceragon Networks Ltd. (CRNT) to deploy the superfast 4G network nationwide.

A Valuable Stock

Telefónica Brasil has a healthy balance sheet with strong cash flow generation (up to 9,576 million in 2013 from 3,488 million in 2011) and reasonable debt levels. Its net debt-to-EBITDA ratio is of 0.17 times and it has a debt- to-equity ratio of 0.2 against its peers’ average of 0.9. Its financial strength and a robust dividend have attracted investment gurus like Charles Brandes (Trades, Portfolio) and David Dreman (Trades, Portfolio), who have recently incorporated the company to its portfolio.

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Considering the stock’s trading price of 14.6x its trailing earnings compared to the peer group average of 16.90x, and a compelling dividend yield of 7.30 with a payout ratio of 1.1 (against its competitors’ median of 3.53 and 0.62, respectively), I believe this stock is a worthy investment opportunity with excellent growth potential.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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