Telefonica S.A.

[Thriftville]

Telefonica's share price has plunged by half recently. Any buddies has research into this company?

Any thoughts would be appreciated!

[yawnyawn]

Telefonica 2012 Q1 Results

This is a company that is having a financing issue.

Basically, Telefonica S.A. now derive almost 50% of its revenue from its Latin America operations. More than 50% of their OIBDA are derived from their Latin America operations.

OIBDA margins have decreased by 3.4% y-o-y. However, it shows a different picture if we go deeper into the results. Margins in Europe operations are falling, especially in Spain and Italy. This is not surprising as Spain and Italy are in a recession. But if we are to look into the figures of the Latin America operations, they are seeing strong growth, both top and bottom lines!

From Q1 earnings, debt maturing in 2012 have all been refinanced but we should pay attention to rise in effective interest from 4.91% to 5.23%, an increase of .32%. This will add onto the interest expense due to the ballooning debt.

The company has a huge load of debt at around 56b euros as at 31 Dec 2011. Its current ratio is also below 1.

I did a quick check,

The company also said it's moving to reduce its debt by shedding some assets in Europe, and is in the process of selling its 2% stake in Portugal Telecom SA (PTC.LB, PT). It is also preparing to sell Rumbo, an online booking service, and Atento, a call-center firm that it already tried to float last summer on Madrid's stock market.
Telefonica said it is targeting income in excess of EUR1.5 billion from those moves, and is also studying the sale of some additional non-strategic assets, as well as launching initial public offerings for some affiliates, as a mechanism to raise more funds.

https://www.adr.com/Markets/GlobalNewsSt...VN9B2A30SD

Telefonica Merges Colombian Phone Assets to Reduce Debt

IPO at this juncture? Sounds like a firesale to me. It doesn't sound promising as compared to last summer since the Spanish stock market has plummeted almost 35% since 1 year ago!

In 2011 the company reduced its dividend payout for the first time since 2003. Dividend for 2012 will cost 5b Euros. I will prefer the company to reduce the dividend further rather than "lelong" its assets out as a discount! A 30% cut in dividend will save 1.5b Euros, the amount they expect from the sale of those assets.

Not vested.

[Thriftville]

Poor thing! They are in such a bad shape! Thanks a lot yawn spending so much time to explain the situation!
Are you very into telecom sector?

[yawnyawn]

Nope, i was only curious after seeing the high yields of our 3 local telcos, so i did a bit of research on other telco firms.

Going back to Telefonica,

IPO of its German's O2 unit

I read in one article that another telco provider in Spain, Jazztel has been gaining quite a bit of market share in Spain, especially in the ADSL segment.

Revenue for its retail segment of Internet and Data jumped 28% y-o-y.
Jazztel Q1 2012

Comparison of ADSL price plans between Jazztel and Telefonica in Spain
http://hogar.adsl.jazztel.com/internet-l...ea-jazztel
http://www.movistar.es/particulares/inte...istar-adsl

Looks like Jazztel is the cheaper of the two, no wonder customers are switching from Telefonica to the cheaper option.

[Thriftville]

Thanks yawn!

Now I see the main reason for the sharp down of Telefonica. I don't quite understand why a lot of European telco, like France, UK (Vodafone) are offering so high dividend (7%) for their shares. Is it because people are dumping their shares?

If you were to invest to Telco stocks, which company would you buy?

[Drizzt]

the safest among them has to be vodafone. france telecom is very global but have a lot of land lines that would be eroded as well

[Thriftville]

Oh i see... land lines will be affected due to falling business volume?
Would you consider investing China Mobile? China has ventures into Africa and other developing countries, so the potential for growth could be good.

Thanks for sharing!

[jaco]

Now I see the main reason for the sharp down of Telefonica. I don't quite understand why a lot of European telco, like France, UK (Vodafone) are offering so high dividend (7%) for their shares. Is it because people are dumping their shares?

If they don't offer generous dividends, their stocks would fall even further, because there is very little potential growth in their business models. Europeans already use more than 1 phone per person on average. In addition, the income from SMS text messaging is dissappearing rapidly with the rise of smartphones and customers are cancelling their landline phones.

Apart from the revenue issues, the telco's have to invest heavily in broadband offerings (glass fibre). Let's remind here that Europe is not as densily populated as Singapore and they have to reach out to remote areas too.

Many former national telco's that have been privatized, are still being run in inefficient ways. They may have underfunded pension liabilities, because pension were (or still are) very generous in government related organizations.

If you were to invest to Telco stocks, which company would you buy?

I would proceed carefully when looking at European Telco's. I like Vodafone too, because it uses it's brand and expertise worldwide. Besides that, it focusses on mobile services and is not a former state monopoly. Finally, it is present in many emerging markets where there is still a lot of growth.

If you like Telefonica for it's South American potential, I suggest you take a look at América Móvil too. This Mexican telco is run by world's richest man Carlos Slim, who seems to operates according to value investing principles.

América Móvil is also a cleaner bet on South/middle America only, although Slim is bidding at European telco's now.

Disclosure: currently no position in telco's. I am from Europe.

[Drizzt]

jaco, what do you know about France Telecom? The diff between them and vodafone is their land line issues?

[jaco]

jaco, what do you know about France Telecom? The diff between them and vodafone is their land line issues?

Yes. Also, France Telecom is the former national telco of France, so I would expect the issues of inefficiency that I mentioned also to occur within FT. Especially, considering that the unions in France are traditionally strong and the country has recently elected a socialist president to replace a more business oriented president.

I never studied FT in depth though. I just looked at some financial ratio's from Reuters and I realize that the dividend yield is very appealing right now. Do consider thought that France has a 25% dividend withholding tax, where the UK (Vodafone) has 0%.

FT seems to be facing a high debt load. The shareholder's equity has been shrinking over the last 5 years. I do consider it possible that they will not be able to repay their debt obligations at some point and that the French government may re-nationalize them.

I would caution to buy the stock for the dividend yield only. It is probably wise to investigate the financial reports screening for risk factors, also in the light of the debt crisis threatening the economies of Europe.