We remain cautious on Brazilian fixed-line carrier Telecomunicacoes de Sao Paulo SA (TSP), better known as Telesp.
Although the company has been investing in new businesses such as video, broadband Internet and Pay TV to boost long-term growth, we believe Telesp remains significantly challenged by the falling subscriber base of its legacy voice telephony operation as evidenced in the recently concluded first quarter.
Additionally, the carrier’s exposure to an increasingly competitive environment is expected to limit future operating results. The company operates in a highly regulated industry and is subject to changes in regulatory measures (including tariff revisions for local and long-distance business).
Telesp, the Brazilian subsidiary of Spanish telecom giant Telefonica (TEF), reported unsatisfactory results with lower profitability in the first quarter. Net income and EBITDA declined on falling fixed access lines and higher operating expenses. On the other hand, revenue improved on higher subscriber addition to broadband and Pay TV services.
Telesp is experiencing encouraging growth in its relatively new broadband Internet and Pay-TV businesses. Its “Speedy” broadband service (offering top speeds of 30 Mbps) continues to lead the domestic market. The company added 578,000 broadband (offered under the Speedy, Ajato and Fiber brands) subscribers as well as 22,000 Pay TV subscriber during the first quarter.
The company plans to invest in technology upgradation and expansion of broadband network infrastructure to remain competitive in a rapidly changing market. Various new products are also expected be introduced over the coming years. In addition, the company is expanding its broadband network infrastructure in Brazil where demand for Internet connections is growing rapidly.
Telesp is also strengthening its balance sheet by reducing its debt level. Total debt reduced substantially to R$2.4 billion in the first quarter from R$3.56 billion in the year-ago quarter. Further, Telesp is committed to return value to shareholders in the form of dividends. The company distributes a minimum of 25% of adjusted net income as annual dividends.
Hence, we are maintaining our long-term Neutral recommendation on Telesp. However, for the short term (1-3 months), the stock retains a Buy rating with the Zacks # 2 Rank.
TELEFONICA S.A. (TEF): Free Stock Analysis Report
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