Telefónica: Still getting a wrong number
In our view Telefónica’s outlook has deteriorated. Domestically we see two main issues: 1) the emergence of low-cost convergent bundles will, in our view, create difficulties for TEF to keep expanding its ARPU levels; and 2) we see risks of inflation on sports content costs as the new auction for the Spanish league rights approaches and initial comments from League representatives suggest a 30% rise in the rights value. With headwinds on the top line/OPEX we don’t see scope for domestic OIBDA to resume growth until 2020E. On LatAm we expect TEF to keep growing below local inflation and losing market share, factors that undermine the region’s input into the valuation. Our 2018E-19E EBITDA numbers are cut on average by 13%/year owing to lower assumptions and FX revision, driving our FV from €9.1 to €7.3 and for 2018E/19E our OIBDA numbers are 4% below Bloomberg consensus. The lack of operational momentum and risk on consensus leads us to downgrade the shares from Neutral to SELL.
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