Morningstar | Telefonica Deutschland Reports In-Line 3Q Results; Shares Undervalued
Telefonica Deutschland reported in-line third-quarter results, and we expect to maintain our EUR 4.50 per share fair value estimate and no-moat rating. We believe the shares are undervalued. The firm reported that revenue declined 1.1% year over year, but the nine-month result is only minus 0.7%, versus our full-year projection of a drop of 0.5%.However, its wireless telecom business, which accounts for about 89% of revenue, is showing signs of improvement. Telefonica added 233,000 contract subscribers in the quarter, taking its contract base to 22 million. This more than offset the decline in prepaid customers. Contract subscribers now account for 51.1% of its total wireless base. As contract customers generate higher average revenue per user, or ARPU, the growth of these subscribers is important. This led to an ARPU increase of 4.2% from the year-ago period to EUR 10.20 per month. We expect both contract subscriber growth and higher ARPUs to continue, which we expect will lead the company to small revenue growth in 2019.
However, the fixed-line telephone business continues to struggle, with revenue falling 10.6%. Telefonica doesn’t own its own fixed-line network in Germany, but rather wholesales capacity from Deutsche Telekom, the incumbent operator. As such, Telefonica has struggled to sell a converged product in Germany, unlike its home country in Spain, where it owns both networks and has been very successful. We believe this demonstrates the value of owning both networks in the same country. We expect the firm will continue to have issues in the fixed-line market in Germany, but not as severe as in 2018.
However, Telefonica continues to make progress on the cost side as it integrates its acquisition of E-Plus. This led to a 2% increase in adjusted EBITDA and an adjusted EBITDA margin of 26.1% for the quarter and 25.6% for the nine-month period versus our full-year projection of 25.5%.
Telefonica Deutschland Holding is a telecommunication company. Co. offers its consumer retail and business customers postpaid and prepaid wireless communications products, along with wireless data services using Global Packet Radio Service, Universal Mobile Telecommunications System and Long Term Evolution technology as well as Digital Subscriber Line wireline telephony and high-speed internet services. Co. markets its products and its wireless and wireline communications products as well as services via the core brand O2. Co.'s secondary brands include the brands Fonic and netzclub. Co. also markets high-speed DSL internet access and wireline telephony.
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