Report
Luis Sanchez-Lecaroz ...
  • Polo Tang

Telefónica Deutschland "CEO/CFO meeting feedback" (Buy) Tang

Confidence on guidance supported by easing headwind /ongoing tailwinds
TEFD were confident in an improving trajectory for mobile service revenues supported by the following elements: i) Pre-paid activity and gross adds back to pre-crisis levels; ii) The benefit of lower churn throughout the lockdown period should be visible in Q3 given a lag effect (German subscribers need to give three months’ notice) and churn remains low;  iii) The one-off special factor in Q2 (-€24m legal settlement on Partner revenues/EBITDA) will not recur; iv) Roaming revenues remained subdued but have improved since Q2 amid Germany being seeing as a safe holiday destination and an influx of seasonal workers.


Huawei – less exposed?
TEFD is lagging peers in terms of 5G rollout but this could prove beneficial if there are restrictions on the use of Huawei equipment, as has been the case in other markets ( link). The German government is likely to give an update on security certification protocols and potential vendors/suppliers restrictions by the end of the year. While it is not clear what will happen to Huawei, TEFD sees limited risks given its limited rollout of 5G thus far and potential for any vendor restrictions not to apply to existing equipment.


Fiberco in Germany
TEF highlighted in its Q2 results call it is aiming to start a Fiberco in Germany as it views the country as underserved in terms of fibre and sees an opportunity. The vehicle will be led by the TEF Infra business unit and will have a neutral wholesale approach targeting mainly rural areas. TEFD is likely to be the future anchor tenant of the Fiberco, but it is not clear whether or not TEFD will acquire a minority stake in any new fibre vehicle, which could impact shareholder returns. TEF noted it will be seeking a financial partner for its new project in Germany.


Valuation: PT based on DCF
Our revenue/EBITDA assumptions are broadly unchanged but low absolute changes in net income trigger high percentage changes in EPS given net income is close to breakeven. On EFCF, we trim it by c-4% due to higher lease payments/re-phasing of capex. TEFD offers a c7.5% EFCF yield (post-spectrum) and a c7.2% dividend yield for 2020E. PT trimmed to €3.40 from €3.50.UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of such reports. Investors should consider research reports as only a single factor in making their investment decision. Important information including analyst certification and required disclosures regarding specific companies, derivatives or other instruments discussed in the email is included in the relevant latest research report. Such reports are provided to our clients through UBS Neo and, where appropriate, UBS.com. Where such report is not attached and/or hyperlinked you should refer to UBS Neo for a copy. You should also refer to the public disclosures website at /disclosures for required disclosures regarding specific companies. The message is subject to the Global Research Disclaimer available at /disclosures. (c) UBS 2020. All rights reserved. Intended for recipient only and not for further distribution without the consent of UBS.
Underlyings
1&1 Drillisch

Drillisch is a holding company. Co. through its subsidiaries, is a mobile virtual network operator in Germany. The services acquired from the network operators Telekom Deutschland GmbH, Vodafone D2 GmbH, E-Plus Mobilfunk GmbH and Telefonica O2 Germany GmbH & Co. OHG are sold further to the end consumers for Co.'s own account and at rates established by Co. Co. organizes its operations into three segments: telecommunications, which includes its activities in the sector of wireless services; freenet holding, which comprises the operations of its freenet AG subsidiary; and software services, which involves activities related to the development and marketing of a workflow management software.

Deutsche Telekom AG

Deutsche Telekom is engaged in the telecommunications services and information technology sectors. Co. operates as an integrated telecommunications provider. It is organized into four operating segments: Germany, Europe, and the United States; and Systems Solutions, as well as Group Headquarters and Shared Services. Co. provides fixed-network lines, broadband lines and mobile communications. Co. also provides customized Information and Communication Technology (ICT) solutions for corporate customers under the T-Systems brand. The Group Headquarters and Shared Services segment comprises cross-segment management functions, real estate services, and mobility solutions, among others.

Freenet AG

Freenet is a telecommunications provider in Germany. Co. provides its customers a portfolio of services and products, particularly in the field of mobile voice and data services. Co. does not operate its own network, but markets mobile communication services for the mobile network operators Telekom, Vodafone, E-Plus and O2 in Germany, under its own name and on its own account. Apart from its own network-independent postpaid, no-frills and prepaid services, Co. also provides the original network operators' tariffs. Co. operates within two segments: mobile communications and other/holding.

Telefonica Deutschland Holdings

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.

United Internet AG

United Internet AG. United Internet AG is a Germany-based Internet service provider (ISP) and holding company of the United Internet Group. The Company's products and technical services are divided into two key segments. The Access segment comprises narrowband, broadband and mobile access subscriptions, including the corresponding applications. The Applications segment includes such applications as home pages, e-shops, Personal Information Management applications, group work, online storage and office software. The Application segment also includes the operations of the Company's brands Sedo and affilinet, which serve customers performance-based advertising and sales possibilities. The Company's brand portfolio also includes GMX, WEB.DE, 1&1, united-domains, Fasthosts and InterNetX. In addition, the Company develops Internet based applications, such as cloud applications. The Company acts primarily via its wholly owned subsidiary 1&1 Internet AG, and Sedo Holding AG, in which it holds a majority stake.

Vodafone Group PLC

Vodafone Group provides mobile and fixed telecommunication services including: access charges, voice and video calls, messaging, interconnect fees, fixed and mobile broadband and related services such as providing televisual and music content, connection fees and equipment sales. Co. provides a range of consumer products and services including mobile, fixed voice, broadband and television, financial as well as other services to operators outside its footprint. Co. also provides a range of enterprise products and services including total communications such as mobile, fixed and a suite of converged communications services, internet of things, cloud and hosting and carrier services.

Provider
UBS AG
UBS AG

UBS Group AG is a Swiss multinational investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres as the largest Swiss banking institution in the world. 

Analysts
Luis Sanchez-Lecaroz

Polo Tang

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