Re: Telefonica
- Dividend siesta, German fiesta Telefonica board of directors announced last night that it intends to a) list its German mobile asset, b) cut 2012 cash DPS to EUR40c from EUR1.50, with the remaining EUR90c scrip and EUR20c buyback and c) explore listing options around its Latam assets. In our view cutting the cash dividend is the right strategy to solve deleveraging (see Addicted to Dividends, 08 Dec 2011), however the listing of German assets solves little unless it is a precursor to a more meaningful consolidation in Germany, as we argued yesterday (KPN: Catch me if you can, AMX increasinly hostile, 30 May 2012). Finally, we calculate listing individual assets in Latam would be dilutive as local peers in Chile and Argentina trade at a discount to Pan-Latam AMX. Investors are likely to read the dividend cut as necessary, but negative, the listing of Germany is positive for KPN (1-OW, PT EUR10) and Latam options as initially confusing. For Telefonica we reiterate our 3-OW rating but applaud the decision to cut the dividend.
Dividend cut, still needs EUR2bn asset disposals to meet 2012 deleveraging target. Telefonica is sticking to its 2.35x net debt/EBITDA target for end 2012. Cutting the 2012 cash dividend saves cEUR450m versus our EUR50c dividend estimate, or EUR1.7bn versus last year's interim dividend of EUR77c. Hence even including the debt/equity swap in Colombia already announced, Telefonica will need to dispose of EUR2bn of assets to meet its 2012 targets. For 2013, Telefonica has confirmed a EUR1.50 per share return but at this stage the mix of cash, scrip and buyback is uncertain. We expect consensus will assume a EUR40c cash dividend going forward, removing the yield support. In our view, unless there is a credible operational story the shares will struggle, hence we see German consolidation as material to the Telefonica equity story.
German solutions - what makes sense for KPN. Listing Telefonica Germany would seem to make sense only if it is a precursor to a wider industrial consolidation in Germany (i.e. buying KPN's EPlus). Listing Germany provides a currency for consolidation with EPlus. KPN would need a substantial cash component, we assume EUR5bn to allow for deleveraging and reinvestment in its domestic operations, leaving shares in a new German vehicle as final payment. This would also allow KPN investors to share in potential merger synergies as well as reducing the cost to Telefonica.
Latam listings - "Telefonica Latam" makes sense, the rest is dilutive. Currently, Telefonica Brazil is listed (26% free float) and there are tiny stub listings in Peru and Argentina. Listing assets locally, would seem to have little positive benefits with Entel Chile (a peer of Telefonica Chile) trading on 4.1x EBITDA (Bloomberg estimates) and Telecom Argentina (a peer of Telefonica Argentina and covered by our Latam analyst Vera Rossi) trading on sub 2x. Pan-Latam AMX by comparison trades on 5.5x 2012 (source Barclays), hence we see most value in Telefonica Brazil becoming a vehicle to own all of Telefonica's Latam assets, which should potentially: a) lead to a re-rating of Latam, and b) reduce minority leakage.
Valuations. We estimate Telefonica trades on 9.1x 2012E P/E, 4.5x EV/EBITDA and 4.5% cash dividend yield (based on new EUR40c guidance). KPN trades on 10.3x, 4.7x and 11.9% respectively. Whereas the sector is on 9.3x, 4.5x and 8.8%. |
