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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: Steve Fancy who wrote (7672)	9/9/1998 1:27:00 PM
From: Steve Fancy	Respond to of 22640

Here's some more information from Warburg Dillion Read. Everyone, make sure you read the backwords link from this message also! sf =========================== TELEBRAS: REDUCING PRICE TARGET - WDR Authors: Warburg Dillion Read Tickers: INT, TBR, TBH Recommendation: Buy Symbol: TBR Price: $64.88 Country: Brazil Sector: Telecommunications The following repoirt was first published by WDR LLC on September 4, 1998 and by PaineWebber on September 4, 1998. All data in the report, except where indicated, is based on the original report and local shares. Telebras: BUY - Reducing Price Target Ticker: TBR Price: $65 Price Target: $100 Current opinion: Buy Prior Opinion: Buy 52-week range: $147.38 - $65.00 After extensive and careful review of Telebras outlook, going forward, we have decided to reduce our target price to $100 per ADR from $140. This is a twelve-month view. We are, however, maintaining our buy recommendation. Nevertheless, over the short term, we believe that Telebras shares have not seen the bottom yet and could fall to between $52 to $55 per ADR, a potential 15% to 20% decline. a) Best Case: $140 per ADS, discount rate (Weighted Average Cost of Capital(WACC)) of 13.51%, no changes in growth assumptions; b) Base Case: $100 per ADS, discount rate (WACC) of 16.83%, changes in growth assumptions; and c) Worst Case: $52 per ADS, discount rate (WACC) of 25.18%, significant changes to our model. The methodology was based on a discounted cash flow (DCF) and an implied enterprise value (EV) analysis. We did, however, weight in DCF more so than EV, simply due to the fact we believe in order to get a short term view in a volatile market DCF tends to be more appreciated. In light of a deteriorating macro environment, we are of the opinion that the share price could call further, as cost of capital increases and multiples contract. In our worst case scenario we assume that discount rates (over the next six months) would remain high. This is based on the current equity risk premium in Brazil and the current long-term rates, which yields a 24.86% to 25.18% discount rate. The range is a result of using different leverage ratios and betas. Under a worst case scenario, our outlook on the company's performance suffers as well, especially, if the economy goes into a recession next year. We expect even of the investment or the capital expenditure programs are not revised by the new owners of the Telebras assets, demand for new lines could contract and consumption should fall. Our best case scenario uses our previous WACC of 13.51%, which yielded a $140 per ADS. Our base case scenario suggests a more normalized discount rate or weighted average cost of capital (WACC) of 16.83%. This we believe will be a more sustained level of WACC. Using such a rate on our models yields a share price of $100 per ADS. Even under this scenario, we believe the operating environment would suffer due to a downturn in the macro economic indicators. As our Telebras share price is based on a sum-of-the-parts valuation, we have also adjusted the share prices of all twelve holding companies as well. We believe the twelve companies will begin trading by the end of September 1998. Our approach remains the same, a combination of DCF and EV. SHARE PRICE - SUBSIDIARY VS. HOLDINGS NEW FAIR VALUES FOR THE REGIONAL HOLDING COMPANIES WIRELINE NEW OLD ======== ======= ======= Telesp Participacoes $18.00 $24.00 Tele Norte-Leste $24.00 $33.00 Tele Centro-Sul $12.00 $17.00 WIRELESS ======== Telesp Celular $11.00 $15.00 Tele Sudeste Celular $ 5.00 $ 7.00 Telemig Celular $ 3.50 $ 4.75 Tele Sul Celular $ 1.25 $ 1.75 Tele Centro Celular $ 1.75 $ 2.50 Tele Norte Celular $ 0.50 $ 1.00 Tele Leste Celular $ 1.25 $ 2.00 Gele Nordeste Celular $ 2.00 $ 3.00 LONG DISTANCE ============= Embratel $20.00 $29.00 Total $100.25 $140.00