Renta 4 | Telefonica shares hit their lowest level in August since 2006, since when they have recovered more than +10%. We see that investors have turned their back on the operator, disappointed by a business evolution which has not improved at an operational level and lacking confidence in a significant and sustained improvement in the future.
In our opinion, there are various reasons why Telefonica is having such difficulty in growing at an operational level. Some of these reasons originate in the nature of the sector which is strongly deflationist (in unitary terms for use of data) and which demands a very level of investment (capex) in networks, infrastructure and equipment to improve speed, the level of coverage, broaden services and maintain income.
In addition, and specific to Telefonica, the group´s structure, the high level of debt in recent years and the management strategy have also contributed.
Stability expected in EBITDA and cash generation
We expect that Telefonica´s EBITDA will remain stable for the next few years and that level of investment (capex) excluding licences (spectrum) will remain high, around 15% of income (15% in 2019). In addition, the level of investment in 5G spectrum will be high, even if they have been able to reduce its impact on cash in Germany.
We value Telefonica at 7.2€/share (before 9,2€/share)
We value Telefonica through the “sum of the parts” method and each of the divisions (geographical) applying an EBITDA multiple for 2020. The principle catalysts are the monetisation of assets and infrastructure and stability in Latin America.