Telefonica will face the scenario after the Covid-19 outbreak with a suitable level of competitiveness for the strategic decisions taken in recent years with the restructuring of businesses, the containment of expenses and debt and the improvement of the set of services it provides the operator, with connectivity and content as the main showcase, according to analyst reports collected by Europa Press.
Although international organizations point to a recession in their first forecasts of international economic developments, the economic effects of coronavirus, which will also punish the Spanish and Latin American economy, will depend on the length of the period in which these economies are paralyzed.
In a scenario in which said stoppage is intense but does not last long, the confinement derived from the pandemic It is turning out to be a showcase for the added value services that Telefonica offers both for companies and professionals ( telecommuting, cloud, digital workplace) and for individuals: connectivity and quality television content, according to Fidentiis analysts.
In its latest report on the operator, the consultancy values the level of competitiveness shown by Telefonica and points out, among the main reasons, the change in business profile that the group has designed to overcome the market loss it registered in the crisis of the years 2011-2012.
In this period, when it was focused on the fixed connectivity business after a great advance in its implementation in the years prior to the 2008-09 crisis, Telefonica had to face aggressive competition in this segment that caused a significant loss of market share.
The company managed to reverse this situation thanks to the launch in the third quarter of 2012 of the Fusion packages with the incorporation of new content on pay television and an aggressive pricing policy.
Fidentiis highlights that since the launch of Fusion, Telefonicas revenues have been generally stable, with a gradually increasing market share that places it at more than 50% of the market share in Spain. In addition, this differentiated television offer is playing in favor of the operator in the current stage of confinement.
Connectivity and content
In recent years, the operator has created a set of products in both B2C and B2B that are growing rapidly due to high demand and that could benefit in the long term from the connectivity and content consumption needs that have emerged among the population during the period of confinement.
The Fidentiis report analyzes how with the confinement and the increase in teleworking the networks have gained importance and Spain has been fortunate to have a wide coverage of FTTH (fiber optics), which will benefit the growth of the operator through its new subsidiary Telefonica Tech, which offers its value-added products and services, such as cybersecurity, cloud storage and the Internet of Things (IoT).
In this regard, the analysis firm New Street Research points in a report on the situation of the teleco sector in Europe to a better performance of this segment with respect to the stock market as a whole, mainly due to the greater resilience of income in these companies, including Telefonica, in periods of crisis.
Likewise, the Fidentiis report highlights that, although the penetration of pay television in Spain has traditionally been very low compared to countries such as Portugal or the countries of northern Europe, the need for the population to consume content on This phase of isolation has increased the demand for products in this segment.
In this context, it is worth noting that Telefonicas pricing policy with Fusion + packages has been paramount here, and the company’s rapid response with promotional campaigns to retain customers and attract new users.
In the last three years, Fusion + has more than tripled its revenues and ‘premium’ subscribers, despite the fact that there is more supply in the pay TV market. Although sports content, soccer in particular, has been a competitive advantage for Telefonica, the television product has proven to be “very successful” and is definitely a “differentiating factor” vis-a-vis its competitors.
Another reason that supports the good forecasts of Fidentiis for Telefonica is the postponement of 5G auctions in Spain, the United Kingdom and, predictably, also in Brazil. In addition, it highlights that Telefonica 4G networks are offering optimal behavior, despite the large increase in traffic.
Thus, it highlights that the operator is reaping the fruits of investments in assets (in Capex) of recent years, which are now showing excellent performance and that will be able to make much more profit if the moratorium on 5G investments is determined as a result of the economic stop by the Covid-19.
This reading is signed by New Street Research when analyzing the situation of the telecommunications sector in Europe and Telefonica in particular, from which it reaffirms that the fact that the auction of the 5G network will probably not be possible in 2020 will allow it to “still make profitable plus their nets and cut the capex considerably. “
Fidentiis analysts highlight that while Europe has lagged behind in 5G, which would put its telecommunications industry at a global disadvantage, the moratoriums that will have to be implemented will increase the bargaining power of operators vis-a-vis providers and regulators and should lead to a significant decrease in hardware costs.
On the connection to the network, analysts indicate that if the economic recession is short and sharp, Telefonica will be reinforced. The operator has a low market share in the segment of the population with the least economic resources, which may be those that are most affected by this crisis and need to adjust their expenses.
In this context, Fidentiis recommends “buying” Telefonica titles. Taking into account that Telefonica is trading at its lowest level in the last twenty years in terms of the price-to-book ratio, the firm places the price of the shares of the Spanish company in a range between 6.2 and 7.5 euros .
Regarding the liquidity of the telecommunications sector in Europe and, in the case of Telefonica, the New Street Research report highlights that the Spanish operator has one of the highest cash generation capacities on the Ibex.
Telefonica has been one of the few Ibex companies that has maintained a policy of high shareholder remuneration in recent years and that, despite the Covid-19, it will maintain the announced remuneration of 0.40 euros per share, with a total disbursement of 2,000 million euros, and a first payment of 0.20 euros in June 2020.
New Street Research considers that the announced dividend policy is still affordable despite the new scenario, although it would advise a certain reduction, given the fear of economic developments in Latin America and the consequences of the foreign exchange market in this area in which Telefonica has assets.
Thus, he admits that the deleveraging policy that the company has carried out in recent years is important for this. “The weakness of the share price during the financial crisis (and during Covid) has little correlation with debt,” the report states.