TEF has long faced intense domestic competition whilst labouring under a heavy debt pile. But as we unveil the results of our STAMP 2023 survey it looks like a comeback is on the cards....and with stronger pricing power this year we double upgrade to Outperform, TP EUR 4.40. It''s not all good news however, and we also downgrade Telefonica Deutschland to Underperform with a TP EUR2.5.
TEF has seen strong STAMP improvements in Spain/Brazil, with VMEDO2 supporting FCF
In Spain, Movistar has consolidated its position as the go-to premium operator. We are now more optimistic on the ''stickiness'' of recent backbook price increases. Furthermore, we find ongoing weakness at Vodafone/Orange Spain (both also raising prices) and the O2 sub-brand providing a buffer against low-end competition. In Brazil the Vivo brand has also seen strong improvements in brand perception and NPS, and whilst the UK results for VMEDO2 are more mixed TEF should benefit from 15% backbook price increases which are supporting a higher dividend upstream.
Germany remains a weak spot with specific risks - downgrading TEF DE to Underperform
Our findings are not universally good for TEF however, and in Germany O2 has slipped backwards in terms of NPS and brand perception. Despite their failure to roll out a network thus far, 1and1 look stronger in the value segment which we think will dampen TEF DE sub growth. We also see risks from a potential Huawei ban in Germany, whilst higher lease costs and uncertainty around wholesale revenues remain longer term risks. Having significantly outperformed over the past 12m, we see risk-reward now skewed to the downside and we downgrade to Underperform with c10% downside.
How have we changed our estimates? Spain inflecting, dividend / leverage risks receding
We increase both subscriber and ARPU forecasts for TEF Spain, and whilst we maintain medium term concerns over Spanish wholesale/B2B risk, we now expect to see a positive inflection in Spanish...
