Wednesday February 29, 2012
by Paul Tracy, editor High-Yield International
Telefonica Brazil (VIV) is one of the two dominant Brazilian fixed-line telecom operators, with 11 million fixed-line clients, 3.5 million broadband users, and 680,000 pay-TV subscribers. It operates mainly in the state of Sao Paulo, the wealthiest region of Brazil.
In addition, the company became the largest wireless operator in the country after acquiring Vivo Wireless in July 2011.The company now has a total of more than 64 million mobile subscribers, a 29% market share.
The Vivo acquisition will be the big growth driver going forward, providing more than 60% of earnings over the next five years, as mobile subscriber revenue continues to grow even as fixed-line telecommunications markets in Brazil stagnate.
According to the latest industry numbers, Brazilian telecom companies added six million new subscribers in December, an increase of around 14% on a yearly basis.
Overall subscriber growth in 2011 was 19%, a particularly solid jump when you consider the tough comparable of 17% growth in the prior year.
The company continues to benefit from strong demand for so-called third-generation (3G) services such as high-speed wireless data.
These higher-end services are gaining traction as more users in Brazil buy smartphones and start to use value-added functions, such as mobile email, Internet and applications.
Today Brazil has 34.5 million 3G subscribers, more than twice the number of fixed-line broadband Internet connections. Vivo services almost 12 million of those and is growing that base at a healthy double-digit rate.
Due to infrastructure limitations, Brazilian fixed-line telecom operators have a limited capacity to deliver high-speed Internet to the 42 million traditional voice telephone-line subscribers they serve.
Since 3G wireless infrastructure is easier to build out, many customers have been turning to wireless to get online.
Offering higher profit margins for operators, data services have become the cornerstone of growth for mobile operators. Vivo's growth in this sector of the market is around 20%, and the company is allocating more resources to further build out capacity and reach new subscribers.
Telefonica Brazil remains the top pick among Brazilian telecoms because of the solid quality of its 3G assets and its market-leading wireless business.
Furthermore, its established position in the wireline segment of the industry shelters it from any serious competition in the core Sao Paulo market and allows for stable growth.
The company's net debt to EBITDA is low at 0.3 times, so the company has access to capital needed to make ongoing growth investments. The payout ratio is high at close to 100% but should be sustainable given ongoing growth in cash flows.
Risks to Consider: The biggest risk facing Telefonica Brazil is a major slowdown in subscriber growth or adoption of high-speed 3G services due to a broader economic slowdown.
The firm's dividend payout ratio is high, so there's not much room for error; if earnings decline substantially the dividend would have to be cut.
Action to Take --> With a yield around 10% and in the midst of a sizeable share buyback program, Telefonica Brazil offers investors a nice income stream and capital gain potential and rates a buy under $30.
Learn more about this financial newsletter at Paul Tracy's High-Yield International.